Many might not know that the Nobel Foundation does not officially award a prize in Economics. What is commonly referred to as the Nobel Prize in Economics is actually the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Despite this technical distinction, the prize has consistently honoured groundbreaking work in economics since its inception in 1969.
This year Daron Acemoglu, Simon Johnson, and James A. Robinson have been awarded this prestigious prize for their groundbreaking work. They analysed the underlying reasons behind why some nations are rich and some are poor.
Their work has spanned almost 15 years and the famous book Why Nations Fail was their landmark publication, but their work was not only limited to the reasons why poor nations are poor, rather they expanded upon these reasons and have introduced the solutions to inequality.
Institutional autonomy is the principle behind their theory. Both Robinson and Acemoglu expressed in their book that there are two types of institutions that govern a nation. One is inclusive, in which institutions such as the central bank, the trade commotion, the election board, and other bureaucratic departments are strong and devoid of rampant corruption.
The writers defined them as inclusive because they enable capitalism and promote individual achievements, and they ensure the safeguarding of those achievements and wealth in society. In the book, countries with colonial history such as Australia, The United States, and Europe were mentioned as having inclusive institutions with democratic values and norms.
The other type of institutions are the extractive kind where money and power of a nation are concentrated in the hands of a few, and there is no culture of institutional integrity. Sounds familiar? Yes, Robinson and Acemoglu are both referring to countries such as Bangladesh which came out of the colonial exploitative culture, so it failed to develop democratic values. Therefore, some elites were able to extract as much wealth as they wanted from society and the institutions themselves proved helpful for them.
Why did the Nobel Laureates pinpoint the necessity of strong independent institutions? It seems that the old Malthusian theory of resource gathering is not a good indicator of becoming wealthy. Many resourceful countries such as Venezuela do not have the proper institutions in place to reallocate the wealth and distribute it for the betterment of its own economy.
Therefore, the rampant corruption and mismanagement makes it the richest producer of oil as well as one of the poorest countries with a below average GDP.
Whereas, landlocked countries such as Luxembourg or Switzerland have one of the most prosperous economies of the world, their citizens enjoy a higher standard of living whilst living on very arid land with limited natural resources.
It is clear that generating wealth and extraction of natural treasures are not enough to increase the living standard amongst citizens. Historical factors of exploitation such as colonialism or slavery are also significant.
In comparing two colonial territories such as America and the Indian subcontinent, one can observe that in the 1500s, in order to properly maximise the resources, British and European settlers had to settle into North America.
An ocean away from their own motherland, they had to set up their own governing system, monetary policy, education and infrastructures to meet their own needs and causes, which forced them to reach a democratic compromise, and ultimately this separation from their motherland led them to proclaim their sovereignty and independence from the colonial overlord.
The same practice was not seen in British ruled India. By the time, The East India Company gained significant power and the colony was established under Queen Victoria, there was already a social hierarchy in place, where creed, religion and other variables shaped a unique culture.
Therefore, the British hardly tried to establish any autonomous institutions and simply exploited the land by building an obedient educated upper class of Indian aristocrats. This way the institutions were never truly free as they were wholeheartedly caged to the whims of their colonial masters, and society at large remained distant from upwards mobility because upward mobility hardly was a concern for the British.
The lack of democratic values in the making of such Institutions is the main reason for why developing nations are suffering. Through their work, it is quite clear that the colonial outposts which were more than 500 years old with distinct cultures were extremely prosperous, but are poorer today whereas barren lands cultivated by warring tribes, where settlers were forced to establish new institutions, are now thriving. The deep racism, and exploitative nature of colonialism becomes more apparent through their work.
However, some also criticised their work as having a western bias. The laureates emphasised the need for political inclusivity and have clear faith in Adam Smith’s invisible hand doing its ‘magic’ if the institutions let it to.
The economists with certain marxist motivations might not agree with this basic premise. As pointed out by Mushtaq Khan, a professor of economics at the University of London.
“Today’s high-income countries score higher on western-based institution indexes, and not that economic development was achieved because states first established inclusive institutions. In fact, history is rife with examples of countries that grew rapidly without having these inclusive institutions in place as a precondition for growth. East Asian states such as Singapore, South Korea and Taiwan are good examples. Most recently, so too is China.”
Their work might also be ignoring the immense genocidal history of the colonialists in both the Americans and in Australia. When colonisers completely decimated the native population which enabled the establishment of somewhat “inclusive” European style institutions.
Whatever its historical reckoning, the importance of independent and democratic institutions is undeniable moving forward. The nations would be prosperous only if the society’s wealth is not concentrated through corruption or other means. Therefore, prosperity is not only a prospect to be tackled through economic theories, but also a problem needed to be addressed through political means.