The failure of state-led economic development on American Indian reservations.

• Author: Mathers, Rachel L.
• Position: Essay

Most of the literature on state-led economic development focuses on development at the international level. (1) An intriguing case much closer to home--that of American Indians--is rarely considered in discussions of state-led development. In spite of decades of state-led economic development efforts, American Indians remain among the poorest groups in the United States. The 2000 U.S. census reveals that the median income per capita for American Indians is less than half that of all U.S. citizens. Poverty levels among American Indians are more than twice the poverty level for the United States as a whole. Perhaps more striking is the lack of adequate infrastructure--water, sewerage, telecommunications, and so forth--in many American Indian communities (U.S. Government Accountability Office [GAO] 2004). "Broadly speaking, one constant has characterized Indian reservations since their creation--poverty" (Harvard Project 2008, 112).

These facts are particularly perplexing because state-led economic development efforts on American Indian reservations face fewer problems than international state-led economic development. For example, American Indian economic development planning does not face problems of international political economy, such as numerous international bureaucracies, differing national strategic goals, and so forth. Although political economy issues still exist domestically, we would expect them to be smaller than those in the international arena for at least two reasons.

First, U.S. government resources in many American Indian communities are extensive, including access to significant amounts of funding and highly trained bureaucrats (relative to bureaucrats in underdeveloped countries). Therefore, domestic state-led development provides a somewhat "cleaner" test of state-led development because these issues are minimized. Second, American Indian reservations and the U.S. government are geographically in the same country, making sheer physical distance a nonissue. The country providing development assistance--the United States--lies within the same borders as the American Indians, making interaction between the two groups much easier and less costly. Monitoring of domestic economic development programs is also much easier than monitoring international programs. However, as Peter Boettke, Christopher Coyne, and Peter Leeson (2008) note, geographic distance is not what matters; knowledge distance is more decisive. The greater the knowledge distance between where the rule is designed and where it is to be implemented, the less likely the rule is to "stick." Although the geographic distance between American Indians and the U.S. government is minimal, the knowledge distance between the two can be great: the U.S. government may simply be unable to acquire the relevant knowledge to achieve the desired end.

Domestic state-led development, in theory, should be easier than international state-led development. However, the results of development efforts on reservations do not match the expected outcome. In this article, I examine two factors that contribute to the failure of top-down, state-led economic development on American Indian reservations: (1) the state's inability to perform economic calculation and (2) the political allocation of resources. The first factor is important because it provides a reason for the state's inability to achieve its stated goals with the given means. Because the state operates outside the market, economic calculation is impossible, leading to the second factor, political allocation of resources outside the market, which yields several political economy problems related to bureaucracy, including perverse incentives and lack of adaptability to changing conditions.

To analyze how these two factors contribute to the failure of state-led development on American Indian reservations, I focus on the Economic Development Administration's (EDA) efforts to stimulate economic growth there. I focus on the EDA (2) because this agency is concerned solely with economic development, whereas the other agencies involved with the reservations (for example, the Bureau of Indian Affairs, the Department of Housing and Urban Development, and the Department of Agriculture) deal with a variety of services besides pure development efforts, which makes it much more difficult to separate economic development projects from their other activities. (3)

My analysis contributes to at least two strands of literature. The first is the aforementioned literature on international economic development. The second is the literature on development among American Indian populations (see Graham 2004; Rosser 2005; Cornell and Jorgensen 2007). For example, Stephen Cornell and Joseph Kalt (2006) emphasize what they term the "nation-building" approach to economic development on reservations, an approach that emphasizes tribal sovereignty and institution building as opposed to the standard approach, which is often short term and under the control of individuals outside the reservation. In a volume edited by Terry Anderson, Bruce Benson, and Thomas Flanagan (2006), the argument is made that property rights, along with sovereignty, are the key to successful economic development on American Indian reservations. My article complements the existing literature on economic development and American Indians by emphasizing the role of economic calculation (Mises [1922] 1981, [1920] 1990; Hayek 1935) and the political economy of bureaucracy (Tullock 1965; Niskanen 1971) in explaining the failure of state-led development efforts.

The History of the Economic Development Administration

The EDA was created in 1965 as a replacement for the Area Redevelopment Administration (ARA), the first federal agency devoted to regional economic development. During the ARA years (1961-65), it was thought that lack of capital was the reason for underdeveloped or distressed communities, so the ARA sought largely to provide capital in the form of long-term, low-interest loans that could cover up to 65 percent of the cost of an industrial development project (Sorkin 1971). However, by the time the EDA was created to replace the ARA, the consensus about the path for economic growth in these areas shifted from capital to infrastructure. The idea was to make blighted communities attractive to business by improving basic infrastructure (for example, sewerage, water supplies, and telecommunications).

Both agencies' primary goal has been to increase jobs in depressed regions, though the EDA introduced an added emphasis on making blighted communities attractive to business by improving basic infrastructure. To designate a region as depressed and hence qualified to receive EDA funds, several measures have been used, including high unemployment and low income. American Indian reservations are among the poorest regions in the United States, so many of them have qualified for federal assistance from the EDA. Between 1993 and 2002, for instance, 143 of 219 federally recognized tribes and tribal organizations received total funding of $112 million from the EDA (U.S. GAO 2004, 4). An EDA annual report notes that the agency "provided over three-quarters of a billion dollars in assistance to Native Communities to promote and support their sustainable development from 1965 through 1999" (U.S. EDA 2000, 14).

Given that high unemployment and low income define a distressed region, the EDA's clear goal is to help these regions experience economic growth that will assist them in emerging from the distressed classification by means of increased employment and decreased poverty. As David A. Sampson, former assistant secretary for economic development in the U.S. Department of Commerce, stated,

The Economic Development Administration (EDA) was established to work with states and localities to generate new jobs, retain existing jobs, and stimulate industrial and commercial growth in economically distressed areas and regions of the United States. The purpose of its program investments is to provide economically distressed communities with a source of funding for planning, infrastructure development, and business financing that will induce private investment in the types of business activities that contribute to long-term economic stability and growth. EDA's investments are strategically targeted to increase local competitiveness and strengthen the local and regional economic base. (qtd. in Lake, Leichenko, and Glasmeier 2004, v)

The EDA's mission statement has been altered over time, but the stated ends remain the same--to create jobs, build infrastructure to attract business, and provide capital.

One simple way to analyze whether the EDA has achieved its mission objectives is to examine the poverty and employment rates for American Indians. Figure 1 depicts the...