Why nations fail or succeed

Last Updated16/10/2024

The laureates in the economic sciences have demonstrated the importance of societal institutions for a country’s prosperity, the Nobel committee said.

The 2024 Sveriges Riksbank Prize in Economic Sciences, in Memory of Alfred Nobel, was awarded to three U.S.-based economists—Daron Acemoglu, Simon Johnson, and James A. Robinson.
The award recognized their groundbreaking research on how institutions are formed and their impact on a nation’s prosperity. Their work helps explain the persistent differences in wealth and development across nations.

For decades, economists have grappled with the fundamental question of why some countries are prosperous while others struggle. Explanations have ranged from geography, climate, and biology to historical factors.
According to the Nobel committee, the richest 20% of countries are now about 30 times wealthier than the poorest 20%. This gap has persisted, and despite some poorer countries becoming wealthier, they have not caught up with the most prosperous nations.

Acemoglu, Johnson, and Robinson's research emphasizes the critical role that societal institutions play in determining a country’s prosperity. Institutions, in this context, refer to the set of rules that govern societal behavior.
Inclusive institutions: These involve democracy, law and order, protection of property rights, and opportunities for individuals to contribute to and benefit from economic growth.
Extractive institutions: These are characterized by the concentration of power, weak rule of law, and exploitation, which stifle long-term economic development.

The laureates supported their argument with historical evidence, particularly focusing on European colonization. In their landmark 2001 paper, The Colonial Origins of Comparative Development: An Empirical Investigation, they demonstrated how the institutions established by colonizers determined the economic fate of various colonies.
In some colonies, the focus was on exploiting resources and the indigenous population, leading to the establishment of extractive institutions.
In others, colonizers created inclusive systems aimed at long-term economic benefits for settlers.
A case in point is India under British rule. By the mid-18th century, India’s industrial production exceeded that of the U.S. However, by the 19th century, institutional differences had resulted in a dramatic shift, with prosperity favoring countries with more inclusive institutions.

The choice of institution was closely linked to the colonizers’ mortality risks. In regions where colonizers faced high mortality (due to diseases or strong local resistance), they tended to establish extractive institutions, focusing on short-term resource extraction. In regions where the risk of death was lower, inclusive institutions were more likely to be established, encouraging long-term settlement and prosperity.

Today, India operates under a Constitution that ensures regular elections, an independent judiciary, and free media. Yet, despite these inclusive institutions, India’s economic growth has not been as rapid as China's, which lacks such institutions.
This divergence raises important questions about the role of institutions in economic development. As noted by economist Arvind Subramanian, China’s rapid growth over the last three decades contrasts with India's slower rise, despite its democratic framework.

Acemoglu remarked on the weakening of institutions worldwide, pointing to declining support for democracy. This deterioration, seen in surveys by international organizations like Freedom House and V-Dem, is a concerning trend. He emphasized the need for democracies to regain strength through better governance and by fulfilling the promises of equality and prosperity for all.