2024 Nobel Prize in Economic Sciences: Institutions and Prosperity

Perhaps the most exciting days of the year for science enthusiasts are the days when the Nobel Prizes are announced. This year’s Nobel Prize in Economics made us all proud.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2024 was awarded jointly to Daron Acemoğlu, Simon Johnson from Massachusetts Institute of Technology (MIT), and James A. Robinson from Yale University “for studies of how institutions are formed and affect prosperity.”

Prof. Daron Acemoğlu, who was awarded the Koç University Rahmi M. Koç Science Medal in recognition of his groundbreaking contributions to macroeconomic growth and development, labor economics, and political economy, is particularly known for his research on the role of political institutions in shaping economic development in developing countries.

(You may read our 2017 interview with Daron Acemoğlu when he received the Rahmi M. Koç Science Medal)

Why are some countries wealthy while others remain poor?

Globally, the wealthiest 20% of the population is about 30 times richer than the poorest 20%. Furthermore, this income gap remains persistent –even when poor countries experience growth, they are still unable to catch up with the wealthiest nations. The laureates attribute this persistent inequality to differences in social institutions. Wealthy countries differ from poor ones in terms of institutions and many other respects. This raises the possibility that wealth may shape institutions rather than vice versa. The laureates used an innovative empirical approach to address this question.

Acemoğlu, Johnson, and Robinson studied the colonisation of much of the world by Europeans. A key explanation for today’s wealth disparities lies in the political and economic systems that the colonisers introduced or chose to preserve from the 16th century onwards. These systems often reversed the fortunes of many regions –places that were relatively prosperous at the time of colonisation are now among the poorest.

European colonisers significantly altered existing institutions when they colonised large regions. In some colonies, the goal was to exploit indigenous populations and extract natural resources, while in others, inclusive political and economic systems were built for the long-term benefit of European settlers. These differences are among major factors in today’s wealth disparities.

In their research, the laureates provided the story of Nogales, a city that stands at the border between Mexico and the USA, as an example. This city is divided by a fence: The northern part offers better economic opportunities, secure property rights, and political freedoms, while the southern part is plagued by organised crime, corruption, and harsher living conditions. The primary difference between the two parts is not geography or culture, but the institutional structure and the opportunities it provides.

Colonisers established extractive institutions to exploit local populations in some regions, while they built inclusive systems that ensured long-term benefits in others. These differences have contributed to shaping the current wealth levels. The population density in colonised regions also affected the type of colony that developed there.

Acemoğlu, Johnson, and Robinson offer a groundbreaking theoretical framework explaining why some societies fall into the trap of extractive institutions and how escaping this trap can be challenging. However, they also demonstrate that change is possible and that new institutions can be established. In some cases, countries may free themselves from the inherited institutions to establish democracy and the rule of law, leading to a reduction in poverty over time.