Institutions and Economic Development on Native American Lands.

Author:Lofthouse, Jordan K.

Native American lands are often rich in natural and cultural resources. Paradoxically, these lands are often the poorest parts of the United States. Native Americans own private businesses at a much lower rate per capita compared to other Americans, and the businesses they own produce less income on average than the businesses owned by all other racial groups (Miller 2001). As of 2010, 28.4 percent of American Indians and Alaska Natives were below the official poverty line, compared to 15.3 percent for the nation as a whole. Roughly 22 percent of Native Americans live on federally recognized reservations or other specially designated areas (U.S. Bureau of the Census 2011).

Previous economic scholarship has demonstrated an institutional basis for Native American poverty. Poverty is blamed largely on formal governance structures, especially inefficient property-rights regimes and excessive bureaucratic governance (McChesney 1990; Cornell and Kalt 1995; Anderson and Parker 2008, 2009; Akee and Jorgensen 2014; Regan and Anderson 2014; Russ and Stratmann 2014). Although previous scholarship has emphasized the role of formal institutions, market-process theory as it relates to Native American economies has been neglected in this literature.

This paper attempts to fill the gap by bringing market-process theory and entrepreneurship into the broader discussion of the institutional effects on Native American economic development. Institutions, as the formal and informal rules by which people interact, are critical to economic development anywhere in the world. Institutions are fundamental to economic development because certain institutions tend to facilitate mutually beneficial exchange, entrepreneurship, and innovation. Other institutions, however, may impede economic relations between people, or they may direct people to act in socially wasteful manners (Baumol 1990; North 1990; Murphy, Shleifer, and Vishny 1991, 1993; Acemoglu, Johnson, and Robinson 2001, 2002, 2005; Acemoglu and Johnson 2005; Boettke, Coyne, and Leeson 2008; Sobel 2008; Acemoglu and Robinson 2012).

The entrepreneurial market process is inextricably linked with the institutions that shape the private and public spheres. Within the market-process framework, people in the market react to their constantly changing circumstances. In this state of flux, they can become entrepreneurs and innovators by using their unique, subjective, and tacit knowledge to find new ways of fulfilling human desires (Hayek 1945, 1978, 1988; Mises 1949, [1936] 1981; Kirzner 1973). Institutions can sometimes create barriers or raise costs to participating in the market process. Economic growth and development are the direct result of the competitive entrepreneurial market process, and the quality of institutions that govern social action is the ultimate determinant of individuals' willingness to engage in entrepreneurial activity.

This paper explicitly adds market-process theory to the existing literature related to institutions and entrepreneurship on Native American reservations. This addition is important because it gives greater insight into the intimate connections between institutions, entrepreneurship, and economic growth. Institutional contexts lead entrepreneurs to direct their attention in either wealth-creating or wealth-destroying ways. When institutions guide individuals to be alert to arbitrage opportunities that are privately and socially beneficial, they can engage in productive entrepreneurship, which subsequently determines how economic growth and development will unfold in a dynamic world (Holcombe 1998; Boettke and Coyne 2003,2009). Without an explicit acknowledgment of market-process theory, the institutional explanation for Native American economic development lacks the holistic view it deserves.

Institutions impede entrepreneurship, the market process, and economic development on Native American reservations through three overarching channels: (1) the federal land trust, (2) a dual federal-tribal bureaucracy, and (3) legal and political uncertainty. Those channels generally raise barriers to mutually beneficial exchange, entrepreneurship, and innovation. In particular, they generally increase transaction costs, rent seeking, and bureaucratic delay, which impede many Native Americans from engaging in private enterprise. This paper uses comparative institutional analysis and case studies to illustrate how the federal land trust, the dual bureaucracy, and institutional uncertainty create barriers and high transaction costs to private enterprise and other forms of entrepreneurship on Native American lands. It pulls examples from a number of different reservations and acknowledges the institutional differences across reservations. It takes a very broad view of the formal institutions that are common to most federally recognized tribes, even though reservations across the United States have great diversity regarding institutions and levels of wealth. The federal land trust, dual federal-tribal bureaucracies, and legal/political uncertainty are common to many tribes regardless of other differences in institutional structures that are unique to each tribe.

First, the federal trust system allows the federal government to hold the title for parcels of land owned by a tribal government or for individual Native Americans. Due to this system, private-property rights are often ill defined and convoluted. When private-property ownership is not well defined and enforced, Native Americans face higher costs of engaging in the entrepreneurial market process.

Second, due to the long history of federal-Native relations, a dual bureaucracy of federal and tribal officials now has broad discretion to oversee and regulate economic enterprises. Federal officials in many agencies and tribal officials have the power to oversee how land is used, which types of businesses are allowed, who will receive money, how business will be regulated, and so on. Relatively large amounts of bureaucratic red tape increase the costs of engaging in market enterprises, entrepreneurship, and innovation on Native American lands.

Third, legal and political uncertainty and complexity caused by formal institutions have been two of the greatest barriers to economic development. Uncertainty regarding taxation schemes, judicial jurisdiction, incorporation codes, and access to the capital market creates potential barriers to potential Native entrepreneurs as well as to off-reservation entrepreneurs who wish to enter reservation markets.

Understanding the history of Native American policy is critical to understanding how institutions have affected entrepreneurship and economic growth; however, this paper cannot adequately explain the nuances that are necessary for a hill historical perspective. I have attempted to include the historical context that is necessary to understand a few key institutions as they affect entrepreneurship and economic growth in Indian Country.

In the first section, I present a theoretical framework for how institutions affect entrepreneurship and the market process, which subsequently has an impact on economic development. In the second section, I discuss specifically how the three channels described earlier hamper the market process and impede economic development on Native American lands. I conclude with the implications of this research.

Institutions Affect Entrepreneurship and the Market Process

Institutions influence what activities people may engage in and whether those activities will be wealth creating or wealth destroying. Institutions are the formal and informal rules that determine economic, political, and social outcomes. Economic development occurs only in contexts where institutions have the characteristics necessary to facilitate such development (North 1990; Acemoglu, Johnson, and Robinson 2001, 2002, 2005; Acemoglu and Johnson 2005; Acemoglu and Robinson 2012).

Some institutional arrangements guide entrepreneurs toward productive market activity, while other institutions guide entrepreneurs to unproductive activities such as rent seeking. Institutions that help entrepreneurs focus on productive market activities are more likely to generate higher rates of economic growth (Baumol 1990; Murphy, Shleifer, and Vishny 1991, 1993). With institutions that decrease the profitability of unproductive entrepreneurship, entrepreneurs are more likely to be productive by creating new wealth and enhancing society's overall well-being (Sobel 2008). For formal institutions to be successful, they must comport with the informal institutions; otherwise, it is likely that the formal institutions will be useless at best or harmful at worst (North 1990, 2005; Boettke, Coyne, and Leeson 2008).

The importance of institutions is made more explicit with an understanding of the market process. The market process is a spontaneous order of mutually beneficial exchange that is embedded within an institutional environment (Hayek 1978, 1988; Kirzner 1985, 2002). One of the major prerequisites for a well-functioning market is the institution of private-property rights. Markets cannot work effectively if property rights are not clearly defined and protected, which requires some basic standard of the rule oflaw (Mises 1927). If an economic system is based in private-property ownership, the rationally self-interested owners function as speculators who work toward the highest return on their capital as possible (Mises [1936] 1981). Property-rights regimes and formal governance structures are constituent parts to a larger, more comprehensive approach to Native American economic development.

A key component of the market process is the entrepreneur, who is alert to profit opportunities. As entrepreneurs look for and exploit opportunities to fulfill human wants more efficiently, they allow people to cope reasonably well with changing conditions through a process of discovery and coordination...

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