Spotlighting the work of the Economics Nobel winners

Last Updated18/10/2024

The term Great Divergence refers to the widening gap in economic and political development between the Western world and the East, particularly from the 17th century onward.
This divergence was largely driven by the industrialization of Western Europe, which enabled these nations to project political power and reap economic benefits globally, especially through colonization.
One of the significant findings from this period is the enduring impact of colonial institutions on modern sovereign nations. The work of economists Daron Acemoglu, Simon Johnson, and James Robinson (AJR) has been instrumental in explaining how these historical institutions continue to shape economic trajectories today.

The 2024 Nobel Prize in Economics was awarded to Acemoglu, Johnson, and Robinson for their contributions to new institutional economics. Their research highlights how institutions—the rules and laws governing society—affect the direction of development. Institutions can either foster growth or hinder it, depending on whether they are inclusive or extractive.
Inclusive institutions promote broad participation in economic activities, motivating people through incentives to contribute to productivity and innovation.
Extractive institutions, on the other hand, concentrate power and wealth in the hands of a few elites. These institutions stifle broad-based economic growth by limiting opportunities for the majority.

Colonial powers, particularly in regions like Sub-Saharan Africa, South Asia, and Latin America, established extractive institutions to benefit the colonizers. These institutions persisted long after the colonies gained independence, creating long-lasting impacts on economic development.
In contrast, countries like the United States, Canada, and Australia, which saw large numbers of European settlers, developed relatively more inclusive institutions due to the settlers' vested interest in creating stable environments for long-term economic growth.

AJR’s research approach is based on natural experiments, a method social scientists use to approximate real-world experiments in settings where they cannot manipulate variables directly.
For instance, they explored the relationship between settler mortality rates and the type of institutions established. In regions with high mortality, such as tropical colonies, colonizers set up extractive institutions. In temperate regions with lower mortality, where settlers established long-term communities, inclusive institutions were more common.
This method has been pivotal in providing empirical evidence of how institutional legacies affect modern economic outcomes.

AJR’s work has inspired a wave of research, especially in regions with a colonial past. For instance, in India:

Economists Abhijit Banerjee and Lakshmi Iyer (2005) found that regions with landlord-based colonial land tenure systems saw lower agricultural productivity and fewer investments in infrastructure, such as irrigation. These disparities persist even decades after independence.

Iyer’s further research (2010) demonstrated that areas under direct British colonial rule had fewer schools, health centers, and infrastructure development compared to regions under indirect rule through local kings. The legacy of these differences is still visible today, though it is gradually fading.
These studies emphasize that economic institutions—such as property rights, education systems, and public health infrastructure—are the outcomes of political power dynamics, which were deeply shaped by colonial legacies.

AJR’s work has transformed our understanding of how institutions shape a country’s economic and political development. By highlighting the role of colonialism and institutional design in long-term growth, they have inspired a wealth of research on the persistent effects of historical events.
However, their approach has sparked debate, with some scholars advocating for a more nuanced analysis of the relationship between institutions and development.