Economic Development and Corruption: Case of the American Indian
Abstract
American Indians have the lowest standard of living of any ethnic group in the U.S., ranking
near the levels of the least developed nations. Since a negative relationship between
economic growth and corruption of nations has been found in many studies, it would seem
logical that corruption is a determinant of the American Indian situation. In this study,
corruption among American Indian tribes is examined. We find that there is no simply
determinant of corruption. There is a level of corruption that is fairly constant among tribes no
matter structure of government or existence of casinos. Our conclusion is that corruption
seems almost unavoidable --- a fact of life in a society with poorly defined and unsecure
private property rights.
JEL: D02, D23, D73
Economic Development and Corruption: Case of the American Indian
William J Boyes
Founding Director
Center for the Study of Economic Liberty
Arizona State University
[email protected]
Paul Bernert
Analyst, Center for the Study of Economy Liberty
Arizona State University
[email protected]
American Indians have the lowest standard of living of any group in the U.S., ranking
near the levels of the least developed nations. In 2000, the average real per capita income
among Reservation Indians was $7,942; today 25% are below poverty level and 20% live on
only $5000 per year. The proportion of American Indians who have finished college is half
that of all races in the U.S. and the percent that is unemployed is twice as high as among all
U.S. races. Education levels on the reservation are significantly lower than the rest of the
United States. Less than two-thirds of the population age 25 and older has a High School
diploma (or GED equivalent) or higher. In addition, some schools on the reservation face
astronomically high dropout rates (ranging from 2.04% all the way up to 38.3%, compared to
the US average of 3.8%). Drug, crime and gang-related activity by teenagers and young
adults are significantly higher on the reservation than compared to other areas in the United
States. Deaths from alcoholism are 700% more likely among Native Americans than the
general population. Deaths from tuberculosis are 650% more likely, and deaths from
diabetes are 420% more likely. In some tribes, half of the population suffers from
diabetes. The Indian Health Service, which is the primary provider of health-care on the
reservation, is so underfunded that it only is able to provide around $1,900 per patient
per year on services, compared to the average American receiving over $5,000 per
patient per year.
What are the leading factors that account for the American Indian situation of
being an island of poverty in the midst of a nation of wealth? Our hypothesis is that
American Indian poverty is primarily a matter of a lack of well defined and secure
private property rights. The lack of well defined and secure private property rights
often means that economic activity can occur only with significant corruption.
Corruption is the abuse of entrusted power for private gain, according to
Transparency International, and it influences economic growth. While most studies
argue that corruption reduces economic growth, there are some studies showing the
opposite. There is a view which contends that corruption can be efficiency-enhancing
by allowing economic agents to overcome pre-existing, inefficient regulation and red
tape (for example: Leff (1994), Levy (2007), Egger and Winner (2005), Mendez and
Sepulveda (2006) and Meon and Weill (2010)).
Almost every study on the causes of corruption identifies economic development
as a crucial variable, with higher levels of economic development leading to less
corruption since a high level of economic development reduces the discount rates of
both bribe-givers and bribe-takers, thereby making them less eager to jump the queue
via illegal ways. On the other hand, less developed economies generate minimal wealth
for average citizens, which creates structural incentives for bribery and other means to
obtain wealth. Murphy et al. (1993) and Lambsdorff (2007) see the causality as running
from high corruption to low income while Treisman (2000) and Paldam (2002) argue
that economic development leads to less corruption.
A large intrusive government is usually found to foster more corruption. Treisman
(2007) notes that highly developed, long-established liberal democracies, with a free
and widely read press, a high share of women in government, and a history of
openness to trade, are perceived as less corrupt. Countries that have intrusive business
regulations and unpredictable inflation are considered more corrupt. Majeed and
Macdonald (2010, 2011) find that the presence of military elites in politics fosters
corruption while financial reforms (reducing government intrusion) significantly
controls the incidence of corruption.
Increased regulation reduces economic freedom so a more heavily regulated
entity should have more corruption. A few studies examine the relation between
economic freedom and corruption and they consistently show the more freedom, the
lower the level of corruption, implying that economic freedom is a deterrent to
corruption (Chafuen and Guzma ́n, 2000; Paldam, 2002). Typically the more
government is involved in business the greater is crony capitalism.1
Drury et al. (2006) argue that one of a decentralized government’s (democracy's)
indirect benefits is its ability to mitigate the detrimental effect of corruption on
economic growth. They find that corruption has no significant effect on economic
growth in decentralized states, while states with centralized government suffer
significant economic harm from corruption.2 Centralized states are especially
susceptible to corrupt incentives because their rulers have the potential to organize
government with few checks and balances.
A characteristic of a mature democracy is the existence of an environment
where the probability of being caught, if acting corruptly, is very high. In addition, the
examination of the interaction between economic freedom and democracy suggests
that economic freedom reduces corruption in any political environment, and the effect
is substantially larger with a high level of democracy. In transitioning countries, the
shift from command economies to free market economies has often been
1
Holcombe (2012)
According to Johnson et al. (2014), corruption affects centralized states less than it does noncentralized states. A one standard deviation increase in corruption convictions in one of the least
regulated American states (e.g. South Dakota, New Hampshire, or Colorado) is associated with half a
standard deviation decrease in gross state product growth between 1975 and 2007. By contrast, in
the most heavily regulated American states (e.g. New York, Arkansas, or Hawaii), corruption did not
have an effect on growth during this period.
2
accompanied by a change from a well-organized system of corruption to a more
chaotic one.
It also should matter whether industries within the state or nation are centralized or
decentralized. Large food conglomerates push for agricultural subsidies. Large tech firms
benefit from special laws. Large automobile firms are bailed out by taxpayers. Financial firms
are bailed out and on and on. Crony capitalism occurs primarily within the interface between
large firms and government.3
The American Indians provide a laboratory for the examination of institutions and
corruption. Different tribes have different governments, some centralized and some
decentralized. Much of the difference stems from the creation of the reservation system. In
1851, the United States Congress passed the Indian Appropriations Act which authorized the
creation of Indian reservations in modern-day Oklahoma (interestingly there are no
reservations in Oklahoma today). Underlying this doctrine is the notion that tribes are not
capable of owning or managing their lands and that their communal nature would not work
with private ownership. The government is the legal owner of all land and assets in Indian
Country and is required to manage them for the benefit of the Indians.
When the Dawes Act was passed in 1887 and reinforced in 1934 through the Indian
Reorganization Act, two major environmental changes took place. The acts institutionalized a
land tenure and property rights system that was collective in nature, forcing an alien legal
3
Krueger, Anne O. “The Political Economy of the Rent-Seeking Society.” American Economic Review 64 (June
1974): 291–303. And “The Political Economy of Controls: American Sugar.” In M. F. G. Scott and D. Lal, eds.,
Public Policy and Economic Development. Oxford: Clarendon Press, 1990: 170–216. McChesney, Fred S. “Rent
Extraction and Rent Creation in the Economic Theory of Regulation.” Journal of Legal Studies 16 (1987): 101–
118.
system upon the indigenous population that had no experience or interest in collective
organization.4 Until the reservation system, American Indians had private property and were
communal only in the nature of cooperation among a family or a small tribe.5 The Dawes Act
required tribally-held land to be divided among individual tribal members and the remaining
``surplus'' lands opened to white settlement. The map below shows the ownership pattern of
reservations resulting from the Dawes Act. Trust lands, fee lands, and lands owned by tribes,
individual Indians and non-Indians are mixed together on the reservation, creating a
checkerboard pattern. This seriously impairs the ability of Indian nations or individual Indians
to use land to their own advantage for farming, ranching, or other economic activities that
require large, continuous sections of land.
4
5
Cite a Terry Anderson study
Cite a Terry Anderson study
A major problem created by the dependent nation status of Indians is that land owned
by Indians is passed on to heirs but can not be sold or mortgaged. Thus, additional owners of
each parcel of land arise with each generation. The following chart summarizes the
development of what is called fractionation, assuming three heirs each generation.
Source:
When the original allottee died, title ownership was divided up among all of the heirs, but the
land itself was not physically divided. As such, each Indian heir received an undivided interest
in the land. As each generation passed on, the number of owners continued to multiply
rapidly, which resulted in the highly fractionated ownership of much Indian land today.
Parcels with fractionated ownership can have hundreds or even thousands of owners. Since
an undivided interest owner must gain consent from a majority of the parcel’s owners to do
anything with the land, it is very difficult to undertake many projects.
Fractionated land and lack of ownership have surely led to inefficiencies which in turn
are likely to increase corruption. Additional inefficiencies arise because federally recognized
tribes are considered domestic dependent nations leads. The nations are sovereign but
dependent on the federal government. Sovereignty means a Tribe governs itself and defines
membership, manages tribal property, and regulates tribal business and domestic relations.
Although tribes are sovereign states, the 56 million acres of reservation land currently under
Indian ownership are held in trust for Indian people by the U.S. federal government.
Consequently, approval by the secretary of the interior is required for nearly all land-use
decisions, such as selling, leasing or business development. Indian nations have the right to
determine their form of government, define citizenship, make and enforce laws through their
own police force and courts, collect taxes, regulate the domestic affairs of their citizens, and
regulate property use.
Indian gaming has become the primary source of income for many tribes. Congress
passed the Indian Gaming Regulatory Act (IGRA) in 1988, which retained tribal sovereignty—
which allowed reservations to create casino-like halls. Gambling has often been associated
with corruption.6 The other aspect of Indian gaming is that the casinos are the only in some
cases and by far the largest industries on the reservation in most cases. This may be
6
William Norman Thompson, Gambling in America: An Encyclopedia of History, Issues, and Society,
copyright material, 2nd edition, 2015; William Evans and Julie Topoleski, “The Social and Economic
Impact of Native American Casinos” (NBER Working Paper No. 9198).
analogized to the “natural resource curse” where an abundance of a natural resource leads to
lower economic growth than when there is no abundance.7
Using a unique data set on American Indians in the year 2000, we are able to examine
the effect of a lack of private property rights, centralized and decentralized government, and a
large industry on corruption. The governmental structure of the American Indian is unique. In
many cases tribes have to deal with Forced Coexistence. In many cases, more than one tribe
was placed on the same reservation. Throughout history and through policy, American
Indians have been placed into their current jurisdictions. The majority of reservations today
are collections of several sub-sections of communities that have the same language, ethnicity
and history of other communities in the reservation, but tend to be governed differently.
Roughly 62% of reservations experienced Forced Coexistence. Historical Centralization
measures whether the tribal government is centralized or decentralized. The difference
between forced coexistence and historical centralization is that historical centralization looks
at tribal structure, while forced coexistence looks at reservation structure. The large majority
(144 of the 182 tribes or roughly 79%) of tribes in the Year 2000 are not historically
centralized.
While most studies examining corruption use the Corruptions Perception Index,
CPI, as the measure of corruption, we use the actual reports of corruption in tribal
governments and in non-governmental reservation activities.8
7
Jeffrey A. Frankel, “The Natural Resource Curse: A Survey”, NBER Working Paper No. 15836, Issued
in March 2010,NBER Program(s): EEE IFM
8
The CPI is the compilation of different survey data by the Transparency International Organization in
Berlin. It combines assessments of previous years to reduce sharp variation in scoring which ‘‘[...]
might be due to high-level political scandals that affect perceptions, but do not reflect actual changing
levels of corruption’’ (Lambsdorff, 1999, p. 5). The CPI measures corruption from 0 (highest degree of
Corruption is measured as the number of news reports regarding a wide variety of
different types of corrupt activity on American Indian Reservations from the 1980s and
onward. <<Paul, explain number of observations, etc. here>> Reports of corruption are
classified into Tribal Governmental Corruption and Non-Governmental Corruption. Tribal
Corruption includes reports of unethical (re-)election processes, improper use of tribal
resources, and corruption within the tribal police force or any other division in the tribal
government. Non-Government Corruption includes information regarding business activity,
particularly casino activity. The average number of corruption reports for tribes that have
Casinos, tribes that have Historical Centralization, and tribes that have Forced Coexistence
are calculated. Among all variables, corruption levels are up between 167% and 450% from
the 1980s to the 2000s. The highest number of corruption observations are Non-Government
Historically Centralized tribes. Casino tribes tend to have the highest number of corruption
observations among all categories, while the tribes with the lowest levels of corruption are
those tribes without casinos. Larger tribes tend to have higher levels of corruption within their
government but less corruption outside of the government
corruption) to 10 (no corruption). A country is taken up in the CPI if at least three surveys are
available for the assessment of its level of corruption. The measurement of perceived corruption
includes, however, assessments of the extent of illegal behavior in a country in general.
[[OLS REGRESSION IN PDF FILE]
('CG' stands for Corruption Government and 'CNG', Corruption Non-Government).
According to the regression results, corruption does increase with forced coexistence
at the government level. Forced Coexistence is essentially two different governments with
different citizens attempting to behave as one. The diverse governmental entities must
interact to allocate resources, set up rules and regulations, and deal with land and regulatory
issues. This obfuscates the ability to discern or monitor what each entity is doing. The
governments may, in fact, work against one another in a zero sum game.
Forced coexistence may make it more likely that individual citizens and other entities
would be more closely monitored. Two governments may mean a greater chance that rent
seeking and other corrupt behaviors would be discovered. The regression results show that
corruption outside of government actually declines due to Forced Coexistence.
All else the same, when tribal governments are centralized, reservations are shown to
have lower levels of governmental corruption, but noticeably more non-governmental
corruption. The ability of a centralized government to observe the actions of officials may be
easier than is the case with decentralized government. But, the centralized government is not
as able to monitor the activities of the non government public and the incentive to rent seek is
greater under a centralized government.
Two very interesting relationships between Forced Coexistence and Historical
Centralization occurs when both variables are allowed to change. When historical
centralization lowers corruption in one arena (such as governmental corruption), forced
coexistence increases corruption in that arena. By the same token, when forced coexistence
lowers corruption in one arena, more corruption due to historical centralization can be found
in that arena.
Similarly ,when an independent variable lowers corruption in one arena, the other
arena sees higher levels of corruption. For example, when a variable such as historical
centralization is associated with lower levels of governmental corruption, it also appears to be
associated with higher levels of non-governmental corruption. There appears to be a tradeoff
of some sort between governmental and non-governmental corruption. This may show that
corruption levels are fairly constant throughout all tribes and reservations; the only thing that
varies is the source/location of corruption. Corruption exists, no matter the medium, and
attempting to combat corruption in one area just causes corruption elsewhere. This suggests
that a lack of well defined and secure private property rights is the principal culprit of
corruption. Institutional factors may allocate the corruption, but it is lack of private property
rights that allows the corruption to occur.
Concerns are often voiced regarding the relationship between a strong, centralized
industry like Casinos and overall levels of tribal corruption. Those who are against the
construction of Casinos on reservations often claim that casinos are harmful because they
provide a breeding ground for corrupt activity. However, after reviewing the data for the 122
tribes with casinos in the Year 2000 (which is 67% of all 182 tribes in the dataset), no clear
relationship between casinos and increased levels of corruption can be made. In this dataset,
casinos appear to be associated with higher levels of governmental corruption and lower
levels of non-governmental corruption. However, when also accounting for the fairly high
variance in the standard errors, it is clear that there is (on average) a net-zero change in
corruption. Corruption levels float around 0.00 between both types of corruption, and any
difference in the two variables end up netting out to zero. Casinos are a primary source of
revenue on American Indian Reservations, provide on-average little to no additional
corruption, and provide tribal members a secure job.
Tribal populations vary dramatically across all tribes. Tribes range from only several
hundred members up to many thousands of members. As a result, the log value of tribal
populations is used to help keep the scale, coefficients and standard errors as reasonable as
possible. Based on the OLS Regression, higher populations are associated with more
governmental corruption and lower levels of non-governmental corruption. Again, this variable
follows the pattern of the other variables, where corruption observations are low in one realm
(non-governmental corruption) but high in the other.
Conclusions
When corruption is low in one area (government or non-government), it tends to be
high in the other (and vice-versa). There is a level of corruption that is fairly constant and
whether it occurs primarily in the tribal government or outside of that tribal government is not
identifiable. Because of the high variance in each variable and the many inverse relationship
between tribal characteristics, there seems to be no effective way to show how any of these
tribal characteristics combats corruption. Most corruption counts across variables and across
mediums end up offsetting each-other. In other words, corruption seems almost unavoidable
--- a fact of life in a society with poorly defined and unsecure private property rights.
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