The 2024 economics Nobel prize is an important one as it highlights what really matters at the end of the day for the long-term economic success of any country. U.S. economists Daron Acemoğlu, Simon Johnson and James A. Robinson were rewarded for their work on how the quality of institutions in a country can lead it either down the path of economic prosperity or abject poverty. Their study was on the effects of colonialism on the quality of institutions and post-colonial growth of various countries. They found that countries with institutions that secured the rule of law and enforced property rights offered individuals a strong incentive to work, save and invest in the long run. On the other hand, countries with extractive institutions which gave rise to concentration of power and constrained political freedoms suffered deep economic pain. Some have pointed to the authors’ lack of a substantial critique of the brutality of colonialism and of painting too rosy a picture of the development of western institutions. But the salience of their analysis remains.
The “institutions” that the laureates talk about as crucial to long-term economic prosperity are nothing but the various rules, which could be either explicit laws or implicit social norms that govern human interaction in society. Such institutions may also include laws that protect citizens from expropriation by the government. The rapid economic growth of China and India since their economic liberalisation in the late 1970s and the early 1990s, respectively, are good examples of countries prospering soon after a significant change in the nature of the institutions or the “rules of the game” that governed their economies. Structural reforms that further improve the quality of institutions are thus crucial if these economies are to achieve living standards similar to those of high-income developed countries in the West. Notably, the Nobel also comes at a time when existing institutions around the world are under the significant threat of being destabilised by personality-driven populist movements. It is worth noting that in their work, the Nobel laureates have classified democracy as an important “inclusive” institution that is good for long-term economic growth. However, the rise of illiberal democracies with protectionist economic policies in recent years shows that liberal institutions that work for the upliftment of the many and development not just for a few, are now under severe threat. A democracy driven by short-term populist policies can be as “extractive” as an autocracy that serves the interests of a narrow elite that is close to people in power.
Published - October 19, 2024 12:10 am IST
