Opinion The Third Edit: Economics Nobel and why institutions matter

Why are some countries rich and others poor? Over the decades, many have tackled this deceptively simple question. Is it geography, or culture? Or do other factors hold back poor countries? This year’s Nobel prize in Economics has been awarded to the trio of Daron Acemoglu, Simon Johnson and James Robinson for their pioneering work on the issue. At a broader level, the scholars have shown the “importance of societal institutions for a country’s prosperity”. Simply put, some countries are more prosperous because of the nature of their political and economic institutions.

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 are characterised by the absence of the “the rule of law” and “property rights”, with political power concentrated in the hand of a few. The book Why Nations Fail (by Daron Acemoglu and James Robinson) provides compelling examples in support of their arguments.

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However, some have pointed out outliers to the argument. For instance, the Economic Survey 2015-16 had argued that China was “too rich” considering its “weak democratic institutions”, while India was “not rich enough” considering its “vibrant political institutions”. While China has slowed considerably since, and there are questions over how vibrant institutions are in India, perhaps the core view of this year’s winners, as encapsulated by the Nobel prize committee, should be kept in mind — “economic prosperity, or its absence, is fundamentally influenced by political institutions.”