Why do countries prosper?
Published: 03:11 PM,Nov 06,2024 | EDITED : 07:11 PM,Nov 06,2024
Each autumn, a telephone call from Stockholm launches one or a few scholars to international fame with the bestowal of the Nobel Memorial Prize in Economic Sciences—a process that Irving Wallace dramatised in his 1962 potboiler The Prize.
This year, the call went to three renowned figures: economists Daron Acemoglu and Simon Johnson from the Massachusetts Institute of Technology, and political scientist James A. Robinson from the University of Chicago. The three were recognised for their “studies of how institutions are formed and affect prosperity,” marking the 15th anniversary of Elinor Ostrom’s Nobel recognition for her own work on institutions, particularly “for her analysis of economic governance, especially the commons.”
Acemoglu, Johnson, and Robinson (or AJR, as they are known) received the award primarily for their research into the role of colonialism in determining the economic fate of nations. Prominent social-science works like Max Weber’s The Protestant Ethic and the Spirit of Capitalism and Jared Diamond’s Guns, Germs, and Steel: The Fates of Human Societies have long sought to explain the “great divergence” between Europe and its affluent offshoots and the rest of the world. While AJR pursued similar goals, they took a novel approach by examining why societies once prosperous are now relatively poor, and vice versa.
In their influential 2002 paper, “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” AJR concluded that the key determinant of future growth is whether a country has “inclusive institutions” that allow economic gains to be widely shared, as opposed to “extractive institutions” that funnel wealth to a narrow elite.
The type of institutions a colonial power left behind was influenced by various environmental and other factors. In their widely cited paper, “The Colonial Origins of Comparative Development,” AJR argued that the best predictor of future economic growth was the suitability of the terrain for European settlers. Colonisers invested in sound institutions in regions where their own survival chances were high—such as the New World colonies of North America, Australia, and New Zealand.
AJR’s scholarship is both sophisticated and innovative, and I, for one, appreciate their emphasis on institutions. They have continued the tradition established by Nobel laureate economist Douglass North in his magnum opus, Institutions, Institutional Change and Economic Performance. However, their recommendations are not novel. Traditional “law and economics” theories, along with the Washington Consensus, have long highlighted the importance of rule of law for economic growth.
By contrast, Ostrom’s research on community-driven institutional solutions truly broke new ground. She fundamentally changed our understanding of the role played by “polycentric institutions” that go beyond the binary of market and state. Until her pioneering work (summarised in Governing the Commons: The Evolution of Institutions for Collective Action), it was widely assumed that common property—such as ecological resources like forests, water systems, fisheries, and the global atmosphere—was inherently inefficient.
Ostrom’s extensive empirical research—from water management in California to irrigation in Nepal—demonstrated that this assumption is not always correct. Her laboratory experiments showed that people are more willing to enforce mutually agreed rules than previously thought.
Most significantly, Ostrom’s work investigated the factors that correlate with, or create conditions for, cooperation to solve collective-action problems, showing (contrary to Garrett Hardin’s classic work) that commons-related challenges need not lead to tragedy. By illustrating that the success of institutions heavily depends on participants’ engagement with and investment in them, she offered an alternative perspective on AJR’s results.
Consider AJR’s assertion that countries with Western institutions, where European settlers also thrived, later experienced rapid and robust growth. In a recent paper, I argue that the success of these societies may not stem from the inherent superiority of their institutions, but from the inhabitants’ relative psychological familiarity with them. The cognitive and contextual mismatch between institutions and their environment has long been known to play a part in the difficulties surrounding “legal transplantation” (the importation of foreign legal codes).
In Wallace’s novel, the protagonist poignantly wins the Nobel Prize in Literature for a book titled The Perfect State. While we wait for an ideal institution to be devised, we remain dependent on flawed people to uphold our institutions. Fortunately, Ostrom showed that this is feasible. As we celebrate AJR’s contributions, let us also remember Ostrom’s. While Acemoglu and Johnson’s bestseller Why Nations Fail: The Origins of Power, Prosperity, and Poverty sheds light on one path to prosperity, Ostrom’s work reveals that there may be many.
Copyright: Project Syndicate, 2024.
Antara Haldar
The author is a visiting faculty member at Harvard University and the principal investigator on a European Research Council grant on law and cognition.
This year, the call went to three renowned figures: economists Daron Acemoglu and Simon Johnson from the Massachusetts Institute of Technology, and political scientist James A. Robinson from the University of Chicago. The three were recognised for their “studies of how institutions are formed and affect prosperity,” marking the 15th anniversary of Elinor Ostrom’s Nobel recognition for her own work on institutions, particularly “for her analysis of economic governance, especially the commons.”
Acemoglu, Johnson, and Robinson (or AJR, as they are known) received the award primarily for their research into the role of colonialism in determining the economic fate of nations. Prominent social-science works like Max Weber’s The Protestant Ethic and the Spirit of Capitalism and Jared Diamond’s Guns, Germs, and Steel: The Fates of Human Societies have long sought to explain the “great divergence” between Europe and its affluent offshoots and the rest of the world. While AJR pursued similar goals, they took a novel approach by examining why societies once prosperous are now relatively poor, and vice versa.
In their influential 2002 paper, “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” AJR concluded that the key determinant of future growth is whether a country has “inclusive institutions” that allow economic gains to be widely shared, as opposed to “extractive institutions” that funnel wealth to a narrow elite.
The type of institutions a colonial power left behind was influenced by various environmental and other factors. In their widely cited paper, “The Colonial Origins of Comparative Development,” AJR argued that the best predictor of future economic growth was the suitability of the terrain for European settlers. Colonisers invested in sound institutions in regions where their own survival chances were high—such as the New World colonies of North America, Australia, and New Zealand.
AJR’s scholarship is both sophisticated and innovative, and I, for one, appreciate their emphasis on institutions. They have continued the tradition established by Nobel laureate economist Douglass North in his magnum opus, Institutions, Institutional Change and Economic Performance. However, their recommendations are not novel. Traditional “law and economics” theories, along with the Washington Consensus, have long highlighted the importance of rule of law for economic growth.
By contrast, Ostrom’s research on community-driven institutional solutions truly broke new ground. She fundamentally changed our understanding of the role played by “polycentric institutions” that go beyond the binary of market and state. Until her pioneering work (summarised in Governing the Commons: The Evolution of Institutions for Collective Action), it was widely assumed that common property—such as ecological resources like forests, water systems, fisheries, and the global atmosphere—was inherently inefficient.
Ostrom’s extensive empirical research—from water management in California to irrigation in Nepal—demonstrated that this assumption is not always correct. Her laboratory experiments showed that people are more willing to enforce mutually agreed rules than previously thought.
Most significantly, Ostrom’s work investigated the factors that correlate with, or create conditions for, cooperation to solve collective-action problems, showing (contrary to Garrett Hardin’s classic work) that commons-related challenges need not lead to tragedy. By illustrating that the success of institutions heavily depends on participants’ engagement with and investment in them, she offered an alternative perspective on AJR’s results.
Consider AJR’s assertion that countries with Western institutions, where European settlers also thrived, later experienced rapid and robust growth. In a recent paper, I argue that the success of these societies may not stem from the inherent superiority of their institutions, but from the inhabitants’ relative psychological familiarity with them. The cognitive and contextual mismatch between institutions and their environment has long been known to play a part in the difficulties surrounding “legal transplantation” (the importation of foreign legal codes).
In Wallace’s novel, the protagonist poignantly wins the Nobel Prize in Literature for a book titled The Perfect State. While we wait for an ideal institution to be devised, we remain dependent on flawed people to uphold our institutions. Fortunately, Ostrom showed that this is feasible. As we celebrate AJR’s contributions, let us also remember Ostrom’s. While Acemoglu and Johnson’s bestseller Why Nations Fail: The Origins of Power, Prosperity, and Poverty sheds light on one path to prosperity, Ostrom’s work reveals that there may be many.
Copyright: Project Syndicate, 2024.
Antara Haldar
The author is a visiting faculty member at Harvard University and the principal investigator on a European Research Council grant on law and cognition.