Why some countries are rich while others are poor is a question that economists have long debated. Symbolic file image. , Photo Credit: AP
the story So Far: 2024 economics nobel prize The award was presented on Monday to American economists Daron Acemoglu, Simon Johnson and James A. Robinson was awarded for his study of “how institutions are formed and affect prosperity”. The awards committee credited the winners for enhancing our understanding of the root causes of why countries fail or succeed.
Read this also Economics Nobel Laureate 2024 and his study on ‘How institutions are formed and affect prosperity’
What is the significance of the work of this year’s economics Nobel laureates?
Why some countries are rich while others are poor is a question that economists have long debated. According to the Nobel Committee, today the richest 20% of countries in the world are 30 times richer in terms of average income than the poorest 20%. Ever since the Industrial Revolution led to the “Great Gap” in living standards between East and West, various theories have been proposed to explain the vast differences in living standards in rich versus poor countries.
Some people still consider Western colonialism as the primary reason for the prosperity of the Western world. Other scholars have argued that disparities in natural resource endowments explain differences in economic prosperity across countries. Some others have argued that intelligence and even historical accidents can explain a country’s fate.
However, the 2024 Nobel Laureates have argued that it is differences in the quality of economic and political institutions that best explain differences in the economic fortunes of countries. This thesis is most famously detailed in the 2012 book Why Nations Fail: The Origins of Power, Prosperity, and Poverty Daron Acemoglu and James A. Robinson, and also in a 2004 paper Institutions as a fundamental cause of long-term developmentWritten together by all three of this year’s Nobel Prize winners.
Explore this year’s Nobel winners and their achievements with this interactive guide
Why is the quality of institutions so important?
According to Douglas North, Nobel laureate and pioneer of the New Institutional Economics, institutions are the “rules of the game” that define the incentives that human individuals face when dealing with each other. For example, institutions that prevent the state from confiscating the property of honest citizens will encourage ordinary citizens to work hard without fear of confiscation and this will in turn lead to general economic prosperity. On the other hand, institutions that legitimize expropriation will negatively affect individual incentives and lead to economic stagnation.
Now, Acemoglu and Johnson argue in their book that institutions can be either “inclusive” or “extractive”. Inclusive institutions are characterized by secure private property rights and democracy, while exclusionary institutions are characterized by insecure private property rights and a lack of political freedom. He attempted to demonstrate empirically that inclusive institutions lead to long-term economic growth and higher standards of living while extractive institutions lead to economic decline and poverty.
For this purpose, he studied the types of institutions established by colonists in different colonies and the impact they had on the long-term economic fortunes of these colonies. When a colonial power did not want to settle in a certain country due to various reasons (such as high mortality rates due to geography), it established institutions that were extractive in nature and detrimental to long-term economic development. This may have been the case in India where the British established institutions that were designed to extract maximum resources within a short period of time rather than promote long-term economic growth. But in countries where colonizers wanted long-term settlements, they established inclusive institutions that encouraged investment and long-term economic growth rather than short-term plunder. This may have been the case in the United States where the British established inclusive institutions that promoted long-term economic prosperity.
It should be noted that institutions may also include factors such as culture, which influence the more obvious “rules of the game” expressed by political and economic institutions.
If inclusive institutions are so good for development, why don’t we have more of them?
Nobel laureates have also shed light on why inclusive institutions, which are found to be extremely important for long-term economic growth, have not been adopted by more countries in the world. He attributes this to the different choices that rulers face in their respective countries. The laureates argue that when a country’s rulers are able to safely extract substantial resources through extractive institutions for their personal gain, they have no reason to bring about political and economic reforms (or inclusive institutions). Which can benefit the wider population in the long run. run. In such cases, unless the public revolts against the status quo, extractive institutions may actually persist for a long time. But if there is a real threat of popular revolt against extractive institutions, at least some rulers may decide to bow to popular demand and reluctantly establish more inclusive institutions that aid economic growth.
What is special in the Nobel Prize given to Acemoglu, Johnson and Robinson?
The Nobel Prize in Economics is typically awarded for groundbreaking academic research on topics that have real-world significance. For example, in the last two years, Nobel Prizes were awarded to scholars who worked on important questions such as the gender pay gap and the fragility of the banking system. While these topics are undoubtedly important for economists to think about, they do not delve into the more fundamental questions that economics as a discipline was founded to answer. This year’s Nobel Prize corrects this flaw by bringing the world’s attention back to the important topic of institutions, which set the “rules of the game” in any economy and thus influence virtually everything that happens in it.
published – October 15, 2024 06:11 am IST