Why in News?

The Royal Swedish Academy of Sciences awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2024 to three US-based economists - Daron Acemoglu, Simon Johnson, and James A Robinson.

Their research sheds light on a fundamental question that has intrigued economists for decades: Why are some nations rich while others remain poor?

Their research focuses on the impact of societal institutions on economic prosperity, exploring how the frameworks governing behaviour can lead to significant disparities in wealth among countries.

What’s in Today’s Article?

• Key Contributions of the 2024 Laureates of the Nobel Prize in Economics
• Historical Events Shaping Institutions and Economies
• Case Studies of India and China
• Current Trends of the Democracies Around the World and the Need for Reform
• Significance of the 2024 Nobel Prize in Economics

Key Contributions of the 2024 Laureates of the Nobel Prize in Economics:

• Classifying institutions: There are two types of institutions -
  • Inclusive institutions:
    • These include democratic governance, a strong rule of law, and protection of property rights.
    • Such frameworks create a stable environment where individuals feel secure in their investments and contributions to society.
  • Extractive institutions:
    • In contrast, these systems concentrate power in the hands of a few, often characterised by autocracy and a lack of legal protections.
    • In such environments, individuals face significant risks of confiscation, leading to a lack of motivation for long-term investment.
• Significance of this classification:
  • The type of institutional framework in place fundamentally shapes the incentives for individuals within an economy.
  • In countries with inclusive institutions, people are more likely to invest in their futures, drive innovation, and contribute to overall economic growth.
  • Conversely, in extractive systems, the lack of security and opportunity undermines long-term prosperity, leading to stagnation or decline.

Historical Events Shaping Institutions and Economies:

• Colonial legacy:
  • One of the key contributions of the Nobel laureates is their examination of how historical events, particularly European colonisation, have shaped modern economic outcomes.
  • They argue that the political and economic systems established by colonisers have lasting effects on the prosperity of nations.
• Significance of this examination:
  • The researchers found a strong correlation between the mortality rates faced by colonisers in different regions and the types of institutions they established.
  • In areas where colonisers faced high mortality - due to disease or conflict - extractive institutions were more likely to be implemented, focusing on immediate resource extraction.
  • Conversely, in regions where colonisers could settle safely, inclusive institutions were more likely to take root, benefiting both the colonisers and the local population.

Case Studies of India and China:

• Diverging paths - Relationship between political systems and economic success:
  • The economic trajectories of India and China illustrate the complex interplay between institutions and prosperity.
  • India, with its democratic framework and inclusive institutions, has seen relatively slow economic growth compared to China, which has prospered under a more authoritarian regime.
• The future outlook:
  • Despite these differences, some argue that India may still realise its economic potential in the coming decades, as it continues to strengthen its institutions.
  • Meanwhile, China's future growth may be jeopardised by its lack of inclusive frameworks, suggesting a possible shift in global economic dynamics.

Current Trends of the Democracies Around the World and the Need for Reform:

• Declining state of democracies:
  • The health of democracies is critical for maintaining governance that benefits a broad range of citizens.
  • However, there is a troubling trend of weakening institutions and growing support for authoritarianism around the world.
• The need for reform:
  • Effective governance, accountability, and broad-based participation are essential for fostering an environment conducive to economic growth and social stability.
  • For this reason, the importance of inclusive institutions cannot be overstated.

Significance of the 2024 Nobel Prize in Economics:

• The ongoing discourse about the interplay between institutions and economic development remains vital for policymakers and scholars alike.
• The lessons drawn from this research will be crucial in addressing disparities and promoting sustainable growth for future generations.