The 2024 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to economists Daron Acemoglu, Simon Johnson, and James Robinson for their influential research into how institutions are formed and their crucial role in shaping national prosperity. Their work has shed light on why some nations thrive economically while others remain trapped in poverty. Central to their findings is the importance of societal institutions, particularly how they develop, evolve, and ultimately influence a nation’s ability to grow and prosper.
The laureates’ research has provided a compelling explanation for why certain countries remain poor despite abundant natural resources, while others that were once economically disadvantaged have thrived. The key factor they identify is the nature of the institutions that govern these societies. Institutions—defined as the systems of rules, norms, and structures that govern social, political, and economic interactions—are crucial in determining whether a country will succeed or struggle.
A historical context underpins their findings. When European powers colonized large parts of the globe, the types of institutions they imposed varied greatly, depending on local conditions and the objectives of the colonizers. In some regions, extractive institutions were established, designed to exploit the local population and resources for the benefit of a distant colonial power. These institutions were typically authoritarian, with little regard for the well-being or prosperity of the local people. In contrast, other colonies, particularly those settled by European migrants, saw the formation of inclusive institutions. These systems, which allowed for broader participation in the economy and politics, fostered long-term prosperity.
The long-term impact of these differing institutional structures has been profound. Acemoglu, Johnson, and Robinson demonstrate that countries where inclusive institutions were established tend to be more prosperous today, while those with extractive institutions remain economically stagnant. The difference in institutional setup is a major reason why former colonies that were rich at the time of colonization, such as some in South America, are now poor, while previously underdeveloped regions, like parts of North America, have become prosperous.
One of the central challenges highlighted by the laureates is how countries with extractive institutions often become stuck in a cycle of poverty. These institutions serve the interests of those in power, creating short-term gains for elites while preventing broad-based economic development. Reform is difficult because promises of change by those in power are often not credible, and the political system remains rigged to maintain the status quo. However, when there is a credible threat of revolution or significant upheaval, political leaders may be forced to democratize, leading to the establishment of more inclusive institutions.
As Jakob Svensson, Chair of the Prize Committee, remarked, “Reducing the vast differences in income between countries is one of our time’s greatest challenges. The laureates have demonstrated the importance of societal institutions for achieving this.”
The laureates’ work offers valuable insights into one of the world’s most pressing economic questions: how can we reduce the vast inequality that exists between nations? By understanding the role institutions play in shaping prosperity, policymakers and economists are better equipped to design strategies that foster long-term, inclusive economic growth.