Context:
To the three American economists Daron Acemoglu, Simon Johnson, and James A. Robinson was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2024 “for their analysis of the subjects of economic and political inequality through insights from development economics, contract theory and mechanisms”. Their study responds to a long-standing question: Why do some countries become rich and others stay poor? Focusing on the role of societal institutions in prosperity in economies, their work is an extensively deep study into how behavioral frameworks within countries lead to great disparities in wealth in understanding structural differences which give meaning to the different aspect of the global economic landscape.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- Contributions of the 2024 Nobel Prize Laureates in Economics
- Historical Events Shaping Institutions and Economies
- Current Trends of the Democracies Around the World and Need for Reform
- Why the 2024 Nobel Prize in Economics is Important
Contributions of the 2024 Nobel Prize Laureates in Economics
The 2024 Nobel Prize in Economics highlighted the critical distinction between two types of institutional frameworks and their profound impact on economic development and individual prosperity. Below is an overview of the key contributions made by the laureates:
Classifying Institutions
- Inclusive Institutions:
- Characteristics: These institutions are marked by democratic governance, strong rule of law, and the protection of property rights.
- Impact: Such environments enable individuals to feel secure in their investments and social contributions. This security fosters a stable economic environment conducive to growth and innovation.
- Extractive Institutions:
- Characteristics: These systems centralize power among a few, often under autocratic governance without robust legal protections.
- Impact: In these environments, individuals face high risks such as the potential confiscation of assets. This risk hampers their motivation for long-term investments and discourages innovation.
Significance of the Classification
- Economic Incentives and Growth:
- In countries governed by inclusive institutions, there is a natural tendency among the population to invest in their futures, which stimulates widespread economic growth and innovation.
- Conversely, extractive systems tend to stifle economic potential and innovation, as the lack of security and personal opportunity can lead to economic stagnation or decline.
Historical Events Shaping Institutions and Economies:
- The Nobel laureates studied the impacts of certain historical events, such as European colonisation, on contemporary economic outcomes. The laureates argued that those political and economic systems created by the colonizers become lifetime obstacles to making the nations prosperous.
- The authors discovered that, in line with their hypothesis, the kinds of institutions colonisers established were highly correlated with the mortality rates they faced in different regions.
- Areas in which colonisers experienced high mortality-death from disease or conflict-encouraged the installation of more extractive institutions, such as taking resources as directly as possible.
- Whereas in other regions where colonizers can settle securely, more open institutions have been more likely to gain ground, hence to the benefit of both the colonizers and the native population.
Comparative Case Studies of India and China
Case studies of India and China:
- Divergent pathways – How political systems are linked with economic performance
- Economic history and institutions of India and China trace a complex, intertwined relationship between institutions and prosperity.
- India, with a democratic framework of relatively slow economic growth compared to China, which has done well in an authoritarian regime, was developed by inclusive institutions.
The prospects for the future:
- Despite this, others argue that India will still be able to realize its economic potential in the next decades because their institutions continue strengthening.
- For instance, the lack of inclusive frameworks going to undo the prosperity of growth in China’s future; this is one sign that may actually change the dynamics within the world economy.
Current Trends of the Democracies Around the World and Need for Reform
- There is a general trend of a loss of health of democracies, which can devastate governance that benefits a wide range of people.
- While weak institutions and growing support for authoritarianism are concerns around the world, this is indeed the disturbing trend.
- ○ Secure or inclusive governance, accountability, and broad-based participation would help advance economic growth and social stability.
- For all these reasons, inclusive institutions are not given enough importance.
Why the 2024 Nobel Prize in Economics is Important:
- The debate on how institutions relate to economic development is still as current for policymakers and scholars.
- Lessons from this research will be very instrumental in equalization efforts and, thus pave the way for sustainable future growth.
-Source: Indian Express
