A Nobel prize for explaining why nations fail or succeed

On October 14, 2024, the Sveriges Riksbank Prize in Economic Sciences was awarded to economists Daron Acemoglu, Simon Johnson, and James A. Robinson for their research on how institutions shape national prosperity and economic development. 

The Central Question: Why Some Nations Prosper?

• Throughout history, various explanations have been proposed for the wealth disparities between nations, ranging from biological factors to geographical advantages. 
• However, these explanations depend on history, as many countries that are poor today were once wealthy
• Presently, the wealthiest 20% of nations are approximately 30 times richer than the poorest 20%, and this income gap remains persistent despite some improvement in the latter.

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According to the Nobel laureates, the key to understanding national prosperity lies in the quality of institutions.

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The Power of Societal Institutions

• The laureates emphasise that societal institutions(e.g. Judiciary, police etc.) hold the key to a country’s economic prosperity. 
• They define institutions as the rules governing individual behaviour within a society. 
  • The citation highlights that countries with weak rule of law and exploitative institutions struggle to achieve growth and positive change.    

Types of Social Institutions

• Inclusive Institutions: These encompass democracy, rule of law, and protection of property rights. They provide individuals with the security to invest in their future and promote long-term economic growth.
• Extractive Institutions: Characterised by concentrated power and lack of rule of law, these institutions disincentivize investment and undermine prosperity. 
  • In such environments, people cannot trust that their assets or earnings will be secure, leading to stagnation.

Empirical Evidence Supporting the Theory

The economists illustrate their thesis by examining historical contexts in countries like India and the United States. 

• The economists’ influential paper, “The Colonial Origins of Comparative Development,” investigates how colonial powers shaped political and economic systems. 
• They found that the institutions established during colonisation were not uniformly ruled
• In India, the British colonial powers established extractive institutions designed primarily to exploit resources for short-term gain, impeding long-term economic growth.
  • This approach created a legacy of economic underdevelopment that persists in various forms today. 
• In the United States, where British settlers intended to establish permanent colonies, inclusive institutions were developed. 
  • These institutions encouraged investments and long-term prosperity, contributing to America’s position as one of the wealthiest nations globally.

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Critique of the Theory

• Critics argue that this narrative does not adequately explain the economic trajectories of countries like China and India. 
  • China has experienced rapid economic growth without fully inclusive institutions, while India, despite its democratic processes and inclusive institutions, has struggled to realise its full economic potential. 
• If the theory holds, China’s growth over the past three decades may be temporary due to its lack of inclusive institutions. 

Conclusion

In summary, Acemoglu, Johnson, and Robinson’s research underscores the critical role of institutions in determining national prosperity. While their framework explains many disparities, the contrasting economic trajectories of China and India highlight complexities in institutional development, suggesting that factors beyond institutions also influence long-term economic success.