I came across this fascinating paper (pdf) by Jacob T Levy, a political science professor at McGill University, after reading another excellent piece of his at the Niskanen Center on liberalism and identity politics (which I may go into at another time). Coincidentally, the EconTalk episode this week also dealt with this topic, though with a broader focus.
I’ve long had an interest in the Native American experience, which I suppose comes from being born and raised in South Dakota, where there is a relatively large (~8%) Native American population. (The state correctly replaced Columbus Day with Native American Day in 1990, for whatever it’s worth). Inescapable is the fact that American Indians are overwhelmingly poor; the poverty rate nationwide is higher than any other minority group, some of the poorest counties in the entire country are on the reservations in South Dakota, and my hometown had the highest poverty rate among American Indians of any city with substantial Indian population (over 50% in poverty!).
Being interested in economic development as well, the economics of the reservation system have always seemed quite understudied. The conditions on many reservations are comparable to the poorest of developing nations, despite being within the borders of the richest country on the planet, and yet it’s hard to find much good research on them. It’s easy to find journal articles about theories of economic development in Indonesia or Nigeria or what have you, but despite similar examples right in our own backyard we seem to have comparatively little research.
What I’m trying to say is, the reasons many reservations remain so poor seems criminally understudied, which is why I liked this paper. Even though it is primarily about the law, it lucidly demonstrates how the design of legal institutions can have powerful effects on economic incentives.
Indian law is notoriously complicated, because the Native American tribes exist in some legal superposition both inside and outside the jurisdiction of the United States Federal government. Tribes retain the sovereignty they possessed over their members before being incorporated into the United States, except when that conflicts with their status as “domestic dependant nations” or Federal law. As such, tribes are both foreign nations and wards of the federal government. As a body of law has developed around this curious status, it has led to the three perversities of the title, which are:
- Criminal jurisdiction
- Civil and regulatory jurisdiction
- Economic policy
- If a non-Indian commits a crime again an Indian on a reservation, jurisdiction lies only with the federal government. Why? The Supreme Court has decided that it would be unconstitutional to subject a citizen to the jurisdiction of a government to which they have not given, nor ever could give, consent. This means that tribal governments do not have complete sovereignty over their territory, only over their members.
- This idea has been expanded beyond the criminal sphere, so that tribes don’t have sovereignty over commercial activities either. Beginning with Montana v United States in 1981, the Supreme Court began a rollback that has resulted in a shrinking of the jurisdictional boundaries for tribal governments in virtually every subsequent case. In essence, tribal governments have little to no ability to regulate any sort of activity from non-Indians on tribal lands, from the same logic as above.
- Finally, tax incentives and regulatory exemptions lead to strong preference for tribally (i.e. government) owned businesses, even over Indian owned private businesses.
Together, Levy argues these facts strongly favor, on the margin, less economic activity. Why?
Imagine an outside company is considering building a factory on the reservation lands. The tribal government would certainly consider this would bring in outsiders to the reservation, outsiders the tribe has no criminal jurisdiction over (and the federal government isn’t exactly chomping at the bit to enforce the laws on reservations, particularly in very rural areas). A lack of civil jurisdiction as well means they would have no ability to tax or regulate such activities. In general, then, we would expect they would tend to err on the side of caution and not allow the company to enter.
The terrible irony is that in a situation where economic development were to begin growing apace, the tribal government would be faced with the prospect of shrinking jurisdiction over the activity on its territory. Additionally, there is considerable historical precedent for the shrinking of reservation boundaries once enough non-Indians had taken up residence. (Yes, the Federal government has essentially decided in instances that since so many non-Indians were living on particular land, it should no longer be considered as part of Indian territory.) On the margin, most governments don’t want to shrink their authority, and will avoid courses of action that would lead to such a situation. As Levy summarizes, “Tribes’ institutional incentives to discourage newcomers amounts to a disincentive for economic growth.” (p. 31)
Regarding the perversity of economic incentives, “The domination of reservation economies by firms owned by tribes has been occasionally remarked upon, but typically in connection with the ostensibly socialistic cultural inheritance of the tribes. I am agnostic as to the importance of that inheritance, but mean to point out that, regardless of cultural explanations, tribes have been left with strong legal and policy incentives to engage in government-led and government-owned development.” (p.41) These incentives include: tribally owned enterprises are exempt from federal corporate taxation (while private enterprises are not); non-Indians are exempt from tribal taxation; tribally owned enterprises have the potential for sovereign immunity.
It should not be shocking that government run enterprises tend to be less efficient than privately owned ones, particularly when there is no other economic activity as competition. Furthermore, the casino based economy that has come to dominate many tribal areas is not altogether different from finding oil or diamonds: a single, lucrative resource in a small area. As such, the ‘resource curse’ present in many developing countries is likely also a contributing factor to poor governance and more robust economic activity.
To conclude (and Levy puts it better than I ever could), “If the rule of law, private sector-led and broad-based economic development, and effective democratic institutions are worthwhile goals for reservations, they ought not to be set in conflict with one another.” (p.48) While Levy does not intend his argument to be a complete explanation of the generally poor conditions on reservations, it certainly serves as a useful point of inquiry for more serious research.