A New Perspective on Native American Community Economic Development:  The Three Key Elements of Success—Sovereignty, Culture and Institutions

"This Land Is My Land", Michael Horse (Yaqui,Mescalero,Apache,Zuni)

A New Perspective on Native American Community Economic Development:  The Three Key Elements of Success—Sovereignty, Culture and Institutions

The Harvard Project on American Indian Economic Development has developed a broad array of research materials, which provide an excellent starting point for the understanding of the unique problems of Native American economic development. The Harvard Project began in 1987 with the question, "What strategies work around Indian Country for reducing chronic Indian poverty?" During the course of their research, particularly in the work of Professors Stephen Cornell and Joseph Kalt, the project found that there were three consistent areas of study whose nature played a determining role in the success or failure of Indian economic institutions. In treating these areas, they concluded that:

1.Sovereignty Matters Where tribes make their own decisions about what approaches to take and what resources to develop, they consistently out-perform outside decision-makers. Whether it is timber operations under PL 93-638, Indian Health Service programs under self-governance compacts, or water rights made secure under a treaty settlement, tribes do better when they make decision-themselves. Because tribes bear the consequences of their government's decision-making, whereas the Bureau of Indian Affairs, non-tribal developers, state governments and other outsiders do not, tribes that make their own development decisions do better.
2.Culture Matters: Not long ago, the federal government espoused the argument that acculturation was a means to development. Indians, they argued, would develop as soon as they shed their "Indian-ness." Research by the Harvard Project finds exactly the opposite: Indian culture is a resource that shores up the strength of government and has concrete impacts upon such bottom line results as forest productivity and housing quality. Not only does culture itself provide important institutional resources, but also so does congruence between the institutions of government and the view of the governed about what appropriate government is also matters to success. Cultural norms and resources support, complement, and sometimes even serve as appropriate institutions of government.
3.Institutions Matter: In addition to defending their sovereignty and having institutions that match their cultures, successful tribal governments share a few core institutional attributes. They settle disputes fairly, they separate the functions of elected representation and business management, and they successfully implement tribal policies that advance tribal strategic goals. Fair dispute resolution is essential to the accumulation of human, financial and infrastructural capital because it sends a signal to investors that their contributions will not be expropriated unfairly. Separating business and government is critical because so many Indian businesses are government- owned (occasionally by law and frequently by design). This feature invites the conflation of two contradicting institutional virtues—good constituent service to voters and fiduciary duty to shareholders—and thereby creates tremendous risk to profitability as elected leaders are pressured to interfere in business on behalf of voters.
Finally, effective administration is a feature of successful tribes because, without it, legitimacy deteriorates and sovereignty is eroded as "opportunities go untapped or other powers fill the vacuum left by weak tribal government.

"Essentially, the research of the Harvard Project finds that poverty in Indian Country is a political problem—not an economic one. There has been a substantial supply of labor in Indian Country for decades, yet scores of economic development plans have been unable to tap that supply on a sustained basis and thereby improve the fortunes of Indian households. Likewise, tribes possessing natural or capital resources have not uniformly led the vanguard of development. While a lack of resources can hamper tribes, and certain systemic features of Indian Country confound investment… the Harvard Project finds that the real deficiency in Indian Country is a shortage of safe havens for capital. The ability to create these safe havens is largely a matter of tribal political and institutional effectiveness."

Modeling Institutional Behavior: Individuals, Institutions and Complexity

Robert Axelrod echoes these sentiments in a 2000 working paper from the Santa Fe Institute. While Axelrod is speaking in a global context, the problem he describes is a very close match to Begey, Kalt and Cornell's thesis on economic failure in Indian Country:

"One of the main obstacles to global sustainability is the "tragedy of the commons." This phenomenon arises when many independent actors (people, villages, states, etc.) each "over-graze" because there is no mechanism to enforce the collective interests of all against the private interests of each. This leads to resource depletion, elimination of bio-diversity, overpopulation, war, and other major social problems. A major route to the prevention of the tragedy of the commons is the emergence of a political actor based upon the organization of previously independent actors. Today we have political actors at the national level who can regulate resource use within their boundaries, but we do not yet have effective political actors at the trans-national level to regulate resource use at the global level."

Axelrod's argument directly parallels the claim of Begey, Kalt and Cornell that the fundamental problem of capital development in Indian Country is political rather than economic. This argument is at least partially echoed in Michael Porter's cluster argument as well, particularly where he states:

"The importance of clusters creates new management agendas that are rarely recognized. Clusters also create new roles for government. The proper macroeconomic policies for fostering competitiveness are increasingly well understood but they are necessary and not sufficient. Government's more decisive influences are often at the microeconomic level. Removing obstacles to the growth and upgrading of existing and emerging clusters should be a priority. Clusters are a driving force in increasing exports and magnets for attracting foreign investment. They constitute a forum in which new types of dialogue can, and must, take place among firms, government agencies and institutions."

By thinking of Indian Country in the context of sovereignty, Porter addresses one of the fundamental problems alluded to in the beginning of this report the inability of Indian Nations to retain capital on the reservation. As we develop the arguments behind the new hybrid model, Porter'' cluster arguments will be highly relevant to the industry selection process for investors which parallel's the Japanese targeting system in the Ministry of International Trade and Industry (MITI). In the context of the new hybrid model for economic development in Indian Country, Rose Community Development Corporation is most heavily focused on the role of institutions in economic development, while the Harvard project is more often focused on issues of culture and how those issues relate to effective governance.

Santa Fe Institute economist, Brian Arthur, analyzes the importance of both clusters and institutions from yet another point of view, that of the mathematical modeler. Arthur's basic argument is that small differences in the initial conditions of a business or a cluster can lock in "path dependent" outcomes, which may not automatically favor the "survival of the fittest" as predicted by the neoclassical microeconomic theory of the "invisible hand" of market efficiency. Interestingly enough, the central focus of Arthur's argument, at least in its simplest form, is the role of institutions. At the most basic level, Arthur characterizes economic activity as the interaction of complex systems all reacting to the elements they create. In his words, "barring some asymptotic state or equilibrium reached, complex systems are systems in process, systems that constantly evolve and unfold over time. He further argues that such systems naturally occur in the economy, and points out that these systems are composed of a variety of entities, most of them quite familiar: banks, consumers, firms and investors. In economic jargon, these are all "agents" which attempt to react to the future with some degree of foresight. The strategic consideration of possible future alternatives by the agents within a system poses problems, which have traditionally been to complex for economists to tackle. As a result, much of economic theory has attempted to simplify the problems of economic agents to the degree that formal mathematical analysis is sufficient to solve the analytical problems of economics. As an alternative to the rather sterile approach of equilibrium economics and pure analysis, Arthur and his colleagues attempt to tackle the problem of conscious agents in the economy, broadening the consideration of economic questions into more general, non-equilibrium terms. The most interesting cases of non-equilibrium economics appear to be those characterized by "increasing returns". In simpler language, there are positive feedbacks within the system as well as between the micro and macro levels of the system. Those familiar with marketing strategy will recognize this as the situation where an early entrant may take the entire market (commonly referred to as the "first mover" advantage). Arthur illustrates this phenomenon with an example from Internet commerce

"Consider the market for online services of a few years back, in which three major companies competed: Prodigy, CompuServe and America Online. As each gained in membership base it could offer a wider menu of services as well as more members to share specialized hobby and chatroom interests with—there were increasing returns to expanding the membership base. Prodigy was first in the market, but by chance and strategy American Online got far enough ahead to gain an unassailable advantage. Today it dominates. Under different circumstances, another rival might have taken the market. Notice the properties here: a multiplicity of potential "solutions"; the outcome actually reached is not predictable in advance; it tends to be locked in; it is not necessarily the most efficient economically; it is subject to the historical path taken; while the companies may start equal, the outcome is asymmetrical. These properties have counterparts in non-linear physics where similar positive feedbacks are present. What economists call multiple equilibria, non-predictability, lock-in, inefficiency, historical path dependence, and asymmetry; physicists call multiple meta-stable states, unpredictability, phase- or mode-locking, high-energy ground states, non-ergodicity, and symmetry breaking."

Of particular relevance to economic development in Indian Country and Rose Community Development's unique hybrid approach are Arthur's observations that

"This shift from a static outlook into a process orientation is common to complexity studies. Increasing returns problems are being studied intensively in market allocation theory, international trade theory, the evolution of technology choice, economic geography, and the evolution of patterns of poverty and segregation. The common finding that economic structures can crystallize around small events and lock in is beginning to change policy in all these areas toward an awareness that governments should avoid both extremes of coercing a desired outcome or keeping strict hands off, and instead seek to push the system gently toward favored structures that can grow and emerge naturally. Not a heavy hand, not an invisible hand, but a nudging hand."

Perhaps of more immediate interest is the fact that (a) all of the above phenomena have close linkages to the issues and challenges facing economic development in Indian Country, and (b) that in this context, we find a powerful scientific foundation for the assertion that institutions matter, and indeed, that institutions matter the most! The "nudging hand" will be discussed further in the latter sections of this business plan in the context of MITI's program of "avoiding confusion in the marketplace". Another reason supporting the argument that institutions are important is the way that institutions shape individual agents' expectations. Arthur explains this in a simplified form by using a metaphorical construction, which he labels "The El Farol Bar Problem"

"Consider as an example my El Farol Bar Problem. One hundred people must decide independently each week whether to show up at their favorite bar (El Farol in Santa Fe). The rule is that if a person predicts that more that 60 (say) will attend, he will avoid the crowds and stay home; if he predicts fewer than 60 he will go. Of interest are how the bar-goers each week might predict the numbers showing up, and the resulting dynamics of the numbers attending. Notice two features of this problem. Our agents will quickly realize that predictions of how many will attend depend on others' predictions of how many attend (because that determines their attendance). But others' predictions in turn depend on their predictions of others' predictions. Deductively there is an infinite regress. No "correct" expectational model can be assumed to be common knowledge, and from the agents' viewpoint, the problem is ill defined. (This is true for most expectational problems, not just for this example.) Second, and diabolically, any commonalty of expectations gets broken up: If all use an expectational model that predicts few will go, all will go, invalidating that model. Similarly, if all believe most will go, nobody will go, invalidating that belief. Expectations will be forced to differ."

Arthur modeled this situation mathematically in 1993. He built a "rational expectations" model where each actor acted like a statistician and either made his weekly El Farol appearance or avoided it based on his most accurate empirical model (i.e. based on previous observations). Interestingly enough, the model converged fairly rapidly to 60—the exact threshold set for staying at home or showing up at the bar. However, the simulation soon proved to have hidden complex dynamics. If there were equilibrium around 70, for an extended period, of time it would create a rather long counter-equilibrium of 30. Similarly a persistent level of 30 would eventually draw regular crowds of 70, based on their historical expectation that only 30 people would show up. Because the expectations ultimately average out, Arthur describes this as an "emergent" or self-organizing system. The general term for such behavior in complex systems is "local rules of behavior", which means that in a complex system a very few simple rules can lead to extremely complex "emergent" ecological structures which are controlled by feedbacks between elements of the system. When Arthur and Computer scientist John Holland used these principles to model financial markets they found a very interesting result:

"Within this computerized market, we found two phases or regimes. If parameters are set so that our artificial agents update their hypotheses slowly, the diversity of expectations collapses quickly into homogeneous rational expectations ones. The reason is that if a majority of investors believes something close to the rational expectations forecast, then resulting prices will validate it, and deviant or mutant predictions that arise in the population of expectational models will be rendered inaccurate. Standard finance theory, under these special circumstances, is upheld. But if the rate of updating of hypotheses is turned up, the market undergoes a phase transition into a "complex regime" and displays several of the "anomalies" observed in real markets. It develops a rich "psychology" of divergent beliefs that don't converge over time. Expectational rules such as "If the market is trending up, predict a 1% price rise" that appear randomly in the population of hypotheses can become mutually reinforcing—if enough investors act on these, the price will indeed go up. Thus sub-populations of mutually reinforcing expectations arise, agents bet on these (therefore technical trading emerges) and this causes occasional bubbles and crashes. Our artificial market also shows periods of high volatility in prices followed randomly by periods of low volatility. This is because if some investors "discover" new, profitable hypotheses, they change the market slightly, causing other investors to also change their expectations. Changes in beliefs therefore ripple through the market in avalanches of all sizes, causing periods of high and low volatility. We conjecture that actual financial markets, which show exactly these phenomena, lie in this "complex" regime."

Arthur and Holland's work has several important empirical implications for Indian Country community economic development. First, if we link this work with Michael Porter's work on clusters, we can easily visualize how enabling institutions, particularly those which would spur patient investment by institutional investors using a blended value proposition decisional calculus could create a regime of mutually reinforcing positive feedbacks in Indian Country. This scenario would exactly parallel the Japanese experience following World War II through the 1973 Arab Oil Embargo. Additionally, Japan's institutional resilience allowed it to weather the first oil shock far more easily and rapidly than any other OECD nation. At least one explanation for this unusual response is MITI's ability to influence agents' (investors, sellers, companies, etc.) expectations about future price behavior. Similarly, as in the case of Arthur and Holland's simulated crashes and swings in volatility, one could argue that the recent stagnation of Japan's economy during the 1990's is a function of agents' lack of confidence in the ability of the ruling Liberal Democratic Party to effect fundamental reform of the Japanese banking system.

The key point with respect to institutions is that the mathematical models of complexity theory provide a scientific basis for understanding why institutions play such a critical role in economic development. To the extent there is an accountable, impartial, culturally acceptable institution, which is charged with the responsibility for tribal investments, the influence of that institution on tribal economic development is likely to be large and positive. The absence of such institutions would seem to indicate that the particular nation in question faces additional, and perhaps insurmountable obstacles in value cluster formation. This line of reasoning is a direct result of Arthur's conclusion that "policies succeed better by influencing the natural processes of formation of economic structures, than by forcing static outcomes." This conclusion also buttresses the Harvard arguments about culture as well as highlighting the need for a new model of both economic development and corporate governance to replace the culturally inappropriate structures created in the Indian Reorganization Act of 1934.