The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2024 has been awarded to Daron Acemoglu, Simon Johnson and James Robinson “for studies of how institutions are formed and affect prosperity.” Each year, the Nobel Committee helpfully publishes both a “Popular information” overview of of the award and a “Scientific Background” essay that goes into greater depth. The Popular Information starts with the kind of basic fact about the world we live in that demands attention.
The richest 20 per cent of the world’s countries are now around 30 times richer than the poorest 20 per cent. Moreover, the income gap between the richest and poorest countries is persistent; although the poorest countries have become richer, they are not catching up with the most prosperous.
Pause for a moment to contemplate that 30-fold difference. When discussing differences in average incomes between, say, the US and France or Sweden or Japan or other high-income countries, one can suggest reasons why the differences in income levels may not reflect actual differences in the underlying standard of living for the average person. But when the difference is 30-fold, it means that the lower-income locations have less health, less education, less living space, less leisure, and dramatically less access to the banquet of goods and services available in high-income countries. It also means that many of the people in the lower-income countries will not be fans of a “de-growth” agenda: instead, would like to have–either in their own country or by migrating–a standard of living 30 times higher than they have at present.
What factors can explain these extraordinarily large differences? You can point to geographic factors like arable land, natural ports, navigable rivers, natural resources, and a temperate climate. But as you enumerate possible reasons, you find yourself pointing to ways in which some countries have been able to build economies based on innovation and technology, which in turn are based on widespread education, infrastructure, a sound financial system, and a rule of law. In a word, you find yourself talking about “institutions.”
Some of the most vivid effects of institutions are visible in satellite photos, like the pictures of the Korean peninsula at night, with lights shining from South Korea and North Korea nearly in darkness, or daytime pictures of the border between Haiti and the Dominican Republic, where the Haitian side of the border is denuded and deforested by poor people desperate for firewood, while the Dominican remains verdant.
But “institutions” is so broad a term that it’s not immediately clear what it includes or what it leaves out, so it’s not clear how to measure it. It’s also not clear how growth-promoting institutions are formed, and whether the institutions precede economic growth, or co-evolve with growth, or result from growth. It’s not clear whether institutions that accompany economic success in one place can be transplanted to other locations.
These questions are hard to tackle such that the argument is based on quantitative evidence, not just storytelling. Economist have been trying for a long time: indeed, the Nobel Prize in economics back in 1993 was given to Robert W. Fogel and Douglass C. North “for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.”
So what’s new about the Acemoglu, Johnson, and Robinson analysis? The Nobel committee writes: “Broadly, their contributions are twofold. First, Acemoglu, Johnson, and Robinson have made significant progress in the methodologically complex and empirically difficult task of quantitatively assessing the importance of institutions for prosperity. Second, their theoretical work has also significantly advanced the study of why and when political institutions change. Their contributions thus entail substantive answers as well as novel methods of analysis.”
Here’s a glimpse these two types of contributions. On “assessing the quantitative importance of institutions for prosperity,” some of their best-known work is based on the historical experience of the colonialism. Acemoglu, Johnson and Robinson argue in a broad sense that there are two types of colonial institutions: those that encourage property rights and those those that are “extractive.” They further argue that colonial powers will choose whichever approach provides the greatest wealth for themselves.
Consider two factors. One is whether the population of the area being colonized is more or less dense. If the population in dense, then the colonial power is more likely to use “extractive” institutions to take from the people; if less dense, than the colonizers were more likely to send people from their own country to live in the country being colonized, and those settlers would demand property rights and more inclusive institutions before they were willing to go. A second factor is the disease environment of the country being colonized. If the country was prone to diseases like malaria, then the colonizing country would be less willing to send settlers, and more likely to choose “extractive” institutions; if the country was less prone to diseases, then the colonizing country would be more likely to send settlers, who again would demand more inclusive institutions before they were willing to go.
The most striking economic research is able to make unexpected predictions. This work suggests that areas which were already fairly prosperous and heavily populated before colonialization were more likely to end up with “extractive” institutions, while areas with less previous success and lower population densities should end up with more inclusive institutions. Thus, over a sustained period of time like a century and more–if the institutions of colonialism matter–one should see a “reversal of fortune”: that is, the places that were more economically successful at the time of colonization should later be overtaken by the places that had been less economically successful.
This very brief sketch suggests the challenges of this research agenda. You need to collect 19th-century data on population densities and disease mortality. You need to collect data on many kinds of “institutions” and classify them as extractive or inclusive. You need to draw connections. Follow-up work also looks for historical other than colonialization in which this general approach might be applied.
If one looks at the period of time after colonialization, an obvious question is how institutions might be chosen and changed. Say that there is a government in power which uses extractive institutions to amass wealth for elite insiders at the expense of ordinary citizens. What might cause this to change? Acemoglu, Robinson, and Johnson argue that the heart of the difficulty here is a “commitment problem”–that is, it can be hard for political leaders to keep their promises. The Nobel committee writes:
A promise by the elite or an autocrat to implement welfare-improving reforms today that will benefit the populace tomorrow is typically not credible because the elite have an incentive to renege on their promise later and act in their short-term interest. Similarly, promises by those advocating for political reform, who are willing to compensate the current elite for agreeing to it peacefully, are not credible because the incentives to compensate the former elite once they are no longer in power are also not credible. Social conflict combined with the credibility problem can even cause the elite to block technological innovation and change, if such changes are perceived as threatening their hold on power.
This approach has been a baseline for future research, in part because it created a common framework for the earlier main explanations of how modernization occurred. Again, the Nobel committee explains:
It is instructive to put the contribution of Acemoglu and Robinson in perspective and relate it to the literature that already existed in the late 1990s. … Recall that the standard answer to why elites gave up the control of economic and political institutions was embodied in modernization theory and related explanations (Lipset, 1959, 1960). According to these theories, the process of socioeconomic development would eventually bring about democratization, essentially as a by product of economic progress. As societies become richer, this wealth brings about rising education, a more plentiful middle class, and gradually milder conflict over income inequality, factors which all favor democratization. A second approach, which challenged modernization (and other structural) theories, argued that democratization is instead the by-product of patterns of strategic interaction among political elites. Personal skills, luck, or strategic mistakes are, according to this approach, part and parcel of what democratization is about. … While the second view thus holds that democracy is usually granted or undermined from above, a third approach to explaining democratization, by contrast, points to the importance of social forces in society, most importantly different class actors (Moore, 1966). The key assertion in this tradition is that democracy is imposed from below by the people through popular mobilization (Rueschemeyer et al., 1992). According to this view, incumbent authoritarian elites would not care to enact reforms or bargain with the democratic opposition if they did not fear the masses or an imminent threat of revolution.
Acemoglu and Robinson integrated these three traditions by providing structural conditions (such as economic crises), relating these to preferences over institutions and social forces (such as the threat of revolution), and by providing the conditions under which strategic elites chose to reform (such as extending the electoral franchise). This is one of the reasons why their approach has become so influential.
Ultimately, they argued for a “window of opportunity” approach to the evolution toward democracy and more inclusive institutions. Much of the time, the commitment problems described above would block reform. But certain kinds of economic and political stresses could fracture the forces that blocked reform, at least for a time, and at least open a window for reform.
Again, one value of a theory is that it can make sense of fact patterns that might not otherwise be obvious. For example, later work argued that countries which enter democratization often experience fall in GDP beforehand. This pattern suggests that it isn’t economic growth which leads to democratization, but instead economic stresses breaking up existing coalitions.
Nobel prizes in economics are often given not because they provide a final answer, but because they launched volumes of future research. By that standard, the work by Acemoglu, Robinson, and Johnson surely qualifies for the award.
