This year’s Nobel Prize in Economics honours groundbreaking research on how institutions shape prosperity

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Arindam Banik and Ikrom Nasimov

This year, the highly esteemed Sveriges Riksbank Prize in Economic Sciences, established in honour of Alfred Nobel, has been awarded to Daron Acemoglu, Simon Johnson, and James A. Robinson. This prestigious award, often called the Nobel Prize in Economics, is a testament to the profound impact of their groundbreaking work. The Nobel Prize in Economics, a recognition of exceptional contributions to the field, is a significant milestone in the careers of Acemoglu and Johnson, both affiliated with the prestigious Massachusetts Institute of Technology, and Robinson, conducting his research at the University of Chicago. The significance of this award cannot be overstated, as it underscores the importance of their research on the role of institutions in shaping prosperity.

The central bank created this prize to pay tribute to Nobel, the 19th-century Swedish inventor and chemist known for developing dynamite and founding the five Nobel Prizes. The inaugural recipients were Ragnar Frisch and Jan Tinbergen in 1969. Although purists argue that the Economics Prize is not technically a Nobel Prize, it is awarded alongside the others on December 10, the anniversary of Nobel's death in 1896. Announcements for Nobel honours in medicine, physics, chemistry, literature, and peace were made last week.

The trio's work has significantly advanced our understanding of economic disparities. Their earlier work, Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012), has had a profound impact on our understanding of the global economy. They argue that societies lacking a robust rule of law and characterised by exploitative institutions struggle to generate positive change or economic development. However, they maintain that inclusive systems promoting prosperity are the key to economic growth. Tackling the significant income disparities between countries is among the foremost challenges of our time, and the laureates' research has shed light on the essential role of societal institutions in achieving this objective, enlightening us all.

The study's findings propose a theory regarding the institutional variations among former colonies of European nations and their impact on economic performance. For instance, extractive states were established in colonies to maximise resource extraction for the benefit of the colonisers. As a result, these extractive states often struggled economically, as they needed the proper institutional frameworks for governance. This absence of institutions meant no checks and balances on the governing bodies, allowing them to exert power without oversight. Conversely, colonies where effective institutions were established tended to experience economic success.

Additionally, the choice of specific geographic locations for colonisation influenced whether an extractive state or a more sustainable colony was created. In regions where European settlers faced high mortality rates due to disease, colonisers were more likely to establish extractive states, as developing a stable settlement was challenging. This was particularly evident in Spanish and Portuguese American colonies, whose primary goal was to extract as much metal and other commodities as possible. Similar circumstances were observed in British West Africa, including the Gold Coast and the Ivory Coast, with perhaps the most extreme example being the Belgian Congo.

The influence of European settlers on the institutions of their colonies is significant. Countries with substantial European settlers and policies akin to their parent countries are referred to as 'Neo-Europes. In these areas, the institutions established closely followed the model of their home countries. If this was not the case initially, settlers were often prepared to enforce such systems by force. This situation was seen in Australia during the 1840s, where many settlers were former convicts, while landowners were mainly former jailers, resulting in pressure for constitutional reforms. The role of European settlers in shaping the institutions of their colonies is a crucial aspect of the laureates' research, as it highlights the influence of historical factors on present-day institutions.

The viability of settlements was closely linked to the prevalence of various diseases in potential colonial locations. This factor was crucial; for example, the Pilgrims chose to migrate to the Thirteen Colonies—now the United States—rather than to British Guiana due to lower mortality rates in the U.S. Similarly, when determining the destinations for convicts, many options were dismissed due to high mortality rates, leading to Australia as the final choice. The mortality rate significantly influenced the development of new settlements, with a higher chance of survival being more enticing to potential colonists.

The persistence of institutions relates to the idea that those introduced by colonisers remained in place even after nations achieved independence. The authors propose three reasons for this phenomenon: First, implementing new institutions can be costly, leading elites to prefer maintaining existing ones. Second, when the ruling elite is small, and the benefits of an extractive strategy are substantial, there is a strong incentive to retain current institutions. Third, individuals who have made irreversible investments in institutions may be more inclined to preserve them. The authors utilise these three premises to argue that the mortality rate of European colonists serves as a basis for understanding present institutions in these countries. Their hypothesis suggests that the mortality rate of settlers influenced initial settlements, which affected early institutions, creating the foundation for current institutions.

Last year, the esteemed Harvard University professor Claudia Goldin was honoured for her groundbreaking research, which explores the reasons behind women's lower participation rates in the workforce worldwide and the wage disparities they face compared to their male counterparts. Her recognition as the third woman in the history of the Nobel Prize in Economics is a testament to her significant contributions to the field.

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The authors of this article is the ICCR Chair Professor of Indian Studies (Economics) and Associate Professor, Department of Digital Economics respectively at Samarkand State University in Samarkand, Uzbekistan.

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