Nobel economists decode the wealth disparity between nations, highlighting the key role of inclusive institutions
Bhaskar Parichha
The disparity in wealth among nations raises a fundamental question: why do some countries thrive while others struggle? This seemingly straightforward inquiry has been explored by numerous scholars over the years, leading to a rich tapestry of theories and perspectives. Is the answer rooted in geography or cultural differences? For instance, some argue that nations with favorable geographic conditions—such as access to navigable waterways, fertile land and abundant natural resources—are more likely to prosper. Others contend that cultural factors, including work ethic, social norms and historical legacies, are pivotal in shaping a nation’s economic trajectory.
Beyond Geography
However, why some countries flourish while others languish is far more complex than it initially appears. Beyond geography and culture, myriad underlying factors can impede the progress of less affluent nations. These may include historical contexts, such as colonial legacies, which have left lasting impacts on political and economic structures. Additionally, issues like corruption, political instability and lack of access to education and healthcare can create significant barriers to development.
The recent Nobel Prize in Economics has been awarded to Daron Acemoglu, Simon Johnson and James Robinson for their groundbreaking research on this topic, which sheds light on the intricate dynamics at play. Their work emphasizes the critical role that societal institutions play in determining a nation’s economic success. They argue that inclusive institutions—those that provide a level playing field, protect property rights and encourage participation in economic activities—are essential for fostering innovation and growth. In contrast, extractive institutions, which concentrate power and wealth in the hands of a few, tend to stifle economic development and perpetuate poverty.
Cycle of Poverty
In essence, the prosperity of certain countries can be attributed to the characteristics of their political and economic frameworks. Nations that have established strong, inclusive institutions are better equipped to harness the talents and resources of their populations, leading to sustainable economic growth. Conversely, countries with weak institutions often find themselves trapped in a cycle of poverty and underdevelopment, unable to break free from the constraints imposed by their systems.
This understanding of the importance of institutions not only provides insight into the disparities in wealth among nations but also offers a pathway for reform. By focusing on strengthening institutions, promoting good governance and ensuring equitable access to resources, policymakers can work towards creating an environment conducive to economic prosperity.
Quality of Institutions
The research of Acemoglu, Johnson and Robinson underscores the idea that the key to unlocking a nation’s potential lies not just in its geography or culture, but in the quality of its institutions and the inclusivity of its economic and political policies. The research of the three recipients goes back decades—in 2001, they co-authored a paper titled ‘The Colonial Origins of Comparative Development: An Empirical Investigation’. They examined whether institutions created by the colonial powers have had ‘persistent effects’ on political and economic institutions.
Their research showed that the ‘colonial experience’ was indeed an abiding factor affecting institutions and that it had a ‘major impact on long-run prosperity’. In their studies, the scholars have sought to differentiate between ‘extractive’ and ‘inclusive’ institutions. In their view, the former is characterized by the absence of ‘the rule of law’ and ‘property rights’, with political power concentrated in the hands of a few. The book Why Nations Fail provides compelling examples in support of their arguments.
However, some have pointed out anomalies in the argument. For instance, the Economic Survey 2015-16 argued that China was ‘too rich’ considering its ‘weak democratic institutions’, while India was ‘not rich enough’ considering its ‘vibrant political institutions’. Ultimately, what the Nobel Prize committee said is important: “Economic prosperity, or its absence, is fundamentally influenced by political institutions”.
(The author is a senior journalist and columnist. Views expressed are personal.)
