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Many First Nation communities in Canada are islands of poverty within an otherwise prosperous, developed country. Yet, some First Nations thrive.
Why do some First Nations manage to break the cycle of poverty and overcome the damage of historical injustices while others do not? Those different outcomes are not due to differences in work ethic or business choices, ethnicity or culture. They are due to different systems of rules and incentives that either stifle or empower growth.
First Nations that succeed have found ways to escape the constraints of the Indian Act. For many, the best path to self-governance is through intermediary institutions which are unique innovations that supersede sections of the Indian Act, piece by piece, backed by modern legislation.
What institutions make possible
Every economy has two parts: comparative advantages and the rules that let those advantages be used. Advantages could be anything from mineral resources to labour, while rules — known as institutions — include property rights, registries, taxation, standards, laws and enforcement mechanisms.
Secure and efficient institutions make it easier to buy, sell and invest without constant risk and uncertainty. Insecure and inefficient institutions do the opposite.
A simple example from the Cold War demonstrates the power of institutions. From 1949 to 1990, Germany was divided into east and west. West Germany was prosperous whereas East Germany was far poorer. The difference was not work ethic or natural advantages. It was the institutions: West German institutions supported a market economy; East German institutions did not.
In current-day Canada, a similar difference exists between First Nation communities, most of which live under a constraining set of institutions set out in the Indian Act. But some have found ways to rid themselves of these institutional shackles and reach appreciable levels of prosperity.
The Indian Act still blocks economic growth
The Indian Act was designed to isolate and exclude First Nations and First Nation governments from supporting their own market economies or participating in the broader market economy. This created a system that is both inefficient and incomplete and undermines some of the basic conditions for economic growth. For example, Section 89 of the Indian Act prevents a First Nation government or citizen from pledging assets on reserve to secure a business loan.
Other sections of the act give the federal government near total control over local affairs, commerce, fiscal powers, education, forms of government and legislating and land management. This is why it takes an average of five times as long on reserve as it does off to get an infrastructure project shovel-ready. Since capital is mobile, it simply flows toward more certain, less risky projects – usually away from reserves.
First Nations who circumvent the Indian Act and implement their own institutions are doing markedly better than First Nations who do not. The most comprehensive way to replace the Indian Act with First Nations institutions is through self-government or modern treaty agreements. This is how some First Nations, such as Westbank in British Columbia, can create jurisdictions that support private investment from businesses such as Walmart, London Drugs and Home Depot.
Unlike the Indian Act, the institutions and legislative power stemming from self-government agreements provide certainty and lower the cost of doing business. Unfortunately, federal evaluations consistently find that modern treaty and self-government negotiations typically take between 10 and 30 years. That is not a realistic prospect for many small or geographically remote First Nations.
For many First Nations, intermediary institutions — those unique innovations that void sections of the Indian Act — are the best route to prosperity.
Some examples. Legislation such as the First Nations Fiscal Management Act (FMA) provides First Nations authority to develop financial laws, raise local revenue and participate in debenture financing. The Framework Agreement on First Nation Land Management provides authority to govern reserve lands. In short, both allow for many elements of control other levels of government take for granted.
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Intermediary institutions are still evolving, not yet complete systems, but our analysis of key economic development indicators in more than 580 First Nation communities shows that those that adopt intermediary institutions enjoy more gains than First Nations that live under the full weight of the Indian Act.
We found that First Nations with even partial institutional development outperform comparatively similar First Nations, and First Nations with broader institutional systems have significantly better economic outcomes. For instance, First Nations with land governance laws, financial laws, taxation and debenture finance generate more than double the revenue of otherwise comparable First Nations. Even after controlling for community remoteness and population, institutional development is still associated with 115 per cent higher self-generated revenue per capita. Self-generated revenue is key if First Nation governments are to achieve development goals such as higher levels of health, education and housing, while maintaining their culture.
The policy lesson: transfer power, not programs
These findings have major policy implications. First, the federal government should do more to support the evolution of modern First Nations institutional systems through the transfer of powers, resources and responsibilities to First Nations governments and organizations from Indigenous Services Canada. Institutional systems support growth, but they are incomplete and do not yet allow markets to fully operate as they do off reserve — routinely, at scale and with minimal cost.
Second, governments should provide more support to the Indigenous-led organizations that work with First Nations as they break free from the Indian Act and develop Indigenous-led institutional systems. Developing intermediary institutions does not take as much time and effort as self-government and modern treaty negotiations. But switching costs can still be significant. Indigenous-led organizations decrease the time and resource costs of switching systems.
Over the last 10 years, the number of First Nation governments that have begun the journey to implementing intermediary institutions has grown from 177 to 385. This growth signals great cause for optimism, but also the need to invest in their future. By creating more space for First Nations to govern themselves and supporting their capacity to govern effectively, the federal government can pave the way for institutional systems that support long run growth.
Many First Nations are already leading the way. It’s time for the Government of Canada to break from managing poverty and support a strategy that works.
