The Origin of Prosperity: Nobel Laureates Discover the Role of Institutions

The recipients of this year's Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, better known as the Nobel Prize in Economics, have tackled the fundamental question of why some countries are rich and others are poor. Daron Acemoglu, Simon Johnson, and James Robinson, who published an influential economic paper in 2001, argue that the quality of government institutions is crucial. In their groundbreaking empirical study "The Colonial Origins of Comparative Development," the economists classified institutions as either "inclusive" or "extractive." The former promote investments in human and physical capital, while the latter hinder them. Using an innovative instrumental variable approach, Acemoglu, Johnson, and Robinson examined the impact of European settlers' mortality rates on the development of such institutions in colonial regions. History shows that colonial areas with high settler mortality rates tended to develop extractive institutions, while regions with lower mortality rates fostered an environment that allowed European settlers economic participation. This led to a "reversal of fortune," with once wealthy colonies becoming impoverished while others rose. The laureates' work has inspired a wide range of research over the past three decades on the historical persistence of institutions. However, as is common with empirical approaches, their methods are not without controversy. Critics like David Albouy and Edward Glaeser have questioned the accuracy of the mortality rate estimates and the link to institutional quality. Despite the controversies, the research provides a fundamental contribution to development policy by demonstrating that economic progress is not inevitable, but rather depends on specific historical conditions. Although Acemoglu, Johnson, and Robinson have not solved all the puzzles of global wealth disparities, their work provides a solid foundation for future economic research.