2024 Economics Nobel Prize

The 2024 Nobel Prize in Economics was awarded to U.S. economists Daron Acemoglu, Simon Johnson, and James A. Robinson for their groundbreaking studies on how institutions are formed and their impact on prosperity. The Nobel committee recognized the winners for enhancing our understanding of the root causes behind the “success or failure of nations”.

Significance of Their Work

• The noble prize winners studied the “global inequality in wealth”.
• The disparity between rich and poor nations has long puzzled economists.
• Currently, the richest 20% of countries have an average income 30 times greater than that of the poorest 20%.
• Various theories have attempted to explain this divergence, ranging from historical colonialism to differences in natural resources and even intelligence.
• However, Acemoglu, Johnson, and Robinson argue that the primary explanation lies in the quality of economic and political institutions.
• Their influential 2012 book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, along with their collaborative paper from 2004, emphasizes that:
  • inclusive institutions—characterized by secure property rights and democracy—promote economic growth
  • whereas extractive institutions—marked by insecurity and lack of political freedom—lead to stagnation and poverty

Why is there a “Wealth Gap” between nations?

• The wealth gap between nations refers to the significant differences in income and prosperity that exist across countries. Some nations that were once rich have become poor, particularly after experiencing
• Economists Daron Acemoglu, Simon Johnson, and James A. Robinson have explored this issue, focusing on the role of societal institutions established during colonization.
• The Role of Institutions: Institutions are the rules and systems that govern how a society operates. They include laws, political structures, and economic policies. The quality of these institutions can greatly influence a country's economic success or failure.
• Inclusive vs. Extractive Institutions
  • Inclusive Institutions: These institutions provide secure property rights, promote political participation, and encourage investment. They allow individuals to work hard and benefit from their efforts. Countries that adopted inclusive institutions tend to become more prosperous over time.
  • Extractive Institutions: In contrast, extractive institutions concentrate power and wealth in the hands of a few. They often lack protection for property rights and discourage investment. Countries with extractive institutions struggle to achieve economic growth and often remain poor.

Impact of Colonization

Institutions are described as the "rules of the game" that shape individual incentives in economic interactions. During colonization, different types of institutions were established in various regions:

• Inclusive institutions: In areas where colonizers intended to settle and build a future, inclusive institutions were often created. For example, in North America, these institutions supported long-term economic development.
• Extractive institutions: In regions where colonizers did not settle, they established extractive institutions aimed at exploiting resources quickly. This approach can be seen in parts of Africa and Asia, including India, where the focus was on extraction rather than growth.

Challenges to Establishing Inclusive Institutions

• Despite the evident benefits of inclusive institutions for economic growth, their adoption has been limited.
• The laureates attribute this to the choices faced by rulers, who may prefer extractive institutions that allow them to secure resources for personal gain.
• When rulers can exploit resources without facing substantial opposition, there is little incentive for reform.
• However, when popular uprisings threaten the status quo, some leaders may opt to implement more inclusive institutions to appease the masses and stabilize their rule.