The Role of Institutions in Economic Prosperity: Insights from the 2024 Nobel Prize Winners

The Royal Swedish Academy of Sciences awarded the 2024 Nobel Prize in Economic Sciences to Daron Acemoglu, Simon Johnson, and James A. Robinson "for studies of how institutions shape prosperity." This article explores their research findings and key contributions.

Why are some societies democratic, prosperous, and stable, while others are autocratic, poor, and unstable? That is the question two MIT Professors of Economics, Acemoglu and Robinson, answered in their book Why Nations Fail (2012). Building on this work, they continued their research, alongside Simon Johnson, the former Chief Economist of the International Monetary Fund (March 2007 to August 2008), and provided new insights into why such vast differences in prosperity exist between nations.

To dive deeper into the topic, consider the city of Nogales. Nogales, a city split between the U.S. and Mexico, illustrates the impact of institutions. The U.S. side is prosperous, while the Mexican side struggles with poverty and corruption. Geographically, these two parts of the city are the same, with common ancestors, but why are the living circumstances so different? The northern part of the city is part of the U.S. economic and political system, while the southern part belongs to the Mexican system. These differences are not exclusive to this city and can be traced back to the colonial era.

When Europeans colonized the world, they didn’t apply the same approach everywhere. The laureates found evidence that distinguishes two vastly different strategies, which still influence countries today. On the one hand, the goal was to exploit the indigenous population and extract natural resources for the benefit of the colonizers. On the other, the aim was to establish inclusive political and economic systems for the long-term benefit of the settlers. The underlying factors here were twofold: first, the density of the indigenous population—higher density meant more resistance and cheap labor, leading to extractive institutions. Second, settler mortality—lower mortality increased the likelihood of inclusive institutions, as seen in North America versus higher-mortality regions like India. Technological development further interacts with these institutions. In inclusive systems, technology fosters innovation and shared economic growth, enabling societies to benefit broadly from advancements. In contrast, in extractive systems, elites often monopolize new technologies to consolidate power, deepening inequality. This dynamic highlights the role institutions play in shaping how technology affects prosperity.

The laureates demonstrated that differences in colonial institutions largely explain today’s economic disparities. Political and economic systems endure, and while extractive systems may benefit elites in the short term, inclusive institutions provide long-term advantages for all. This raises the question: why don’t elites simply transition to a better system?

The laureates’ model explains political institutional change through three elements: resource allocation and power struggles between elites and the masses, mass mobilization, where the population exerts pressure for reform, and the commitment problem, where elites resist reform out of fear of losing control. Together, these factors explain why many nations remain trapped in cycles of inequality.

In conclusion, Acemoglu, Johnson, and Robinson's work reveals that institutions are the key to understanding why some nations prosper while others remain stagnant. Their model explains how power dynamics, mobilization, and elite resistance to reform keep many societies trapped in inequality, highlighting the need for institutional change to promote long-term prosperity.