The Wealth of Indian Nations: Economic Performance and Institutions on Reservations

by Terry L. Anderson and Dominic P. Parker AI_19_13

Islands of Poverty

Despite recent economic growth partly due to gaming, per capita income for Native Americans living on reservations in 1999 was $7,846 compared to a U.S. average of $21,587.

Why do these islands of poverty persist is a sea of wealth?

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Importance of Institutions

Just as a growing number of studies show that private property, a consistent rule of law, and limited government are crucial for encouraging investment in the developing world, Anderson and Parker argue that the same holds for reservation economies.

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The Problem of Paternalism

Tribal sovereignty might have allowed Indians to devise their own property rights and governance structures had the federal government not established the trust relationship with Indians and had it truly been willing to grant full autonomy to Indians to control their property.

Since 1934 the Department of Interior has struggled to find ways to fulfill its trust responsibility and to eliminate corruption, but no one would argue that there has been much success.

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Trustee Malfeasance

Not only does the trust authority raise the cost of managing Indian lands, timber, minerals, and wildlife, it provides opportunities for corruption in the use of those resources and funds.

Bureau of Indian Affairs have been embroiled for years in a lawsuit charging mismanagement of Indian trust funds (Cobell).

With so many assets controlled by bureaucrats and politicians in Washington, it is not surprising that little wealth is generated from these assets for reservation Indians.

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Transfer Payments as Wealth

Despite the fact that many reservations are resource rich and receive tremendous transfer payments from federal assistance programs, nearly all reservations remain among the lowest of income strata in the United States. Estimate that the Crow tribe in the early 1990s had

$27 billion in coal assets or over $3 million per tribal member, but that these assets earned a paltry 0.01 percent.

Despite being resource rich, 55 percent of Crow tribal members receive public assistance.

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Traditional Development View As with many explanations of economic

development, early focus on reservation economies was on physical and human capital. The argument was that Indians were left with poor land, little capital, and inadequate educations to take advantage of the assets they did have.

This explanation is inadequate for developing economies or reservation economies because it ignores the institutional environment in which resource allocation decisions are made.

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An Alternative View

An extensive and robust literature claims that institutions, formal and informal, is a primary reason that economies prosper or stagnate.

Douglass North has been the most prominent scholar to focus on the formation of political and economic institutions and the consequences of these institutions on the performance of economies through time.

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A Brief History of Indian Property Rights It’s a myth that property rights and markets were

inimical to an Indian culture that revered nature and her bounty.

Anthropological evidence suggests that Indians understood the importance of institutions for getting the incentives right.

Personal property was nearly always privately owned because it required a significant investment of time to produce and maintain.

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Indian Property Rights American Indians understood the importance of rules

to limit access to the commons and devoted resources to establishing property rights when it was economical to do so.

Before the national government dictated what property rights they would have, American Indians developed institutions that enabled them to produce with the resources they had. For example, the Blackfeet began accumulating

individually owned but communally herded cattle. Among tribes with an agricultural tradition, “the Indian

concept of land tenure enabled various villages to make the best possible use of the land in order to meet their own specific needs”

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Trusteeship of Indian Lands Under Allotment, reservation land was allotted to

individual Indians, but held in trust until the Secretary of Interior deemed the individual Indian “competent” to hold the land in fee simple. When it was freed from trust it could be alienated in any

way the Indian owner saw fit including its sale to non-Indians.

Surplus land, was opened to homesteading by non-Indians. Senator Dawes himself explained why many non-

Indians supported the Act: “Till this people will consent to give up their lands, and divide them among their citizens so that each can own the land he cultivates, they will not make much progress”

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Individual Trust Land After the IRA, reservations were left with a mosaic of

land tenure including fee simple land that was released from trusteeship prior to 1934, individual trust land that was allotted to individual Indians, but not released from trusteeship, and tribal trust land that was owned by the tribe, but held in trust.

Trust lands are subject to regulation by the BIA. It grants or denies permission to change land use, approves lease arrangements, and agrees to capital improvements. Trust land cannot be sold and cannot be used as collateral for

loans. Individual trust lands have often been inherited many times

over, leaving multiple owners, all of whom must agree on land management decisions.

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Tribal Trust Land

In the case of tribal trust land, management decisions are made by tribal governance institutions. Reduce any individual decision maker’s incentive to

maximize the net value of production. the politics of the Navajo Tribal Council and its grazing

committees have essentially legislated “a common property condition for the range” wherein access is open to all tribal members and overuse occurs.

The higher transaction costs associated tribal governance can thwart optimal land use decisions.

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Three-Part Tenure System

(1) The fee-simple owner’s mix of land, labor, and capital should be approximately optimal.

(2) Because trust constraints raise the cost of capital by restricting the ability of owners to transfer land title, productivity should be lower on trust lands

(3) Because the returns from individual and tribal trust lands are distributed among many owners, each has less incentive to monitor land management thus making output lower.

(4) Because trust land cannot be freely alienated, the size of farms and ranches will remain too small to be optimally productive

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The IRA, Termination, and Public Law 280 The IRA augmented tribal authority over tribal

lands and resources and also permitted tribes to enact their own tribal codes and constitutions.

The resurgence in self-governance put pressure on tribal governments to manage resources responsibly and to create an environment that encouraged investment. Before it was put to the test, however, tribal

sovereignty on some reservations was stripped away by Congress during the termination period (1945 – 1961).

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Public Law 280

During this period, Congress passed numerous resolutions seeking to make Indians subject to the same “privileges and responsibilities” as ordinary U.S. citizens

Public Law 280 legislation, enacted in 1953, epitomized the prevailing Indian policy of the termination period. The law transferred jurisdiction within individual

states from tribal courts to state courts.

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Public Law 280 States

Public Law 280 extended state jurisdiction over civil disputes and criminal offenses arising on reservations in Alaska, California, Minnesota, Nebraska, Oregon, and Wisconsin. Tribes in the “mandatory” Public Law 280 states listed

above did not have the opportunity to formally consent to the transfer.

Reservations in the mandatory states were targeted first either because they were perceived to lack adequate tribal forums and to have rampant lawlessness or simply because the transfer of jurisdiction to these states could take place without legal impediments.

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Additional States

Under Supreme Court decisions and state legislative actions, Florida, Idaho, Iowa, and Washington appear to have assumed jurisdiction over most contractual disputes and tort claims arising between Indians and non-Indians on the reservation.

Tribal authority to adjudicate such cases remains intact in many states including Arizona, New Mexico, Montana, North Dakota, and South Dakota.

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“Bad” Public Law

To many scholars, Public Law 280 is a profound and deleterious example of Congress stripping tribal sovereignty without tribal consent the law has diminished BIA funding for law

enforcement stunted the development of tribal courts created a burden some states have been reluctant to

accept For these reasons, Goldberg-Ambrose

contends that Public Law 280 has caused higher crime rates on some reservations.

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Public Law 280 Tribes

Goldberg-Ambrose contends “Tribes in Public Law 280 states are at a disadvantage compared with tribes elsewhere in the United States.”

Alternatively, Public Law 280 may have advantaged the economies of tribes if state jurisdiction means a more stable rule of law. To the extent that state jurisdiction makes non-Indians

more confident about engaging in business on the reservation, it will bring outside wealth to Indian Country.

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The Sovereign’s Paradox According to this paradox, sovereign governments can

secure short-term gains by changing the rules of the game once immobile investments have been made.

The paradox is that by doing so, the sovereign will frighten away potential investors and sacrifice long-term economic productivity. Public Law 280 is a potential solution to the

sovereign’s paradox, because it conveys a credible commitment to non-Indians that Indians will not opportunistically change the terms of contract after investments are made.

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The Era of Self-Determination Nixon: Indian policy should “strengthen the

Indian’s sense of autonomy without threatening his sense of community.”

Legislation allowed tribes greater control over forest, mineral, and other natural resources.

Tribes allowed to enter into development agreements without as much reliance on Department of Interior authorization.

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Self-Determination and Education Act of 1975 By 1987, over 100 tribes had opened high-

stakes bingo facilities, and a few allowed poker and other card games. Class I and II include bingo and relatively low-

stake gaming. Class III allows for “Vegas-style” gaming including

slot machines and craps. Currently, about 201 tribes are engaged in Class

II or Class III gaming.

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Self-Determination in Courts

The Supreme Court insists that tribal remedies be fully exhausted before state or federal courts consider disputes.

The court, however, has recognized state court adjudication over such matters arising on reservations in Public Law 280 states.

The court has often affirmed the sovereign immunity status of tribes; sometimes in cases where the tribe has signed sue-or-be-sued clauses and ostensibly waived immunity.

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Institutions & Economic Growth Through these congressional actions and Supreme

Court decisions, the era of self-determination has empowered tribal governments and courts. expect institutions governing reservation economies to

affect reservation prosperity more so than ever before. Cross-sectional studies of countries ask whether

institutions can explain differences in economic growth. The common thread weaving these studies together is

the focus on property rights, the rule of law, and constraints on government that limit its ability to redistribute wealth.

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Economic Growth on Reservations

Some scholars have begun to recognize the importance of institutions to growth on reservations and have tried to empirically estimate their importance. Dismissing a lack of human capital as the reason for

Indian cattle ranching inefficiencies, Trosper (1978, 239) concludes that “land tenure or other institutional problems” should be examined as a possible explanation.

Anderson and Lueck (1992) found that the per-acre value of agricultural output was 85 to 90 percent lower on tribal trust land than on fee-simple land, and 30 to 40 percent lower on individual trust land than on fee-simple land.

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Cornell & Kalt (2000)

Natural, human and financial capital do matter in the growth process, but that “resources and knowledge tautologically set the upper bound on society’s potential for growth at any point in time.”

After trying to measure the impact of formal and informal institutions on economic development, Cornell and Kalt concluded that “generous resource endowments, human capital, and access to financial capital will be virtually useless if tribes … lack the institutional structures necessary to maintain a hospitable environment for human and financial investment”

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Reservation Institutions and Reservation Income Each reservation serves as a single observation

in A&P’s cross-sectional analysis.

Dependent variables: per-capita income of American Indians in 1999 percentage growth in American Indian per-capita

income from 1989 to 1999

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Independent Variables

The independent variables of primary interest measure differences in landowner incentives and constraints, the rule-of-law, and the government’s role in transferring reservation wealth. Landowner Incentives and Constraints External Adjudication and the Rule of Law Government Transfer Payments and Political Rent

Seeking Control Variables

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Landowner Incentives and Constraints

Percentage of reservation land that is not held in trust (percent fee-simple).

Interact percent fee-simple with a variable that indicates how many American Indians are employed in agricultural, forestry, mining, and hunting and fishing industries (# employed in resource industries).

The interaction term helps A&P infer whether fee-simple ownership is especially important on reservations whose economies depend on land-based production.

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External Adjudication and the Rule of Law State jurisdiction denotes reservations in the

mandatory Public Law 280 states, reservations in optional states which have most credibly asserted jurisdiction over contractual and tort claims in Indian County, and reservation in New York, where the state has had jurisdiction over civil disputes since at least 1950.

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Government Transfer Payments and Political Rent Seeking To approximate the extent to which governmental activity

on reservations reduces productive activity, AP use per capita bia payments, which indicates the number of dollars per-capita the BIA allocated to tribal leaders on each reservation.

AP also proxy a tribal government’s ability to transfer wealth with % employed by tribal gov 89. This variable indicates the proportion of the Indian

population over 25 years of age employed by a tribal government in 1989.

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Control Variables

To control for the effect of gaming on Indian income, AP estimate the number of slot machines at reservation casinos per American Indian resident (slots per ai resident).

The size of the reservation, reservation acreage, is used to control for this resource endowment effect.

The variable, percent hs grads 89, controls for human capital by measuring the number of American Indians who graduated from high school as a percentage of the 1989 reservation population over 25 years of age.

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Control Variables, cont’d

Exogenous demand is measured by per-capita income earned by non-reservation residents in counties in or adjacent to the reservation, adjacent county pci.

The distance from a reservation to a city with a population of 100,000 or more, miles to metro area, provides a measure of the exogenous demand for Indian resources.

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Empirical Specifications and Regression Results American Indian Income = 0 + 1(landowner

incentives & constraints) + 2(external adjudication & rule of law) + 3(government transfers & rent-seeking) + 4(controls) + e

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Explaining Per Capita Income The coefficients shown in Table 4 have simple

interpretations because the dependent variable is specified in dollars.

For example, the Column 1 coefficient on state jurisdiction simply means that reservations with state jurisdiction over civil disputes are estimated to have per-capita income levels $2,262 greater than those that do not.

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Table 4: OLS Estimates for 1999 American Indian Per-Capita Income Dependent variable = 1999 AI PCI

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Landowner Incentives & Constraints     

percent fee-simple -0.036(0.00)

-0.71(0.10)

-6.12(0.69)

percent fee-simple x# employed in resource industries 99

 ------

 ------

0.33(2.45)**

External Adjudication & Rule of Law     

state jurisdiction 2,262(4.35)**

2,166(4.21)**

2,019(3.88)**

Transfer Payments & Rent Seeking     

per-capita bia payments -0.82(1.69)*

------ -------

Explaining Income Growth

All of the Table 5 coefficients can be interpreted in terms of their impact on income growth.

For example, the Column 1 coefficient on state jurisdiction means that per-capita incomes on reservations with state court jurisdiction grew at rates about fifteen percentage points faster than those lacking state jurisdiction.

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Table 5: OLS Estimates for 1989-1999 American Indian Per-Capita Income GrowthDependent variable = 89-99 AI PCI GROWTH

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Landowner Incentives & Constraints     

percent fee-simple0.016(0.20)

-0.122(1.41)

-0.115(1.27)

percent fee-simple x# employed in resource industries 89

------ ------- -------

External Adjudication & Rule of Law     

state jurisdiction15.14

(2.70)**12.02

(2.22)**13.20

(2.42)**

Transfer Payments & Rent Seeking     

per-capita bia payments-0.014

(2.84)** ------ ------

% employed by tribal gov. 89

-------1.22

(3.06)** ------

Regression Results, cont’d

In Tables 4 and 5, the coefficient estimates on percent fee-simple are not statistically significant by conventional standards. The lack of a significant sign on these coefficients may result

from incongruence in measurement; percent fee-simple measures land tenure on the reservation, but AP do not know how much of this land is owned by American Indians.

In Table 4, however, the coefficient on the interaction term, percent fee-simple x # employed in resource industries, is statistically significant and positive. This result suggests that BIA trust constraints on reservation land

are more likely to stunt economic development on reservations where land-based production is relatively more important.

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Regression Results, cont’d The coefficient estimates on state jurisdiction suggest

a large economic effect that is statistically significant. Table 5 coefficients, for example, show that per-capita

incomes on reservations with state court adjudication grew at rates from 12 to 15 percentage points higher than reservations with only tribal court adjudication.

The coefficient of -0.82 on per-capita bia payments in Table 4 suggests that a one-dollar increase in payments from the BIA to tribal leaders causes an $0.82 decline in the per-capita income of Indian residents. this does not necessarily imply a direction of causation

because lower per-capita incomes could cause greater levels of BIA payments to tribal leaders.

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Regression Results, cont’d

the negative coefficient on the lagged variable, % employed by tribal gov. 89 (see Table 5, Column 2), does imply a causal relationship because the level of employment predates and therefore is exogenous to the period for which growth is measured.

The coefficient suggests that a one percentage point increase in the size of tribal government as measured by employment caused a decrease of 1.22 in per-capita income growth rates.

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Control Variables

miles to metro area is negatively correlated with AP’s dependent variables implying that tribes in isolated locations have fewer economic opportunities.

Reservation Indians benefit economically from having gambling facilities.

Percent hs grads 89 is positively correlated with per-capita income growth suggesting that investments in human capital can help reservation economies.

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Interpreting the Results

While A&P emphasize a different set of institutions, their findings are generally consistent with Cornell and Kalt (2000) who also shift the focus of economic performance from physical and human capital and to institutions.

A strong finding suggests that allowing non-Indian litigants access to state courts in contract and tort cases improves economic performance. A positive effect of a stable rule-of-law on economic

growth. Slower growth is a cost of judicial sovereignty.

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Interpreting Results, cont’d There is also a robust negative relationship between

the size and scope of tribal government and income growth. consistent with Tullock’s (1993) discussion of the

deleterious effects of rent-seeking on economic productivity

Consistent with the Gwartney et. al. (1999) finding of a negative relationship between governmental power and economic growth across a sample of sovereign nations.

BIA trust constraints on land impede the economic development of land-based resources and therefore stunt income growth on reservations dependent on land-based industries.

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Conclusions The wealth and income of Indian nations will remain

low as long as economic development policies remain focused on cultural differences, resource endowments, and welfare payments, and continue to give short shrift to institutions.

Federal trust authority has undermined property rights on reservations, and tribal political institutions have generally undermined the rule of law.

Without formal and informal institutions that lower transaction costs and reward productivity, Indian economies are likely to remain islands of poverty in a sea of prosperity.

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