Three economists based in the US have won 2024 Nobel economics prize. Simon Johnson, MIT, USA emphasizes the importance of societal institutions for prosperity. James A Robinson, University of Chicago, USA focuses on European colonialization which had divergent impacts across the world. Daron Acemoglu, MIT, USA emphasizes the need for democracies to reclaim better governance.
We see the differences between the rich and poor countries. There is persistent income inequality in these countries. Though some poor countries become richer, they still lag behind the richest countries. Of course, some inequality can be attributed to historical reasons. However, there are strong reasons to believe that institutional differences explain the disparity. This theory has been espoused by the trio to win the Nobel this year.
How do we define institutions? These are the economic and political structures that stimulate growth agenda. In short, it denotes an inclusive regime, which is largely democratic. It means a strong legal system, and judiciary. There are transparent laws of doing the business and collection of taxes.
By contrast, there are autocratic regimes where there is no rule of law. There are institutions which exploit the people.
The trio traces their theory to colonization. They examine the progress of colonies post-independence, linking it to the existence of institutions and their quality. Some colonists were exploitative and worked for their own benefit. Some built political and economic systems for the long-term benefit. This varies. Where colonists became settlers and built institutions, they contributed to development.
One important take away from their work is the importance of democratic set up. The second take away is the creation of the right institutions. Protection of private property is an important tenet of such a system. It is protected by a good judicial system.
Though China is autocratic, how it could achieve development. It should be noted that amidst pockets of development, there is immense inequality within China. Here the government owns large part of the means of production. It is not an optimal solution.
Singapore is another exception. Though it is not democratic, it has strong institutions. It can be considered an outlier.
India too happens to be the fastest growing economy and has a good institutional set up. Yet India has still to cover a long distance to become a developed economy.
Nobel laureate trio has no specific solutions and yet they have rightly emphasized a democratic regime which fosters the building of strong institutions to promote growth.