07

The Royal Swedish Academy of Sciences has awarded the 2024 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to three US-based economists—Daron Acemoglu, Simon Johnson, and James A. Robinson—”for their studies on how institutions are formed and affect prosperity.” The Nobel citation highlights that the trio “has helped us understand the differences in prosperity among nations.”

This year’s Nobel laureates have shown how the structure of a country’s institutions can be the key to prosperity. For decades, economists have tried to answer a fundamental question: why are some countries rich while others remain poor?

The answer, as their research suggests, lies in the nature of political and economic institutions. Countries that foster inclusive institutions—those that enforce the rule of law, protect property rights, and provide opportunities for all—tend to prosper, while nations with exploitative institutions struggle to achieve sustainable growth.

The foundation of their Nobel-winning work was a 2001 paper titled “The Colonial Origins of Comparative Development: An Empirical Investigation.” In this seminal study, they demonstrated how historical institutions, particularly those established during colonial rule, have long-lasting effects on a nation’s development. As the Nobel Committee put it, “societies with poor rule of law and institutions that exploit the population do not generate growth or change for the better.” Their research provided a long-sought answer to a puzzle that has perplexed economists for decades.

For centuries, scholars have debated the causes behind the vast wealth disparities between countries. Theories have ranged from differences in biology and geography to evolutionary advantages. Yet, as the laureates’ work has shown, these explanations alone are insufficient. Many countries that are poor today were once among the wealthiest.

In fact, during the mid-18th century, industrial production in India was higher than in the United States. However, as British colonial rule took hold, India’s wealth declined while Britain grew richer. The Nobel Committee noted that this process of enrichment for the colonizers and impoverishment for the colonized was repeated across much of the world.

It’s important to remember that many poor countries today were once rich. The richest 20% of the world’s countries are now approximately 30 times wealthier than the poorest 20%. The question remains: why aren’t the poorer countries catching up?

The Nobel laureates argue that the answer lies in the effectiveness of a nation’s institutions. Institutions that uphold the rule of law, protect individual rights, and ensure broad participation in the economy are essential for sustained growth. Countries with poor legal systems and exploitative institutions, on the other hand, struggle to prosper.

Put simply, prosperity is not possible when power is concentrated in the hands of a few, and institutions fail to protect the rights and property of the broader population. Democracy, sound legal systems, and the protection of property rights are key to fostering long-term prosperity. Conversely, autocracy, corruption, and expropriation are major obstacles to growth.

At the heart of the matter is trust in institutions. People focus on long-term growth and innovation when they are confident that their property will not be arbitrarily taken away and that their income and profits will be protected for future generations.

Historically, in many European colonies, colonizers exploited local populations to extract natural resources for the benefit of the so-called “Mother Country.” Whenever there was a threat of revolution, colonizers often promised economic reforms. However, the local population frequently doubted the sincerity of these promises, which eventually led to demands for the transfer of power and the establishment of democracy.

Reducing the vast income disparities between countries remains one of the greatest challenges of our time. The work of this year’s Nobel laureates underscores the vital role that societal institutions play in overcoming this challenge and promoting prosperity for all.