2024 Nobel Prize in Economics: A study of Institutions, Prosperity, and Inequality

Dipak Kurmi

(The writer can be reached at dipakkurmiglpltd@gmail.com)

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2024 was awarded to three distinguished scholars: Daron Acemoglu, Simon Johnson, and James A. Robinson. These academics were recognised ‘for studies of how institutions are formed and affect prosperity’, offering critical insights into one of the most profound challenges of our time: understanding the vast disparities in wealth and development between nations.

At the core of their groundbreaking research is a deep analysis of how societal institutions shape a country’s economic fortunes. Through their comprehensive study of history and modern political systems, Acemoglu, Johnson, and Robinson have demonstrated that the prosperity or stagnation of nations can often be traced back to the nature of their institutions, particularly those established during periods of colonization. Their work sheds light on how inclusive or extractive institutions influence whether nations thrive or falter, a concept that is now central to contemporary economic discourse.

The Role of Institutions

in Shaping Nations

The laureates’ key contribution lies in their examination of how institutions—the rules, norms, and systems that govern societies—fundamentally determine the success or failure of a nation. Their research highlights a crucial distinction between inclusive and extractive institutions. Inclusive institutions empower broad segments of society, fostering economic participation, innovation, and development. Extractive institutions, by contrast, concentrate power and wealth in the hands of a narrow elite, often stifling growth and perpetuating inequality.

This dichotomy can be traced back to the colonial era, when European powers imposed different types of institutions on their colonies, often based on their immediate interests. In some regions, especially those with smaller indigenous populations or where European settlers sought to establish permanent communities, inclusive institutions were established. These institutions allowed for long-term development, creating the conditions for sustained economic prosperity. In other regions, however, extractive institutions were introduced, with the primary aim of exploiting natural resources and local populations for the benefit of the colonizers. These societies, burdened with exploitative political and economic systems, often remain trapped in cycles of poverty and corruption even after gaining independence.

This historical analysis offers a compelling explanation for the paradox that many of the wealthiest nations prior to colonisation are now among the poorest, while some of the least developed regions during the colonial period have emerged as prosperous economies. The work of Acemoglu, Johnson, and Robinson provides a sobering reminder that the roots of modern inequality run deep into the past, shaped by decisions and institutions created centuries ago.

The Persistence of

Extractive Institutions

One of the key insights from the laureates’ research is the persistence of extractive institutions and their ability to maintain a grip on power, even in the face of economic stagnation. In many countries, political elites benefit from maintaining systems that allow them to extract wealth and resources at the expense of the broader population. The short-term gains of these elites often come at the cost of long-term national prosperity.

For instance, the laureates argue that the inability to make credible promises of economic reform is a major reason why many countries remain stuck with extractive institutions. Even when political elites promise reform, there is often little trust that these changes will be sustained. As long as those in power are assured of their continued dominance, the incentives for genuine reform remain weak. This dynamic creates a vicious cycle of underdevelopment, as economic growth is stifled by corrupt political systems that prioritise the interests of the few over the many.

This insight helps explain why some countries continue to experience low economic growth despite efforts to introduce market-orientated reforms. Without accompanying political reforms that decentralise power and create inclusive institutions, economic growth remains elusive.

Institutional Change and

the Path to Democracy

Despite the seeming permanence of extractive institutions, the laureates also highlight a path to change: the threat of revolution or popular uprising. When political elites face credible threats to their power, they may be forced to concede and introduce democratic reforms. This is often the case in countries where the population becomes increasingly frustrated with corruption, inequality, and the lack of economic opportunities.

However, as the laureates emphasise, such transitions are fraught with uncertainty. Political elites may promise reform in an effort to placate the masses, but without credible institutions to enforce these changes, there is little reason for the population to trust that reforms will be lasting. The failure of many countries to transition from extractive to inclusive institutions underscores the difficulty of establishing long-term political stability and economic growth in the absence of trustworthy political systems.

Why Nations Fail:

A Global Perspective

The work of Acemoglu, Johnson, and Robinson culminated in their seminal book, Why Nations Fail, which provides a broad, interdisciplinary analysis of the historical and institutional factors that determine the fate of nations. Drawing on examples from all corners of the globe, the authors present a compelling narrative of why some nations have flourished while others have languished in poverty and inequality.

A striking illustration of their thesis is the town of Nogales, divided by a fence into two parts—one in Arizona, USA, and the other in Sonora, Mexico. Despite sharing the same geography and climate, the two halves of Nogales have drastically different levels of prosperity. The Nogales in Arizona is a thriving community, while the Nogales in Sonora suffers from high poverty and crime rates. The authors argue that the difference lies not in the physical environment, but in the institutions that govern each part. The inclusive political and economic systems of the United States have fostered growth and development, while Mexico’s historically extractive institutions have hindered its progress.

This example is emblematic of a broader trend that the laureates document: nations that have adopted inclusive institutions tend to experience sustained growth and prosperity, while those burdened by extractive institutions often fall into cycles of poverty, corruption, and political instability.

Colonialism and its Legacy

The laureates’ research also offers a nuanced view of colonialism’s legacy. While it is widely acknowledged that colonialism left a deep scar on many countries, the specific impact varied depending on the institutions that were introduced. In some cases, colonial powers established institutions that prioritised the extraction of resources and wealth, leaving behind systems of governance that continue to benefit a narrow elite at the expense of the broader population. In other cases, particularly where European settlers established permanent colonies, more inclusive institutions were introduced, laying the groundwork for long-term prosperity.

This analysis forces a reevaluation of the colonial period, highlighting the long-term effects of institutional choices made centuries ago. It also underscores the importance of institutional reform in addressing the persistent inequalities that continue to plague many former colonies.

Implications for Today’s World

The laureates’ work has profound implications for today’s policymakers. As Jakob Svensson, Chair of the Committee for the Prize in Economic Sciences, stated, “Reducing the vast differences in income between countries is one of our time’s greatest challenges.” The research of Acemoglu, Johnson, and Robinson suggests that addressing these disparities requires more than just economic reforms. Political institutions must also be reformed to ensure that power is distributed more equitably and that the benefits of economic growth are shared more broadly.

Their research also provides a cautionary tale for countries that remain trapped in cycles of corruption and underdevelopment. Without genuine political reform, efforts to promote economic growth are likely to fail. Conversely, countries that are able to establish inclusive institutions have the potential to achieve sustained growth and development, even in the face of significant challenges.

In conclusion, the 2024 Nobel Prize in Economic Sciences highlights the critical role that institutions play in shaping the prosperity of nations. The work of Daron Acemoglu, Simon Johnson, and James A. Robinson provides a powerful framework for understanding why some countries flourish while others languish, offering valuable insights for policymakers, scholars, and anyone interested in the future of global development.