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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........

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