The Wealth of Indian Nations

Hoover Digest
2004 No.3 Summer

By Terry L. Anderson and Dominic Parker

It is said that a rising tide raises all boats, but that has not been true for American Indians. Despite recent growth partly due to gambling, per capita income for Native Americans living on reservations in 1999 was $7,846 compared to a U.S. average of $27,880. This puts reservation Indians on par with citizens in developing countries such as Palau or Oman.

Why does this bastion of poverty persist in a sea of wealth? One hypothesis is that Indian cultures are inimical to capitalism, but this is not supported by the facts. Supposedly Chief Seattle said in the 1850s: "How can you buy or sell the sky, the warmth of the land. . . . Every part of the Earth is sacred to my people." Never mind the fact that these were not the words of the chief but were fabricated for a television program; this view does not fit the historical facts. From teepees to horses to land and water, pre-Columbian Indians established property rights described by one anthropologist as "naked possession." Even after being confined to reservations, "the tradition of individual ownership was so well established that Indians resisted government efforts to establish common property," says economist Leonard Carlson.

Another explanation for reservation poverty is that they lack high-quality natural resources. Many reservations, however, encompass hundreds of thousands of acres including valuable natural resources. For example, in the 1980s the Crow tribe had $27 billion worth of coal, or over $3 million per tribal member. Unfortunately, the asset earned a paltry 0.01 percent return, leaving 55 percent of tribal members on public assistance.

Physical and human capital are surely important to economic prosperity, but are lacking on reservations mainly because the institutions that govern Indian economies do not encourage investment. Indians cannot borrow money because their land—held in trust by the federal government—cannot be used as collateral and because tribal judicial systems may not consistently enforce contracts. Moreover, education rates lag behind the national average.

Just as a growing number of studies show that private property, a consistent rule of law, and a lack of burdensome governmental regulations are crucial for encouraging investment in the developing world, the same holds for reservations. Agricultural productivity on Indian lands is 30 to 90 percent less than on similar private lands. Furthermore, tribal judicial systems are noted for their biased decisions that discourage outsiders from contracting with tribes or individual Indians. Indeed, tribes that have relinquished their judicial authority to the states wherein they live had growth rates for 1989–99 that averaged 20 percentage points higher than tribes without equivalent state oversight.

Many believe that the only hopes for pulling Native Americans out of poverty are quick fixes such as federal aid and gambling, which are not sustainable solutions, especially for rural tribes. If American Indians are to escape poverty, they will have to abandon what former interior secretary James Watt called "bastions of socialism" and commit to a rule of law with secure property rights and market institutions.

This essay was published as part of the Hoover Institution Weekly Essay series, which is distributed by Knight Ridder/Tribune, June 10, 2004.

New from the Hoover Press is You Have to Admit It's Getting Better: From Economic Prosperity to Environmental Quality, edited by Terry L. Anderson. Also available is Agriculture and the Environment: Searching for Greener Pastures, edited by Terry L. Anderson and Bruce Yandle.

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Terry Anderson is a senior fellow at PERC and the former President and Executive Director of PERC as well as the John and Jean De Nault Senior Fellow at the Hoover Institution, Stanford University. He believes that market approaches can be both economically sound and environmentally sensitive. His research helped launch the idea of free market...
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Dominic Parker is a Senior Research Fellow at PERC and is an Assistant Professor of Agricultural and Applied Economics at University of Wisconsin-Madison where he teaches courses in natural resource economics. His research examines how legal systems and government policies affect natural resource use, environmental outcomes, and economic...
Read More > More Articles by Dominic Parker >