Nobel Prize-winning economist Robinson answers the big question: Why do income disparities exist among nations?

On the evening of October 14, 2024, the Nobel Prize in Economic Sciences was officially announced. James A. Robinson, a professor at the University of Chicago, shares this honor with his long-time collaborators, scholars Daron Acemoğlu and Simon Johnson from the Massachusetts Institute of Technology. The Nobel Prize Committee stated that the three scholars demonstrated the importance of social institutions for a country's prosperity. Societies with poor rule of law and exploitative systems do not bring about growth or positive change. Their research contributes to understanding the underlying reasons for this.

Jakob Svensson, Chairman of the Nobel Prize Committee, stated, "Reducing income disparities between countries is one of the greatest challenges of our time."

Why is there a difference in prosperity among countries? Social institutions are the key

The issue of income inequality among countries has been a concern since the 20th century, with a common belief that natural resources and economic systems were more crucial. The groundbreaking interdisciplinary research by Robinson and his colleagues, spanning history and economics, elucidated that "political institutions and systems" are crucial in shaping economic development in low-income countries such as Latin America, Africa, Asia, and other regions.

The Nobel Prize committee specifically referenced two papers by this trio, including Robinson's work at Berkeley: one exploring how European colonial policies shaped their colonies, and another examining the extreme reversals faced by the world's wealthiest societies in 1500 - the Mughal Empire in India and the Aztec and Inca Empires in the Americas - after colonization.

During the European colonization of much of the world, social institutions underwent changes. In some places, the goal was to exploit the indigenous population and extract resources for the benefit of the colonizers; in others, inclusive political and economic systems were established for the long-term benefit of European immigrants.

The research by Robinson and other scholars indicates that one explanation for differences in national prosperity is the social institutions introduced during the colonial period. When inclusive institutions are frequently introduced in poor countries that were colonized, the population generally prospers, and the economy experiences sustained growth. Conversely, formerly prosperous countries with extractive institutions introduced during colonization fall into poverty. Extractive institutions may not always be introduced, but they are maintained by vested interest groups for their own benefit.

The research suggests that the introduction of inclusive institutions creates long-term benefits for everyone. In contrast, extractive institutions only bring short-term benefits to specific privileged groups through power, and as long as a political system maintains control, people will not believe in economic reform. This is seen as the reason why improvements do not occur.

What conditions are needed for a country to achieve economic growth and prosperity?

According to Robinson's book "Why Nations Fail: The Origins of Power, Prosperity, and Poverty," external new forces supporting inclusive institutions should be stronger than existing elites, who hold power to maintain extractive institutions for their own benefit.

Additionally, a country must have "embedded autonomy," meaning it needs a bureaucratic institution closely related to private enterprises but remaining independent and reputable. This year's Nobel Prize in Economics emphasizes that democracy and inclusive institutions are essential for promoting sustained economic development and prosperity. Robinson, in an interview after receiving the award, mentioned Taiwan as already fitting the social model conducive to prosperity. The question posed is, what is the ultimate meaning of a country's prosperity and development? What is being pursued by aiming for economic growth measured by GDP?

References:

1. Acemoglu, Daron and James A. Robinson. 2012. Why nations fail: the origins of power, prosperity, and poverty. New York: Crown.
2. Evans, Peter B. 1989 “Predatory, developmental, and other apparatuses: A comparative political economy perspective on the Third World state”, Sociological Forum, 44, 561-587. doi: 10.1007/BF01115064
3. The Nobel Prize 2024 https://www.nobelprize.org/prizes/economic-sciences/2024/press-release/