By Rashad Ullah Khan
The Nobel Memorial Prize in Economic Sciences[DP1] was awarded to Daron Acemoglu and Simon Johnson, who both belong to the Massachusetts Institute of Technology and to James Robinson of the University of Chicago on October 14, 2024. The prize was awarded to them for their research on how the institutions present in countries determine the extent of how wealthy and prosperous they will become. The research also delves into the origin of these structures, highlighting the relationship between economic growth and political institutions.
The paper released by the Nobel Committee states, “The laureates’ model for explaining the circumstances under which political institutions are formed and changed has three components. The first is a conflict over how resources are allocated and who holds decision-making power in a society (the elite or the masses). The second is that the masses sometimes have the opportunity to exercise power by mobilising and threatening the ruling elite; power in a society is thus more than the power to make decisions. The third is the commitment problem, which means that the only alternative is for the elite to hand over decision-making power to the populace.”
Prosperity and nations
The researchers have theorised that prosperity is partly due to the legacy of how a nation’s institutions have evolved over the ages, which was studied by looking at what happened to nations during European colonisation. Analysing the world’s colonial past, the researchers traced how gaps emerged between nations, making the argument that countries that set about with more inclusive institutions during the colonial period had the tendency to become more prosperous. The Nobel committee stated that through the use of theory and data, the researchers have explained the reasons for persistent inequality that exists between nations.
The research done by Daron Acemoglu, Simon Johnson, and James Robinson shows how countries with inclusive institutions focused on protecting personal property rights and how allowing for widespread economic participation displayed the tendency to open pathways for longer-term prosperity. In contrast to the inclusive institutions, there were nations with institutions that can be termed as extractive, focused on ensuring that the power elites of a nation were able to maintain control over both economic and political power. Due to this control, the working class of the nation had no share or access to the wealth that was generated. Hence, we see that inclusive political governments focus on extending political liberties and property rights, while also ensuring the presence of a strong legal system and public infrastructure for the masses. In the case of extractive political governments, the aim is to concentrate wealth in the hands of the elite.
Inclusive governments
The scholars demonstrate through their research how inclusive governments experience greater growth in the long run. This is due to inclusive governments focusing on sharing and dividing wealth to the masses and building public infrastructure which helps raise the standard of living for the local populace. In the case of extractive governments, there is a failure to generate growth that is accessible by all strata of the population. Any growth that manifests does so in the form of short bursts of economic expansion, the fruits of which are only enjoyed by the power elites of the nation.
It yields results
A very interesting point that is highlighted by the researchers is the proportional relationship between economic growth and widespread technological innovation. Economic growth depends on technological innovation and such innovations are only sustained when countries promote political and economic rights, including property rights which then gives individuals the incentive and space to invent technological advancements. While the elites of a nation may resist innovation, change, and growth to hold on to power, it is the absence of the rule of law and a strong system that protects the rights of an individual that leads to a decline in innovation and growth.
Overall, the work done by Daron Acemoglu, Simon Johnson, and James Robinson makes the case for the need for and importance of inclusive democratic institutions. While growth in authoritarian nations does happen, in most cases it is often unstable and less innovative. Dr. Daron Acemoglu stated in a news conference how democracies too face a lot of challenges, mainly polarisation, and that representative governments are very hard to introduce and can be volatile. However, he stated that in these times “democracy needs to work harder too,” to ensure that those who feel their voices are not being heard are accommodated to fulfill the promise of democracy. In an earlier paper titled “Democracy Does Cause Growth”, Acemoglu writes about how democracies employ more investment in health and human capital, which is severely lacking in authoritarian states. Due to democracies being more representative, they are also more pro-reform, enabling growth and ensuring that wealth is never concentrated in the hands of the few.
Rashad Ullah Khan is a Senior Research Fellow at the Centre for Developing Policy and Practice. He completed his Master’s in Women’s Studies from the Tata Institute of Social Sciences, Mumbai. His interests lie in religiosity, social movements, and gender.
