Nobel Prize in Economics: How colonial history explains why strong institutions are essential to a nation’s prosperity
This year’s Nobel Memorial Prize in Economics went to Daron Acemoglu and Simon Johnson of the Massachusetts Institute of Technology and James Robinson of the University of Chicago for their research into why there are such wide differences in prosperity between nations.
In announcing the award, Jacob Svensson, chairman of the Economics Prize Committee, said: “Closing the huge income gaps between countries is one of the greatest challenges of our time.” Economists’ “groundbreaking research” has given us “a deeper understanding of the root causes of why countries fail and succeed.”
The award was established decades after the first Nobel Prize was awarded in the 1960s and is known professionally as the Riksbank Prize in Economics. The academics will share the award and the prize money of 11 million kroner (£810,000).
To explain their work and why it’s important, we spoke to Renaud Foucart, a senior lecturer in economics at Lancaster University in the UK.
How did Daron Acemoglu, Simon Johnson and James Robinson win?
The three scholars received the award primarily for providing causal evidence of the impact of a country’s institutional quality on economic prosperity.
At first glance, this may seem like reinventing the wheel. Countries that enforce property rights, limit corruption, and protect both the rule of law and the balance of power are also more successful in encouraging their citizens to create wealth and are better at redistributing it. people would agree.
But anyone who follows the news in Turkey, Hungary, the US or even the UK will find that not everyone agrees. In Hungary, for example, corruption, cronyism, lack of media pluralism and threats to judicial independence have led to a bitter conflict with the European Union.
Wealthy countries usually have strong institutions. However, some leaders (aspirants) have no qualms about undermining the rule of law. They do not seem to think of institutions as the cause of their prosperity, but simply as a correlate.
In their view, why does the quality of educational institutions differ from country to country?
Their study begins with something that clearly has no direct impact on today’s economic prosperity: living conditions at the beginning of European colonialism in the 14th century. Their hypothesis is that the wealthier and more inhospitable a place is to outsiders, the more suzerain powers will brutally steal its wealth.
In that case, they built the facility without any consideration for the people who would live there. This led to the poor quality of educational institutions during the colonial period, which continued after independence and led to today’s poor economic situation.
All of this, and this is another area in which this year’s laureates have contributed, is because educational institutions create the conditions for their own permanence.
In contrast, in more hospitable and less developed places, colonialists did not seize resources. They instead sought to settle down and build wealth. Therefore, it was in their (selfish) interest to build democratic institutions that benefited the people living there.
The researchers then examined historical data to test their hypothesis. First, they discovered a “great reversal” of fortune. The most urbanized and densely populated places in 1500 became the poorest by 1995. Second, while most of the local population had immunity, places where settlers quickly died of the disease and were therefore unable to stay were now found to be even poorer.
Focusing on the colonial roots of institutions is an attempt to disentangle cause and effect. And perhaps this is also the main reason why the committee says that even though this year’s recipients did not invent the idea that institutions matter, their contributions deserve the highest honor.
Some say the piece simply argues that democracy means economic growth. Is this true?
It’s not a vacuum. For example, their research does not tell us that imposing democracy from scratch on countries with dysfunctional institutions will work. There is no reason why democratic leaders cannot be corrupt.
Institutions are packages. That is why today it is so important to preserve their various aspects. Any weakening of the protections that states provide to their citizens, workers, entrepreneurs, and investors can lead to a vicious cycle in which people no longer feel secure that they will be protected from corruption and extortion. This, in turn, leads to decreased prosperity and increased calls for authoritarian rule.
There may also be outliers. China is clearly trying to promote the idea that capitalism without liberal democracy is compatible with economic success.
China’s growth since Deng Xiaoping’s reforms in the 1980s has coincided with the introduction of stronger property rights for entrepreneurs and businesses. In that sense, this is a textbook version of organizational power.
However, it is also true that in 1989, Deng Xiaoping ordered the military to suppress the Tiananmen Incident, which called for democracy. Furthermore, China today is clearly more authoritarian than Western democracies.
And although China is the world’s second-largest economy, it remains far poorer than democracies. China’s GDP per capita is less than one-fifth that of the United States, and China faces major economic challenges of its own.
In fact, Acemoglu says Xi Jinping’s increasingly authoritarian regime is the reason China’s economy is “rotting from the inside out.”
What is the current trajectory of democratic institutions around the world?
Mr. Acemoglu expressed concern that democratic institutions in the United States and Europe were losing support from the public. And indeed, many democracies seem to doubt the importance of defending their institutions.
They cajole by giving more power to agitators who claim it is possible to succeed without strong rules that bind the hands of the rulers. I don’t think today’s awards will have any impact on them.
But if there’s one message to take home from the work of this year’s winners, it’s that voters should be careful not to throw the baby of economic prosperity into the hot water of the sometimes frustrating rules that underpin it. .
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