In News:

The winners of this year’s Economics Nobel, or the Sveriges Riksbank Prize awarded for economic sciences, Daron Acemoglu, Simon Johnson and James Robinson (AJR), pioneers in new institutional economics, emphasised the role of institutions in the direction of development.

The Great Divergence

• Definition: Refers to the economic and political development gap between the West and East, particularly during the 17th and 18th centuries.
• Key Factors:
  • Industrialization in Western Europe enabled the projection of political power globally.
  • Colonial institutions established during this period have long-lasting effects on post-colonial nations.

Role of Institutions in Development

• Nobel Prize Winners: Daron Acemoglu, Simon Johnson, and James Robinson (AJR) awarded for their work in new institutional economics.
• Institutions Defined: Set of rules constraining human behavior, ensuring law and order, and preventing coercion.
• Types of Institutions:
  • Extractive Institutions: Concentrate wealth among elites, historically prevalent in colonized regions (e.g., Sub-Saharan Africa, Latin America).
  • Inclusive Institutions: Promote broader participation in economic growth, more common in countries like the U.S., Canada, and Australia.

Research Contributions

• Natural Experiments: AJR used historical data to show how differing colonial practices influenced economic outcomes.
• Key Findings:
  • Areas with landlord-based colonial systems had lower agricultural investment and productivity.
  • Regions under direct colonial rule lagged in infrastructure like schools and health centers.

Implications of AJR's Work

• Economic Institutions: Reflect collective choices shaped by political power, which can be either de jure (formal) or de facto (informal).
• Challenges in Reform: Conflicting interests often hinder agreement on the nature of beneficial institutions.

Critical Perspectives

• Skepticism of AJR's Framework: Some scholars argue that AJR's emphasis on Western liberal institutions overlooks the complexities of historical contexts, including corruption and systemic inequalities in early U.S. history.
• Modern Economic Dynamics: AJR caution against assuming that inclusive institutions will automatically lead to prosperity, as evidenced by concerns regarding China's future growth under extractive political systems.

Insights from Nobel Prize Research

• Key Focus Areas:
  • Institutional structures in colonized countries significantly shape economic prosperity.
  • Example of Nogales, Arizona, and Nogales, Mexico illustrates the impact of institutions on economic opportunities.

About the Nobel Prize Recipients

1. Daron Acemoglu:
   • MIT professor and co-author of influential works on power and prosperity.
   • Advocates for democracy's role in economic growth while acknowledging its challenges.
2. Simon Johnson:
   • Former IMF chief economist, current MIT professor.
   • Emphasizes the complexity of addressing entrenched poverty due to institutional frameworks.
3. James A. Robinson:
   • University of Chicago professor, co-author of works on economic disparity.
   • Highlights historical transitions toward inclusive societies and their importance in economic development.

Nobel Prize in Economic Sciences

• Established: 1968 by the Swedish central bank.
• Purpose: Complement existing Nobel Prizes, recognizing contributions to economic sciences.
• Notable Previous Laureates: Include Claudia Goldin (2023) for gender pay gap research and Abhijit Banerjee et al. (2019) for poverty alleviation studies.