Mumbai: Nobel Memorial Prize in Economics winners Daron Acemoglu, Simon Johnson, and James Robinson have provided groundbreaking insights into why some societies prosper while others grow poor. Their research challenges the traditional understanding that the accumulation of production, labour, capital, and technological innovation are the sole drivers of a nation’s prosperity.
According to their 2001 research, Colonial Origins of Comparative Development: An Empirical Investigation, the quality of governance plays a far more significant role than wealth accumulation. This research, which has since become one of the most cited in the field, argues that inclusive institutions—those that share wealth and encourage investment in human and physical capital—lead to economic growth. In contrast, extractive institutions exploit smaller groups and hinder the overall development of society.
The Impact of Governance on Economic Development
Acemoglu, Johnson, and Robinson studied European colonies and their institutions, categorising them as either inclusive or extractive. Societies with inclusive institutions thrived, while extractive institutions, which were focused on exploitation, led to impoverishment.
One striking finding was the correlation between high mortality rates among European settlers and extractive institutions. For instance, in regions where European settlers suffered high mortality rates due to foreign diseases, they often implemented extractive systems, such as the encomienda system in South America or the exploitative rubber plantations in the Congo. On the other hand, in areas with low mortality rates, settlers were more likely to establish inclusive institutions, encouraging private property and free markets.
Institutions and Liberalism
The researchers hypothesised that developed societies naturally move towards liberalism, rather than the other way around. Their study showed that some regions which were highly urbanised in the 1500s became poorer over time, suggesting that as societies accumulated wealth, they often adopted extractive practices, coercing large populations into labour.
A prime example is the divergent paths of North and South Korea. North Korea, with its authoritarian regime, grew poorer, while South Korea, with its liberal democratic institutions, prospered. The analysis holds relevance even for recent European colonies such as North America and Australasia.
The Role of Institutions in Modern Times
Despite some criticism from other academics, the work of Acemoglu, Johnson, and Robinson remains highly influential. Their research underscores the importance of governance quality in shaping a nation’s prosperity. Inclusive institutions, which encourage participation and equitable distribution of resources, are far more conducive to long-term growth than authoritarian, extractive systems.
This view is supported by their analysis of authoritarian regimes, which often result in social unrest and the eventual downfall of the ruling class. In contrast, when workers collaborate within inclusive institutions, they contribute significantly to the overall well-being of society, leading to better economic outcomes.
Governance as a Path to Prosperity
Acemoglu, Johnson, and Robinson’s findings highlight a crucial aspect of economic development: good governance. Societies that invest in their citizens’ welfare and take into account their opinions, as seen in liberal democracies, tend to achieve better economic results.
As the world transitions from autocracies to democracies, more inclusive systems are being implemented, giving more people a voice in the political and economic processes. This trend, according to the researchers, has the potential to lead to a more prosperous global economy.
Daron Acemoglu, Simon Johnson, and James Robinson’s work has reshaped how we understand the relationship between governance, institutions, and economic development. Their research highlights the critical role of inclusive institutions and the perils of extractive ones. Their work serves as a reminder that good governance, more than wealth accumulation, is the key to a nation’s prosperity.
