Summary: The latest Nobel prize in Economics was won by researchers who studied how institutions affect long-term economic growth. This approach was mainly applied using historical data, but it offers important insights into today’s world.
The last Nobel prize in Economics has been awarded Daron Acemoglu MIT), Simon Johnson (MIT), and James Robinson (University of Chicago). Their work has concentrated in understanding the profound reasons why some countries experienced economic growth while many others lag behind.
Until the end of the last century, economists understood economic growth as something grounded in macroeconomic figures such as savings and investments. This allowed some at least partial explanations of why poor countries were poor: developing countries lacked capital, were rich of investment opportunities, but poor of resources to finance them. The ability to attract investments and to put them to good use was what made different countries’ growth paths different.
Surely humand capital as well played a role, with economists explaining the incredible growth of countries such as South Korea with a mixture of high level of education and high propensity to save.
In all this, the role of institutions was mostly ignored. Basic economic theory has always posited that protection of property rights (such as contract enforcement) and basic mutual trust were conditions on which economic development is always built. Moreover, these models based on savings and investments were not able to explain long-term dynamics in economic growth and big questions such as where is cross-country economic inequality from.
In their 2001 paper, “The Colonial Origins of Comparative Development: An Empirical Investigation,” Daron Acemoglu, Simon Johnson and James Robinson looked into this issue, starting from countries in Africa. The role of colonial institutions in the long-term development has been always a tense topic of conversation: the anecdotal narrative of British colonizers building railways and founding schools clashed with the legitimate desire of Indians for self-government and enfranchismement from the British rule. The hypothesis of the three Nobel prize winner was that European settlers enganged with their colonies in different according to the disease environment they found. European settlers often experienced higher mortality rate as they were exposed to infectious disease, such as malaria or yellow fever, to which they were not exposed in their own countries. This made their mortality highly variable according to the penetration of these diseases in each colony. The hypothesis then is that in high mortality settings, colonizers were more likely to be “extractive”, i.e. take as many resources as possible with no interest in founding long-lasting institutions. On the contrary, where their survival rate was higher, this incentivized European settlers to build long-term institutions and not just reap resources away. This “trickled down” into stronger economic institutions and healthier economics growth through the centuries: as it can be seen from Figure 1, settler mortality is negatively correlated with present-day GDP per capita.
(Acemoglu, Johnson and Robinson 2001).
Leveraging on mortality rate of British officers and Catholic bishops, they found that indeed in areas with lower settlers’ mortality long-term economic growth was higher. The reasons was to be sought through the foundation of more resilient legal and education systems and better labour markets.
A cognate idea is that it is instead geography that matters most: surely many prosperous ancient cities who still exist nowadays lie in geographically strategic places, such as rivers or straits. This intuitive idea clashes with the empirical evidence, which shows how parts of the world which were more prosperous in 1500 are the poorest countries today (while others preserved their wealth and importance). This points to the fact that the importance of unchangeable characteristics such as geography may not be overstated when thinking about the determinants of nations’ wealth. The recent Nobel prize winners look exactly into this issue in their work “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution”. The “reversal of fortune” refers exactly to very wealthy places in 1500, which were not able to preserve their wealth throughout the ages. The scholars found empirical evidence that when ancient cities were more established in their wealth, they also had stronger “native” institutions, which resisted European colonization. This implied that European settlements ended up being more “extractive”, laying down the basis for a slower path of economic growth.
Their innovative intuitions started a spur of research in the long-term determinants of economic phenomena and an array of works that straddle between the historical and the economic research. For example, Nathan Nunn from the University of British Columbia in Vancouver studied the link between slave trade raids in the Gold Coast of Africa and economic development. He found (as shown in Figure 2) that areas, which were more heavily subjected slave trade raids still show lower levels of development. In more positive terms, another scholar frome the University of British Columbia (Felipe Valencia Caicedo) found out how the areas of Jesuit missions in Latin America, which devoted themselves to the education of native populations, show higher educational attainment and higher levels of income as of today.
Future Research Agenda
The consequences of the approach introduced by Acemoglu, Johnson and Robinson are widespread. Related to very recent news, it has been one of their hypothesis that democratic (bottom-up) institutions are more likely to spur innovation than autocratic (top-down) ones. Some people argue that the recent release of DeepSeek and more generally the huge increase in Chinese technological innovation puts this hypothesis seriously into question. Other argue instead that DeepSeek has been successful exactly because was not part of top-down Chinese-government effort to invest in innovation, but was rather an endeavour which succeeded independently of the central governemnt directions. All in all this year’s winner make us aware once more how formal and informal institutions have wide-ranging effects on people’s behaviour, and that actions which strengthen or undermine them may have long-lasting effects.
Acemoglu, Johnson, and Robinson’s research opened the door for a richer and deeper inquiry into fundamental, rather than proximate, differences between countries and their importance for long-term economic development. Although their work dramatically improved our understanding, much remains to be understood. This includes the role of moral values and norms in supporting and maintaining functioning institutions and the question of how these, in turn, are affected by formal institutions, as well as the role of idiosyncratic events and particular individuals in shaping institutions’ evolution. These questions are particularly relevant given our current political setting, both globally and particularly in the U.S. The relationships between globalization, inequality, discontent, political instability, and rising populist sentiment remain poorly understood. Moving forward, one of the most pressing challenges that we face is recurring climate crises. What institutional designs are best suited to address these challenges remains an open question.
Finally, as societies around the world aim to improve upon existing institutions in a way that leads to improved societal well-being, it is unclear whether “good institutions” look the same everywhere in the world and at all levels of governance. It is likely that the local context, including cultures, norms, traditions, and worldviews, play a critical role in determining which institutional designs work and which don’t work in the local context. Thus, while the research of Acemoglu, Johnson, and Robinson has taught us that “good institutions” are important for growth, there is the important question as to whether good institutions look the same everywhere in the world, or whether they should be adapted to local conditions.