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Stephen Cornell [*]
Joseph P. Kalt 
Since the mid-1970s, the hundreds of American Indian reservations in the United States have been afforded substantial powers of self-government --from law enforcement and taxation to environmental and business regulation. The result has been a set of diverse efforts to overcome widespread poverty, with equally diverse outcomes. This study reports the results of research into the sources of development success during the "take-off' stage of self-government. Little evidence is found to support hypotheses that resource or human capital endowments hold keys to launching Indian economies. Instead, tribal constitutional forms appear to be make-or-break keys to development. Development takes hold when these forms provide for separations of powers and when their structures match indigenous norms of political legitimacy. [C] 2000 Elsevier Science Inc. All rights reserved.
In the modern Western World, we think of life and the economy as being ordered by formal laws and property rights. Yet formal rules, in even the most developed economy, make up a small (although very important) part of the sum of constraints that shape choices; a moment's reflection should suggest to us the pervasiveness of informal constraints. In our daily interaction with others, whether within the family, in external social relations or in business activities, the governing structure is overwhelmingly defined by codes of conduct, norms of behavior, and conventions... That the informal constraints are important in themselves (and not simply as appendages to formal rules) can be observed from the evidence that the same formal rules and/or constitutions imposed on different societies produce different outcomes.
Douglass C. North
Institutions, Institutional Change and Economic Performance, 1990.
1. Some stories
The Crow Indian Tribe is centered on a 2.5 million acre reservation in south-central Montana and has a population of approximately 10,000. The Tribe is one of the four or five largest owners of coal resources in the world. The Crow reservation also contains extensive timber, range, agricultural, water and mineral resources. In the latest audit of its assets, the Tribe's coal and other assets were valued at $26,820,779,087, indicating tribal wealth (i.e., exclusive of individual holdings) of approximately $3,283,239 per person (Real Bird, 1988).
Seventy-eight percent of the Crow labor force is unemployed. At the time of the 1990 Census (the last date at which systematic data are available), 55% of Crow tribal members were receiving public assistance, and 60% reported being unemployed for more than 15 weeks in the previous year. Social pathologies such as alcoholism, crime, and ill health are present in the extreme. 70--80% of reservation employment is in governmental services (Cornell & Kalt, 1990). The only significant income from economic activity within the Tribe's lands consists of a non-Indian coal mine which pays royalties to the Tribe; land lease payments from local ranchers (at lease rates typically equal to less than one-third of market value); and a modest stream of stumpage receipts from below-market timber sales. Annual earnings on the $27 billion of tribal assets amount to an annual rate of return of 0.01%.  The last two tribal chief executives have been convicted of federal felonies, and the current chief executive has had to have a rmed guards surrounding her when addressing the tribal legislature (council).
1.2. Mississippi Choctaw
The Mississippi Band or Choctaw Indians is the second largest employer in me State or Mississippi, after the State Government of Mississippi. Located in natural resource-poor East Central Mississippi, the Mississippi Choctaw reservation is the development "tiger" of Indian Country. All tribal members that can and want to be employed have jobs, and the Tribe "imports" approximately six thousand white and black workers from surrounding communities. The Tribe's plastics manufacturing, automobile subassembly, American Greeting Cards, shopping center, electronics manufacturing, printing and direct mail, construction, golf resort, late-arriving casino, and other enterprises generate 12,000 jobs and more than $170 million in annual wages (Center for Community and Economic Development, 1999). The Tribe's public sector provision of schools, law enforcement, social services, health services, and public utilities further meets the needs of the citizenry while employing hundreds of professionals and other workers. The r ate of dependence on welfare programs--less than 3% of households --is a fraction of the rate for the US as a whole. Amid the booming economy and rising standards of living, the rate of Choctaw language use in everyday life is high and rising, as the Tribe invests in its cultural heritage.
1.3. Pine Ridge Sioux
The Pine Ridge Sioux Reservation is the home of the Oglala Sioux Tribe. The original reservation covered 2.8 million acres in southern South Dakota prior to certain losses of tribal title. The on-reservation population is approximately 20,000. The primary reservation economic activity is agriculture, with approximately 300 tribal members working in ranching and another 75 employed in farming as of the last Census. Tribal members operate less than 50% of Indian-owned agricultural property, with the remainder leased to non-Indians. Indian-owned lands produce approximately $10 million in annual gross revenues, with Indian operators accounting for roughly 35% of this total. The Tribe has entered into projects such as a joint venture in a meat packing plant intended to employ 40 tribal members. Consistent with a pattern across such projects, however, the Nebraska Sioux Lean Beef enterprise failed within 18 months amid charges of mismanagement and embezzlement (Jorgensen, 1993).
The Pine Ridge Reservation covers the poorest Census tract in the United States, with per capita income equal to only about one-fourth of the national average. 47% of the reservation population was reported to be receiving public assistance and approximately 50% of the work force was reported to be unemployed for more than 15 weeks at the time of the 1990 Census. As of 1989, 73% of the employable workforce was unemployed. Over 80% of the employed work force is in the governmental sector (Cornell & Kalt, 1990). As of 1998, the Tribe estimates that approximately 95% of all income on the reservation is the product of a federal or state transfer, grant, or service program.
1.4. White Mountain Apache
The White Mountain Apaches are a tribe of approximately 10,000 occupying 1.6 million acres of forest and rangeland in east-central Arizona. Approximately 750 thousand acres of the Tribe's Fort Apache Reservation is prime logging country, and another 400 thousand acres are high-quality rangeland. The White Mountaln Apaches operate nine tribally owned enterprises, including a major ski resort with seven lifts and $9 million per year in revenues; a sawmill with 95% Apache employees, $9 million per year in payroll, labor productivity that is 30% higher than the average western U.S. mill and $30 million per year in revenues; a reservation forest that yields the Tribe approximately $7 million in net logging royalties per year; pay-per-visit wilderness hunting and fishing that produces annual revenues of approximately $1.5 million and elk hunts that are auctioned on the open market at up to $20,000 per animal hunted; and a small gaming casino and associated motel.
As of the latest assessment, official unemployment among the White Mountain Apaches is approximately 11%, compared with a national average for reservation Indians of 45%. Only 15% of the Tribe's employment is in governmental services, as opposed to enterprises - compared with a figure of approximately 59% nationally for reservations. 25% of White Mountain Apache families were receiving public assistance at the time of the 1990 Census, compared with 42% for the Indian national population (Cornell & Kalt, 1990). The Tribe's economy is the central driving force in the region, supporting tourism-based non-Indian communities and making the Tribe a recognized and increasingly respected polity.
2. Introduction: social institutions and economic development
In the aggregate, American Indian reservations are notable for their extreme and persistent poverty -- reservation Indians are the poorest minority in the United States. Particularly since the mid-1970s, however, changes in the U.S. legal and political landscape have allowed tribes to assert substantial sovereign powers for the first time in the century. Although jurisdictional disputes still rage and areas of federal and state primacy persist, federal legislative, executive and judicial decisions have resulted in a policy of relative self-determination for Indian reservations. American Indian tribes are now able to assert significant powers of self-government, including the powers to tax, set up courts and police forces, regulate commercial, social and environmental affairs, and determine the disposition of reservation resources. As the foregoing stories imply, concomitant with the assertions of sovereignty, a handful of reservations have begun to exhibit sustained economic development.  What explains th is?
Cross-tribe variations in such factors as natural, human and financial capital resources do provide some progress toward answering this question; and the resources-development link certainly has "other things equal" reasoning going for it. Numerous cases, however, illustrate that a tribe's resources can he wasted or go untapped unless that tribe can establish an incentive environment that channels them into productive ends. The resource endowment of the Crow Tribe of Montana (described above), for example, makes the Tribe one of the wealthiest groups in North America, yet the Crow Reservation is a place of stark poverty, social disintegration, and simmering civil unrest.
Akin to the case of natural resource endowments, it does not seem plausible that a society's economic progress is founded primarily on technological advance or the stock of human knowledge. Not only is the stock of human capital endogenous, but side-by-side comparisons leave the questions of why only some societies contribute to and productively utilize civilization's stock of knowledge unanswered. The impoverished Crow, for example, hold education in high esteem and 52% of adult tribal members have graduated from high school. This compares to only 34% at the economically-developing White Mountain Apache Tribe and a national Indian average of 43%.
Resources and knowledge tautologically set the upper bound on a society's potential for growth at any point in time. As is increasingly reflected in the economic development literature, however, how far away a society's performance is from this upper bound depends centrally on the legal, social and political institutions that are imposed on it or selected by it. That is, the origins and paths of growth are determined primarily by the societal institutions which channel effort into productivity, provide payoffs for capital investment, organize the division of labor, and permit exchange (e.g., Olson, 1982; North, 1981). Our thinking on development is now replete with nonideological references to "the rules of the game," "rent-seeking," "property rights," and "third-party enforcers."
Comparative research into more and less successful reservations thus far suggests the paramount importance of tribes' institutions of self-governance as causal factors (Cornell & Kalt, 1992). In this regard, the American Indian context fits with the on-going "demonstration projects" being provided in Latin America, the Pacific Rim, and Eastern Europe. Dissecting the structures of constitutions, legislatures, bureaucracies and other social institutions that "work" presents social scientists with a compelling research agenda. For our part, however, we think that there are analytically prior questions that go to the heart of the "wealth of nations." Since, ultimately, there is no first-mover formal institution that can account for the actual governmental structures that a sovereign society arrives at, what are the foundations of those structures and what is the glue that holds them together? Indeed, these questions are now emerging at the frontier of the rational choice movement in sociology, the public choice approach in economics, and the rational political economy perspective in political science.
Following such analysts as Bates (1988), North (1988, 1990), Douglas (1989), and Coleman (1992), we argue in this paper that construction and adherence to mechanisms of social control and organization must make reference to sociocultural processes. We …