Nobel Economics Prize explains why some nations succeed, others fail

The Nobel Memorial Prize in Economic Sciences was awarded on October 14 to Daron Acemoglu and Simon Johnson, both of the Massachusetts Institute of Technology, and to James Robinson of the University of Chicago.They received the prize for their research into how institutions shape which countries become wealthy and prosperous — and how those structures came to exist in the first place.The laureates delved into the world’s colonial past to trace how gaps emerged between nations, arguing that countries that started out with more inclusive institutions during the colonial period tended to become more prosperous. Their pioneering use of theory and data has helped to better explain the reasons for persistent inequality between nations, according to the Nobel committee.“Reducing the huge differences in income between countries is one of our times’ greatest challenges,” Jakob Svensson, chair of the economics prize committee, said while announcing the award. Thanks to the economists’ “groundbreaking research”, he said, “we have a much deeper understanding of the root causes of why countries fail or succeed”.According to the researchers, prosperity today is partly a legacy of how a nation’s institutions evolved over time — which they studied by looking at what happened to countries during European colonisation.Countries with “inclusive” institutions that protected personal property rights and allowed for widespread economic participation tended to end up on a pathway to longer-term prosperity. Those that had what the researchers called “extractive” institutions — ones that helped elites to maintain control, but which gave workers little hope of sharing in the wealth — merely provided short-term gains for the people in power.“Rather than asking whether colonialism is good or bad, we note that different colonial strategies have led to different institutional patterns that have persisted over time,” Acemoglu said during a news conference after the prize was announced.“Broadly speaking, the work that we have done favours democracy,” he said. medium114247229In fact, the laureates found that different types of colonisation brought about big shifts in fortunes. European nations used more authoritarian systems to control places that were densely populated at the time of colonisation, while those that were sparsely populated often saw more settlers and established a more inclusive form of governance — if not quite a democratic one. Over time, the countries in question saw their economic fates flip: While the Aztec empire was more populous and rich than North America at the time of early European exploration, for instance, today the United States and Canada have outstripped Mexico in economic prosperity.“This reversal of relative prosperity is historically unique,” the Nobel release explained. Places that were not colonised did not see a similar shift, the committee said.The legacy is still visible today, the researchers said. As an example, Acemoglu and Robinson point to the city of Nogales, which straddles the border between Mexico and Arizona.Northern Nogales is more affluent than its southern portion, despite a shared culture and location. The driver of differences, the economists argue, is the institutions governing the two halves of the city.The economists wrote books based on their work, including “Why Nations Fail,” by Acemoglu and Robinson, and “Power and Progress”, by Acemoglu and Johnson, published last year. medium114247302The economists’ arguments have at times been debated, including by academics who think that culture matters more to development than they let on. A few economists posted criticism on social media after the announcement of the award, with some accusing that their research was too centered on European ideals.In an interview, Acemoglu said he thought the European experience in democracy had important lessons for the world, and also that he didn’t think it “means it’s a one size fits all”.And while their research tends to favour democracy, Acemoglu acknowledged during the October 14 news conference that it “is not a panacea”.Representative government can be hard to introduce and volatile, for one thing. And there are pathways to growth for countries that are not democracies, he said, including rapidly tapping a nation’s resources to ramp up economic progress. But, Acemoglu said, “more authoritarian growth” is often more unstable and less innovative.He said that there were many challenges confronting modern democracies, from polarisation and social media to climate change and new technological developments like artificial intelligence.“Democracy needs to work harder, too,” he said, explaining that the many people left behind economically in places like the United States show that the system is not working perfectly. “Many people are discontent, and many people feel like they don’t have a voice — and that’s not what democracy promises.” medium114247553Dani Rodrik, an economist at the Harvard Kennedy School who studies globalisation and development, said the three laureates had contributed a clearer understanding that democracy could be important to successful development — something that had not always been widely accepted within the profession.“They’ve elevated the important and positive impact of democracy on long-term economic performance,” he said.The researchers have also helped to make studying history and institutions, formerly out of vogue, “cool again,” Rodrik said.Many economists noted that this award was a long time coming. Acemoglu has for years topped lists of who might win a Nobel.“You dream of having a good career, but this is over and on top of that,” Acemoglu said during the news conference.Johnson, a former chief economist at the International Monetary Fund, woke up to a bevy of congratulatory text messages in the United States. He said in an interview that he was “surprised and delighted”.