Reservation Economics

1
Reservation Economics

• Failed Policies and Growing Dependence
• AI_14_13

2
The Federal Government and Native Americans

• Many Indians are members of tribes as well as
  U.S. citizens some tribal governments have their
  own court systems and some state laws do not
  apply on reservation lands.
• A number of tribal Indians were not made citizens
  until special legislation was passed by Congress
  in 1924.

3
Special Status

• The origins of the special status of Indian
  tribes goes back to the beginnings of the
  republic.
• The Constitution grants the federal government
  power "to regulate commerce with the foreign
  nations, and among the several States, and with
  the Indian tribes" (emphasis added).
• A second source of this relationship was the
  practice of negotiating treaties with tribes.
• Soon after the United States gained independence
  from Britain, Congress decided to continue the
  British practice of recognizing the rights of
  Indian tribes to the territory they occupied.

4
Special Rights

• Although the government could acquire land from
  tribes through treaties or just wars, Indians
  still had recognized rights, and settlers could
  not purchase land directly from tribes.
• Chief Justice John Marshall wrote in the case of
  Worcester v. Georgia (1832) that the Cherokee
  Nation was "a distinct community, in which the
  laws of Georgia can have no force."
• Marshall affirmed the right of the federal
  government rather than the states to regulate
  intercourse with Indian tribes.

5
Removal of Cherokee

• Despite their success in court, the Cherokee
  were forced a few years later to leave Georgia
  along the "trail of tears.
• The removal was part of a policy of moving
  Indians westward.
• Until the 1840s the federal government negotiated
  treaties (sometimes by coercion) to move most
  (but not all) eastern tribes to the West as a way
  of opening land for white settlement and to allow
  Indians time to adjust to the influx of white
  settlers.
• This system set a boundary between Indian tribes
  and white settlement, and in principle, whites
  were to stay east of the line and Indians would
  stay to the west in "Indian country."

6
Origin of Reservations

• This Indian frontier was completely breached in
  the late 1840s with the massive movement of white
  settlers into California and Oregon to farm or
  mine for gold.
• To protect Indians while still opening land to
  numerous settlers pushing westward, the federal
  government induced tribes to sign new treaties in
  which they ceded all or part of their lands in
  return for some land "reserved" for their
  exclusive use.
• Typically these treaties gave a tribe a defined
  territory and future goods in return for
  surrendering title to other tribal lands.

7
Ending Their Way of Life

• Once Indians were settled on a reservation, the
  federal government assumed the role of guardian
  of Indian property and Indian welfare on the
  reservation.
• Federal agents distributed promised goods and
  supervised educational programs.
• The reservations often lacked sufficient
  resources for tribes to continue their
  traditional ways of supporting themselves.
• For example, the destruction of the bison herds
  in the 1870s and 1880s eliminated the major food
  resource of Plains tribes and ended that way of
  life.

8
Assimilation

• Consequently, one task of the federal agents was
  to teach Indians new ways of supporting
  themselves.
• Congress also expected agents to push Indians to
  assimilate into mainstream society.
• Farming was seen as the ideal means by which
  Indians could gain a new livelihood and almost
  magically become assimilated into white society.
  
• This work was made more difficult because of
  limited resources and widespread corruption.
• In addition, Indians often resisted heavy-handed
  programs to change their way of life.

9
Top-Down Policies

• 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."
• Institutional autonomy, however, was short-lived.
  
• Instead, Congress and federal agencies began
  molding property rights from the top down.
• With the Dawes Act, or Allotment Act, of 1887,
  the government made its first major attempt at
  bureaucratic control over the allocation of
  reservation land.

10
A Legacy of Mismanagement

• The federal government has had an agency dealing
  with Indian affairs for more than two centuries.
• In 1806, the Office of Indian Trade was created
  in the War Department.
• In 1824, that office was replaced by the Bureau
  of Indian Affairs, which was also known as the
  Office of Indian Affairs.
• In 1849, the office was transferred to the new
  Department of the Interior.

11
19th Century

• Indian treaties usually provided various types of
  aid to tribes in exchange for their ceding of
  land.
• Between 1794 and 1871, more than 150 treaties
  were signed that provided teachers, schools, and
  other education benefits to tribes.
• The federal government provided health services,
  food rations, infrastructure, and farm implements
  to Indian tribes.
• It made regular annuity payments to tribes as a
  part of treaties.

12
Mismanagement Corruption

• The dominance of the BIA in Indian life has not
  produced good results.
• One reason is that the BIA has been inefficient,
  mismanaged, and sometimes corrupt since the
  beginning.
• Fraud, corruption, and bribes were common in the
  BIA during some periods in the 19th century.
• One reason was because local BIA officials had
  substantial discretionary control over cash,
  goods, trading licenses, and other items handed
  out by the agency.

13
Corruption

• In the years following the Civil War, "Indian
  rings" of government agents and contractors
  colluded to steal funds and supplies from
  taxpayers and the tribes.
• The New York Times railed against the "dishonesty
  which pervades the whole Bureau.
• And the newspaper argued that "the condition of
  the Indian service is simply shameful. It has
  long been notorious that rascally agents and
  contractors have connived to cheat the Indians.

14
Indian Policy

• Allotment under the Dawes Act, Commodity
  Distribution, and efforts to encourage
  agriculture were not the only programs on Indian
  Reservations.
• After over 100 years, most reservation Indians
  remain at the bottom of the economic scale
  virtually any way it is measured, relying almost
  completely on the U.S. government for support

15
Economic Conditions on Most Reservations

• Difficult to exaggerate the overall depressed
  state of economic development on most
  reservations, or the sorry history of associated
  public policies
• Unemployment rates on most reservations exceed 50
  percent, and many reservations have 80 to 90
  percent unemployment, year after year

16
Structure of Reservation Employment

• 1988 study most reservation economies heavily
  dependent on the transfer economy
• Employed as part of tribal or federal government
  transfer or other public assistance programs not
  in productive enterprises
• 59 percent of all reservation employment was in
  the transfer economy, compared to 17 percent for
  the U.S. as a whole.
• There are some important and revealing
  exceptions, but the fact is that on many
  reservations, the only employment is in
  government funded offices that deliver social
  services to the rest of the reservation.

17
BIA and BIE

• The federal government runs a large array of
  programs for the roughly 1 million American
  Indians who live on reservations.
• Many of the programs are housed within the
  Department of the Interior's Bureau of Indian
  Affairs (BIA) and Bureau of Indian Education
  (BIE).
• These two agencies have about 9,000 employees and
  spend 2.9 billion annually.

18
Self-Determination?

• Since the 1970s, the federal government has
  promoted Indian "self-determination," but tribes
  still receive federal subsidies and are burdened
  by layers of federal regulations.
• In addition, the government continues to oversee
  55 million acres of land held in trust for
  Indians and tribes.
• Unfortunately, Indians who live on reservations
  are still very dependent on the federal
  government.

19
BIA Policy

• The government has taken many actions depriving
  Indians of their lands, resources, and freedom.
• A former top BIA official admitted that federal
  policies have sometimes been "ghastly," including
  the government's "futile and destructive efforts
  to annihilate Indian cultures."

20
Cobell Settlement

• The BIA has administered federal Indian policies
  since 1824, and its history is marked by episodes
  of appalling mismanagement.
• Some of the BIA's scandals are reviewed here,
  including the Indian trust-fund mess that was
  recently resolved in a 3.4 billion legal
  settlementafter a century of federal bungling.

21
Gross Mismanagement

• In 2011, the Department of the Interior's
  Inspector General (IG), Mary Kendall, testified
  to Congress about the "gross program
  inefficiencies at many levels of Indian Affairs
  and in tribal management of federal funds."
• The IG described, for example, how the BIA funded
  a fish hatchery at a reservation for 14 years and
  yet no fish were hatched.
• Eventually, a BIA official visited the
  reservation and found that the alleged hatchery
  was actually a real estate development that the
  tribes had been funneling taxpayer money into.

22
No Management Controls

• The IG found that in one BIA region, millions of
  dollars were wasted on road projects that were
  never competed.
• She noted that "internal management controls were
  so broken down that wage-grade employees were
  earning over 100,000 a year, with overtime,
  without explanation.
• On one of the road projects, 2.4 million had
  been spent, but the IG couldn't find any of the
  work that was supposed to have been done.

23
BIA Uniquely Unresponsive

• Many federal agencies suffer from waste and
  inefficiency, but the BIA seems uniquely
  unresponsive to criticism.
• The IG routinely refers allegations of employee
  misconduct, such as fraud and theft, to the BIA,
  but the agency often fails to correct the abuses.
• The IG testified "For many years, the BIA has
  demonstrated tremendous inefficiency and has
  poorly managed the matters that we refer to them
  for action."

24
Pork-Barrel Politics

• Pork-barrel politics adds to the BIA's
  inefficiency.
• Michigan's wealthy Saginaw Chippewa tribe, for
  example, hit the jackpot after they hired
  infamous lobbyist Jack Abramoff and gave campaign
  contributions to former Senator Conrad Burns
  (R-MT) and other politicians.
• In his recent book, Abramoff brags about how he
  helped direct all kinds of subsidies to the tribe.

25
One Explanation for the Lack of Economic
Development

• Economic resources problems insufficient access
  to capital markets, small endowments of natural
  resources, and low levels of education and job
  skills
• Since at least the 1930s economic development
  programs have played an important part in Indian
  policy U.S. government has poured billions of
  dollars into these programs
• Attempted to provide Indians with capital
• subsidized loans or direct capital investments in
  the form of infrastructure, manufacturing plants,
  irrigation projects, and so on.

26
Development Programs, Continued

• Training and education programs.
• Natural resources
• Some reservations are rich in resources
  (minerals, timber, agricultural land, natural and
  historic attractions that could be important for
  development of tourist industries, etc,)
• Others are not and to augment natural resources,
  the US government has begun to buy land to add to
  reservations, as well as obtaining water rights
  for Indian agriculture.
• None of these programs have made much difference
  for most reservation Indians
• Remain reliant on the government for housing,
  health services, education, and food.

27
Natural Resources Mismanagement

• Federal officials have been found to ignore the
  best interests of the tribes for which they are
  responsible for when it comes to natural
  resources.
• A government audit of Red Lake Chippewa of
  Minnesota discovered that the BIA had misplaced
  as much as 500,000 per year.
• In other instances, BIA timber sale accounts have
  not been balanced in over 70 years.

28
Corruption

• The BIA leased timber owned by the Quinault tribe
  at only about 2 percent of the market value.
• "forestry is a good example of how BIA
  over-regulation of Indian resources often
  interferes with reservation economic growth.
• Indeed, in places where Indian tribes have been
  given control over their timberlands, they appear
  to be more efficient managers than the BIA.

29
Trust Abuse

• In 2004, a court-appointed investigator looking
  into BIA's handling of Indian trust lands found
  that it was standard practice for officials to
  negotiate deals giving energy companies access to
  Indian resources at a fraction of the market
  value.
• The BIA is a costly and unneeded middleman for
  Indian tribes that want to maximize the returns
  from their lands and resources.

30
Failures in Efforts to Stimulate Investment

• Despite reservation tax advantages in competing
  with off-reservation enterprises, and locations
  that would be very attractive if they were not on
  reservations, tribes have found it to be
  extremely difficult to attract capital
• Private investors see the absence of any record
  of success, and at the very real instability in
  both tribal governments and BIA policy, and
  frequent opportunism and corruption in tribal
  governments
• many tribes have also been severely burned by
  outsiders promising to get profitable
  enterprises going in exchange for consulting
  fees, etc.
• reluctant to employ outside management and
  expertise, or seek outside credit

31
Investments, Continued

• On many reservations, the only investment dollars
  are still coming from BIA direct or guaranteed
  loans or outright grants.
• Over a third of the BIA loans typically overdue,
  non-performing, or in default.
• Government business creation efforts have a long
  history of failures
• "white elephant disease" with subsidized
  manufacturing and other projects ending up as
  failures and closing down
• Until very recently, (e.g., success of casino
  gambling on some reservations), almost no
  reservation-based business of significant size
  could withstand market competition without
  government subsidies.

32
Indian Education

• Today, most Indian children attend regular public
  schools and the federal government kicks in
  subsidies to local governments to help cover the
  costs.
• The federal government, through the Bureau of
  Indian Education, also owns 183 Indian schools,
  which have about 41,000 students.
• The BIE operates about one-third of these
  schools, and tribal governments operate the other
  two-thirds.
• Note that these Indian schools were transferred
  from the BIA to the new BIE in 2006.

33
Children Left Behind

• Federal schools have long failed Indian children.
  
• In 1980, the GAO found that, "BIA has failed over
  the years to provide Indians a quality education.
  All of our reviews show that severe management
  problems have persisted for years."
• A 2001 GAO study found that BIA student scores on
  standardized tests was generally "far below the
  performance of students in public schools.
• a much higher share of BIE schools than public
  schools have failed to make "adequate yearly
  progress" under the No Child Left Behind law.

34
Too Little Money?

• The 2001 GAO report found that per-pupil spending
  on BIE primary and secondary day schools was 56
  percent higher than average per-pupil spending on
  all U.S. public schools.
• 26,585 per student in BIE schools.
• Average federal, state, and local spending on
  K12 public schools in the United States in 2009
  was 12,449.
• Spending for elementary and high schools across
  the 50 states and Washington, D.C., averaged
  10,560 per pupil in the fiscal year ended June
  30, 2011.

35
BIA Remains in Control

• Federal government, and therefore, the BIA
  remains omnipresent on most reservations
• Reservation Indians remain heavily dependent on
  federal funding and few of them appear to be
  anxious to sever the flow of funds.
• Public funding does not appear to decline for
  tribes that do enjoy some economic development
  success
• Most reservation economies are, essentially
  directed and controlled by the BIA
• Official trustee, negotiates contracts,
  determines resource use, manages financial
  records and accounts, retains power of final
  approval or veto of investment decisions, makes
  employment decisions

36
Cultural Explanations offered for the Lack of
Development

• Indians have "poor work attitudes"
• Cultural heritage is one of communal property and
  production rather than private property and
  capitalism
• Actually played a major role in Indian policy for
  much of the last two centuries
• 1969, BIA report stated that "Indian Economic
  Development can proceed only as the process of
  acculturation allows."

37
Rejecting the Cultural Explanation

• Fails to recognize the cultural and economic
  adaptability that characterized pre-reservation
  Indians, and even reservation Indians, at least
  until the Dawes Act was implemented
• Fails to recognize the fact that some tribes
  actually enjoy relatively low unemployment and
  strong economies despite the fact that they
  remain culturally conservative, stressing
  preservation of Indian heritage
• White Mountain and San Carlos Apache share common
  conservative cultures but White Mountain Apache
  (discussed later) are quite successful
  economically while San Carlos Apache are not

38
Lack of Effective Tribal Government Explanation

• Sees tribal decision making, dispute resolution,
  and regulatory functions as highly politicized
  and unstable
• Tribal governments squander resources and
  discourage investments by outsiders
• Does in fact appear to be a critical factor on
  many reservations
• U.S. government has been trying to fix this
  problem since the Indian Reorganization Act of
  1934

39
Failed Efforts to Create Tribal Governments

• Policy has ignoring diversity among tribes
• Pushed them to adopt more or less generic formal
  constitutions drawn from larger society models
• Have become the basis for most of tribal
  government institutions which have, as one study
  suggests, "plague reservation development efforts
  today.
• Governance institutions can be very important,
  but the generic reforms imposed by the Department
  of Interior have not been effective
• Not all reservations are plagued, however, by
  ineffective governance institutions.

40
Effective Tribal Governments

• Some tribes appear to have solved at least some
  of the problems of governance
• E.g., the Flathead in Montana, the Mescalero
  Apache, and the Cochiti Pueblo
• Techniques for solving problems vary dramatically
• Successful tribes have different types of
  governments
• Cochiti have a theocracy rooted in indigenous
  culture, Mescalero have a very strong chief
  executive, and Flathead have a parliamentary
  system
• Some characteristics of tribal government can
  make a big difference but this explanation is
  incomplete (BIA remains the dominant
  decision-making power on most reservations)

41
Another Explanation The Dependency Theory

• Attributes Indian poverty to the
• historical and contemporary appropriation of
  resources by non-Indians,
• the enforced powerlessness that is a precondition
  for appropriation, and the
• resultant dependency of Indians on outside
  sources of economic support and decision making
• Implication Indians will be able to establish
  viable economies only when freed from
  paternalistic controls and exploitive economic
  relations with the larger American society

42
Pres. Comm. on Indian Reservations Economics

• BIA "management of Indian trust resources creates
  numerous land, labor, and capital obstacles to
  Indian reservation economic development. In terms
  of land and resources, incompetent asset
  management undermines local initiatives and
  raises costs to Indian tribes and businesses ....
  Bureau personnel are either under qualified to
  manage their present responsibilities, or unable
  to provide expert technical assistance for
  business development.... A Byzantine system of
  over-regulation actually deters investment....
  Exacerbating the development climate is the fact
  that BIA consumes more that two-thirds of its
  budget itself.... The system is designed for
  paternalistic control and it thrives on the
  failure of Indian tribes." (1984 report)

43
Dependency, Continued

• Even those Indians who are employed are dependent
  on the BIA because they work for it.
• Both the employed and the unemployed reservation
  Indians rely on the continuation and growth of
  the BIA.
• As a general explanation for Indian poverty this
  is a pretty persuasive argument
• Resources losses, such as the transfer of lands
  to the whites under the Allotment process, lack
  of political power that allowed for such
  transfers, and persistent domination of the BIA
  in virtually every economic decision made on
  reservations, have, in many cases, done
  irreparable harm to Indian development efforts

44
Block Grants

• A good reform to pursue would be to consolidate
  all BIA funding for each tribe into a single
  block grant of a fixed amount.
• That would give tribes an incentive to allocate
  and spend funds more efficiently, and would
  prevent Congress from micromanaging Indian
  affairs or earmarking funds to favored tribes.
• The tribes would be able to use the block grants
  to provide tribal services in-house or to
  contract them out to local governments or
  businesses.

45
Self-Determination Contracts

• Federal policies have already moved in this
  direction.
• The 1975 Indian Self-Determination and Education
  Assistance Act allowed tribes to contract with
  the BIA to administer the delivery of some
  programs.
• Today, a substantial share of BIA funding is
  delivered to tribes through "self-determination
  contracts" and "self-governance compacts."

46
Trust Responsibility

• As the tribes move further toward
  self-governance, the trust responsibility becomes
  less relevant.
• As tribes gain greater control over their lands,
  natural resources, and trust funds, it becomes
  their own responsibility to manage them well, not
  the federal government's responsibility.
• It had long been understood that the BIA was
  supposed to "work itself out of a job" as it
  helped Indians become self-sufficient.

47
Self-Determination

• Indian self-determination is inconsistent with
  continued Indian dependence on the government for
  subsidies.
• Indian subsidies have similar negative economic
  effects as other government subsidies, such as
  farm subsidies and welfare subsidies.
• Subsidies reduce the incentive of recipients to
  pursue productive activities.
• As far back as the 1928 Meriam report, experts
  have observed that BIA subsidies reduced the
  incentive of Indians to work.

48
Ending Subsidies

• While ending subsidies is controversial, there is
  broader agreement that self-determination should
  mean greater Indian control over their lands and
  resources.
• Over the last century, the BIA has been a
  miserable failure at managing Indian resources.
• As discussed above, the agency has too often sold
  timber, coal, minerals, oil, and natural gas on
  Indian lands at below-market prices.

49
Dependency Theory is an Incomplete Explanation

• Does not account for the differential success
  that some tribes have had in overcoming poverty
• Indians generally have come from the same
  powerless dependency positions, but some tribes
  have managed to improve their economic lot.
• Degree of dependency varies
• The relatively successful reservations are all
  relatively free of BIA control, but what has
  enabled a few tribes to at least partially break
  the hold of the BIA while most have not?

50
Institutional Explanation of Reservation Economies

• Complementary to the dependency argument, but
  helps fill the gaps
• Focuses on the overall institutional environment,
  not just parts that arise through Congress and
  the BIA, or through tribal government or culture
• Douglass North, the Nobel Laureate who was Terry
  Anderson's Graduate advisor, explains that
  transactions costs affect the structure of
  property rights, and therefore social, political
  and economic behavior

51
Structural Production Frontier
Good Y
Technical Production Frontier
Structural Production Frontier 2
Structural Production Frontier 1
Good X
52
Institutions, Productivity and Economic Growth
(North)

• Stock of knowledge and the endowment of resources
  determine the technical upper limits for
  productivity and output - the technical
  production frontier (TPF)
• For each institutional structure there is a
  structural production frontier (SPF)
• Set of feasible forms of economic organization is
  defined by the institutional environment, and the
  institutional environment, in turn, depends on
  the social, cultural, and political systems
• Some institutional systems create incentives that
  place a SPF close to the TPF others do not
• economic growth can result from institutional
  change

53
Cannot Take Advantage of Resources and Technology

• Modern technology creates the potential for very
  high levels of productivity.
• High levels of output cannot be reached without
  elaborate specialization in production and
  complex webs of exchange extending across both
  time and space
• The more advance the technology, the more complex
  the transactions, and the higher the transactions
  costs of utilizing the technology
• Appropriate institutional structures are needed
  to reduce transactions costs to manageable
  levels.
• Technological or resource constraints often are
  not the constraints that limit economic growth

54
Institutions often Prevent Economic Development

• North notes that the problems of "devising a
  system of law, justice, and defense are the basic
  underlying sources of civilization."
• Technologically, the world is probably easily
  capable of bringing everyone up to the standard
  of living enjoyed in North America and Western
  Europe, or higher, but political forces prevent
  it.
• As North emphasizes, the willingness of
  individual owners to supply specific appropriable
  assets, essential for economic growth and
  utilization of advanced technologies, depends on
  the rules structure, including clear and secure
  property rights, enforceable contracts, the
  availability of relatively consistent and
  impartial dispute resolution

55
Failure of Organization

• Overwhelming evidence that governments typically
  do not supply institutional structures that are
  appropriate for placing their economies close to
  the TPF
• Many cases of relative and absolute economic
  decline can be explained only by what North calls
  failures of organization
• Institutional structure of the U.S. economy is
  probably closer to our TPF frontier than most,
  but Congress, the BIA, and tribal governments
  have developed institutional structures for most
  Indian reservations that are much more like those
  that failed in Eastern Europe than those that
  work in U.S.