The 2024 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was awarded to Daron Acemoglu (Massachusetts Institute of Technology), Simon Johnson (Massachusetts Institute of Technology), and James A. Robinson (University of Chicago), for their studies on how institutions are formed and affect prosperity. Their research has also helped to demonstrate the importance of social institutions in determining the enormous and persistent income differences in countries around the world.
Despite the economic growth experienced by many developing countries in recent decades, there still exists significant differences in per capita income between rich and poor countries. For instance, the richest 20% of nations have a per capita income about 30 times higher than the poorest 20%. This is surprising given the rapid and relatively inexpensive flows of information, capital, and technology across the globe. The work of Acemoglu, Johnson, and Robinson published from 2000 to 2020 highlights the crucial role of one specific factor in explaining this persistence: differences in the institutions that regulate social life in different countries.
The economic theory to which the prize winners, among others, have contributed, suggests various mechanisms through which the quality of institutions can influence the economic growth and welfare of a society. However, the most important contribution of Acemoglu, Johnson, and Robinson is the ample and convincing empirical evidence they provided about the fundamental role of institutions in generating prosperity, and the reasons why some countries adopt growth-friendly institutions and others do not.
Providing clear evidence about the ultimate causes of complex social and economic phenomena is a challenge. For instance, rich and poor nations vary in culture, social norms, and historical experiences, all of which can impact their economic performance and institutions. Moreover, a community's wealth and prosperity can influence the type of institutions that govern society. To back up their theories with solid evidence, Acemoglu, Johnson, and Robinson developed a unique and innovative empirical approach.
In their 2001 work "The Colonial Origins of Comparative Development: An Empirical Investigation" published in the American Economic Review, Acemoglu, Johnson, and Robinson examined the impact of institutions on the economic performance of colonised countries. They used differences in the mortality rates of European colonisers in various countries to quantify this effect. The basic idea is that different colonisation policies led to the development of different institutions. In places where Europeans suffered high mortality rates due to infectious diseases, they were unable to settle in large numbers, leading to the development of different institutions. For the few Europeans living in a large and resource-rich territory, a predatory strategy proved to be the most profitable. Therefore, the colonisers of these regions typically developed ‘extractive’ economic and political institutions, aimed solely at dragging as many resources as possible from the colonised territories. Conversely, where mortality rates were low, Europeans settled in large numbers relative to the resources present, making the mere extraction of local wealth insufficient for the colonisers. This scenario propitiated the emergence of ‘inclusive’ institutions to foster the economic activity and well-being of the colonisers in the long run. By exploiting differences in the mortality rates of colonisers, Acemoglu, Johnson and Robinson isolated a source of variation in the current institutions of colonised countries that is independent of other factors that might influence the economic growth of these countries today. They then used this variation to quantify the effect of the quality of a society's institutions on its per capita income.
Similarly, in their 2002 paper "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," published in the Quarterly Journal of Economics, Acemoglu, Johnson, and Robinson used an innovative empirical strategy to show how variations in colonial institutions in the past are crucial for understanding the significant differences in prosperity between countries today. To this end, they used data on urbanisation and population density as measures of economic prosperity. From this data, a paradoxical regularity emerged: among the countries colonised by Europeans during the last 500 years, those that were relatively rich in 1500 are relatively poor today. The explanation given for this ‘reversal in prosperity’ lies in a corresponding ‘reversal in institutions’. Specifically, in the initially rich and densely populated regions, the colonisers found resources to extract and a large indigenous population to exploit as cheap labour, the latter factor discouraging the settlement of Europeans. For the few Europeans, the most profitable strategy is once again predatory, leading to the creation of ‘extractive’ institutions and damaging economic growth prospects. Conversely, in the initially poor and sparsely populated regions, the shortage of local labour resulted in the settlement of large numbers of Europeans in the face of limited wealth to be extracted. Thus, ‘inclusive’ institutions prevailed that favoured productive investment and the advent of industrialisation, generating prosperity and wealth in the centuries that followed.
The work of Acemoglu, Johnson, and Robinson goes beyond simply documenting the causal link between the quality of institutions and economic well-being. It also involves a crucial theoretical and empirical analysis of the reasons behind the long-lasting nature of institutions that were initially designed to benefit a few at the expense of the majority, but ultimately harm everyone. Why do the ruling elites not reform these inefficient institutions? Providing a credible answer to this question could have significant implications for the economic development of poorer countries, extending beyond the purely academic value of this research.
In their work "A Theory of Political Transitions," published in 2001 in the American Economic Review, Acemoglu and Robinson proposed a theoretical model that demonstrated how the persistence of inefficient institutions can be attributed to issues with the credibility of commitments made by different factions in a political power struggle. In summary, in an authoritarian political system based on extractive institutions, the oppressed may occasionally have the opportunity to exploit the weaknesses of the regime to demand democratisation, resulting in more efficient institutions. However, the lower classes cannot guarantee that once democracy is achieved, they will not penalise the wealthy classes in power by, for example, promoting strongly redistributive policies. Hence, the wealthy class has a stake in maintaining or reinstating the traditional and ineffective extractive institutions as soon as possible, to the significant detriment of the community. This credibility issue is especially severe in societies with substantial income inequality. This study establishes a potential causal connection between economic inequality and the persistence of inefficient institutions, indicating that policies aimed at reducing income inequality may also help to overcome inefficient institutions. This finding is an innovative addition to the ongoing scientific discussion about the relationship between income inequality and economic growth.
The empirical studies of Acemoglu, Johnson and Robinson have contributed greatly to demonstrating a causal link between institutional quality and long-term economic welfare. They showed that repressive institutions designed to exploit the masses hinder economic growth, while those based on economic freedom and the rule of law promote it. Their theoretical studies have also explained why extractive institutions persist despite their inefficiency and under what conditions they can be replaced by more participatory and efficient ones. Their work has greatly influenced research in economics and political science and has contributed to the promotion of democracy and inclusive institutions as a means of fostering prosperity and economic development.
