Why is it in the news?

• The 2024 Nobel Prize in Economic Sciences was awarded to Daron Acemoglu, Simon Johnson, and James A. Robinson for their work on how institutions shape national prosperity. Their research addresses a key economic question: why some nations are wealthy while others are not.
• By studying the role of institutions, they demonstrated that societies with strong, inclusive institutions thrive, while those with extractive institutions fail to achieve sustained growth.

The Role of Institutions in Prosperity

• The laureates distinguished between inclusive and extractive institutions. Inclusive institutions—such as democracy, rule of law, and property rights—encourage economic growth by providing individuals with incentives for long-term investment.
• In contrast, extractive institutions, where power is concentrated in the hands of a few, discourage growth by stifling innovation and broader economic participation.

Historical Evidence from Colonization

• Their research into European colonization revealed that the type of institutions introduced by colonizers had long-lasting effects on prosperity. In colonies where colonizers intended to settle, they built inclusive institutions, fostering long-term growth.
• In contrast, in regions where they focused on extraction, they established exploitative institutions, which hindered economic development.

Institutional Choices and Mortality Rates

• The laureates found that colonizers’ choice of institutions was linked to local mortality rates. In regions with high mortality risks, colonizers established extractive institutions, whereas in areas with lower mortality, inclusive institutions were more common.
• This historical pattern helps explain persistent economic disparities across nations today.

Modern India and China: A Challenge to the Theory?

• Despite having inclusive institutions, India has not achieved the same level of growth as nations like China, which lacks such institutions. This has sparked debate on whether the theory applies universally.
• Some argue that China’s recent growth might not be sustainable without inclusive institutions, while India may realize its potential in the future.

Global Weakening of Institutions

• Acemoglu also noted the global weakening of institutions, with declining support for democracy. He stressed that democracies must work to strengthen governance and fulfil the promises of economic inclusion to ensure future prosperity.