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An economics Nobel for work on why nations succeed and fail
Daron Acemoglu, Simon Johnson and James Robinson tackled the most important question of all
Why are some countries rich and others poor? The question, full of childlike curiosity, is the most important in economics. A person’s living standards are mostly determined not by talent or hard work, but by when and where they were born. Historically, models of economic growth focused on the accumulation of factors of production, labour, capital and, more recently, technology or ideas. The greater the capital stock per worker and the more productive its use, then the richer a country would be.
Yet that still left a gap. Why did some countries manage to accumulate more of these factors than others? This year’s winners of the Nobel Prize in economics argue that the answer depends on the quality of government. In 2001 the three men—Daron Acemoglu and Simon Johnson, both of the Massachusetts Institute of Technology, and James Robinson of the University of Chicago—published what has become one of the most cited papers in economics, “The Colonial Origins of Comparative Development: An Empirical Investigation”. In the paper they developed a schema for institutions, dividing them into “inclusive” (those which shared prosperity) and “extractive” (those where a small group took from the rest). Inclusive institutions encourage investment in human and physical capital. Extractive ones discourage it.
The idea that institutions are central to economic growth was not new. It had been the contention of Douglass North, who won the Nobel Prize in 1993, along with Robert Fogel, a historian. The problem investigated by this year’s laureates was whether development encourages liberalism, rather than the other way round. Richer societies could, for instance, lead to democratic reforms.
Messrs Acemoglu, Johnson and Robinson used an “instrumental variables approach” to solve the riddle. This exploited variations in the mortality rate among settlers to identify which European colonies developed inclusive institutions and which developed extractive ones. In colonies with a high rate of mortality, owing, say, to tropical diseases, colonial powers exploited native labour. That could be in the form of the encomienda system in South America, which enslaved locals, or the rubber plantations of the Belgian Congo. Meanwhile, low death rates in English-speaking offshoots—America, Australia and Canada—attracted European settlers by offering them a chance to share in the wealth they produced via private property and free markets.
As such, there was a “reversal of fortune” among colonies. The richest in 1500, as measured by urbanisation, became the poorest in modern times. Messrs Acemoglu, Johnson and Robinson hypothesised that this was because the greater wealth of the once-rich colonies encouraged the development of methods of extraction, while the higher population provided a labour force that could be coerced to work in mines and plantations. A later paper augmented the research with the “quasi-experiment” of North and South Korea, where half of the peninsula became a rich, liberal democracy and the other half authoritarian and destitute.
Messrs Acemoglu and Robinson theorised that states could become stuck with poor institutions. In a highly unequal society, the poor could threaten revolution. Any commitment by the elites to redistribute wealth in response was not credible; they could always change their mind when the threat disappeared. As a result, unequal states were prone to instability. Checks and balances represented a response to this commitment problem: if elites were restrained then their promises to redistribute would be taken seriously and any revolutionary threat would be forestalled. This was, the authors suggested, why European states had expanded the democratic franchise in the early 19th century.
Few economists will doubt the influence of this year’s prizewinners. Mr Acemoglu, in particular, has long been regarded as a future Nobel laureate for his work on technological growth and labour economics, as well as development. Research on the persistence of institutions, using quasi-experimental techniques such as instrumental variables, has grown vastly more popular in recent years. But as often happens with empirical work, the prizewinners’ methods have been questioned. David Albouy of the University of Illinois has suggested that their estimates of settler mortality are incorrect and selectively cited. Edward Glaeser of Harvard University pointed out that there were ways settler mortality could affect growth other than through institutions. Europeans brought over education and trade links with them as well, for instance.
Historians, too, have questioned the neat division of extractive and inclusive institutions. South Korea developed under a military dictatorship. England’s Glorious Revolution in 1688, which Messrs Acemoglu and Robinson have identified as the point at which the country’s rise began, allowed Parliament to dispossess peasants as well as constrain the king. America’s development combined individual rights and democracy for white men with slavery and later disenfranchisement for their black peers.
For all the debate over methods, the prizewinners’ research undeniably demonstrated the importance of historical specificity, moving development economics away from abstract growth models. Their work was a break from theories assuming an inevitable, deterministic path to modernisation based on the unusual experiences of western Europe. Although Messrs Acemoglu, Johnson and Robinson may not have been able to provide a complete account of why some countries are rich and others poor, new generations of economists have a firm foundation on which to build.
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