It’s all about politics, stupid. Is it?

Reliable property rights, efficient banks and free elections - in short: functioning institutions - ensure that a country achieves prosperity. Acemoglu, Johnson and Robinson (AJR) were awarded the Nobel Prize in Economic Sciences on Monday for their work on this topic.?

When I read about this, I had just boarded the plane in San José, Costa Rica, with 15 hours of travel time ahead of me and just enough time to download the book on the subject. "Why nations fail" published by AJR in 2011 is an exciting book! The story is entertainingly written (even though this word may seem out of place in view of the cruelty described in there committed by the Europeans in LatAm during colonization).?

And it is incredibly instructive! Before the settlers arrived, there were 500 times more people living in Mexico and Peru than in the USA. Therefore, AJR argue, only a small number of settlers were needed in Latin American countries to control and exploit the local “resources” (natural resources and labor). This did not work in the USA - it took a few harsh winters before first settlers realized that the LatAm-model did not work there. And more settlers - this time willing to work - were brought in. They brought with them not only their labor but also their demands for a say in politics and the development of entrepreneurial activity. And they apparently also had the opportunity to translate their demands into democratic control instruments, property rights and the creation of financing instruments for companies (unlike the native Americans!). This is how institutions fostering economic growth came into being - and history as we know it took its course.

When I read David Landes' Wealth and Poverty of Nations as a student 20 years ago, it was mainly about geography and culture as causes of prosperity of nations. A geography can hardly be changed - institutions can. This is another reason why AJR's hypothesis is simply very beautiful, also looking at income inequalities between countries today and ways how to change them.

I wondered, is this hypothesis to beautiful to be true? Especially when all the checkboxes of my belief system get ticked in my head, I have learned to be cautious.

During the stopover in Paris, I read Noah Smith's commentary on the subject. His intuitive reaction was similar to mine: “[the hypotheses] resonates strongly on an emotional level, because it agrees strongly with my values.” (Noahpinion) He then points out a difficult point: it is empirically impossible to distinguish whether the observed growth/prosperity effects are due to “Europeans implementing good institutions” or just “Europeans [with their specific skills and culture] moving in” (the Nobel Prize Committee also reflected on this point when they wrote that the analysis “should be taken with a grain of salt”).

Too good to be true, then? No. As the Nobel Prize Committee writes, the "laureates have shown that one explanation for differences in countries’ prosperity is the societal institutions”. And how countries "become trapped in a situation with extractive institutions and low economic growth." (Press release)

And history is complex - institutions have certainly moved up in my ranking of explanations for why countries prosper economically. However, I won't let go of the "geography hypothesis" just yet: having lived in Central America for several years, 100% humidity and temperatures above 30 degrees, continue to be plausible predictors of “slowness” in any value-adding activity for me.