2024 · Economics

Why some nations stay poor: the rules behind prosperity

Q: What did Acemoglu, Johnson and Robinson identify as the main driver of why some nations are rich and others poor?

The institutions, or rules, a society runs on. The laureates argued that a country's institutions, the rules deciding who holds power and whose property and effort are protected, are a fundamental cause of long-run prosperity, deeper than geography, climate or culture.

Q: Why did the laureates use settler mortality from the colonial era in their study?

It served as a natural experiment, since deadly places drew few settlers and got extractive institutions, helping isolate the effect of institutions on income. Higher settler mortality meant few Europeans settled, which led to extractive institutions. Because that early death rate plausibly affects income today only through the institutions it shaped, it works as an instrument that separates cause from effect.

Q: What is a 'reversal of fortune' in this research?

Many regions that were relatively rich when colonised are now relatively poor, and the reverse. Places that were richest and most densely populated around 500 years ago, such as Aztec Mexico, are often relatively poor today, while once-sparse regions grew wealthy. The flip points to institutions rather than geography as the deep cause.

Awarded to Daron Acemoglu, Simon Johnson and James A. Robinson “for studies of how institutions are formed and affect prosperity”.

What was the 2024 Nobel Prize in Economics awarded for?

The 2024 economics prize honours the finding that a country's prosperity rests mainly on its institutions, the rules that decide who holds power and whose property and effort are protected. Inclusive institutions, which spread power widely and protect ordinary people, tend to make nations rich, while extractive ones, which let a small elite seize the gains, keep them poor. Using European colonial history as a natural experiment, the laureates showed that these early rules still shape which countries are wealthy today.

Predict first

Two countries have the same climate, the same natural resources, and equally capable people. One is rich, the other is poor. What is the most likely reason?

Their institutions, the rules of the game. The 2024 laureates argued that the deepest cause of a wealth gap is usually not geography or culture but whether a country's rules protect ordinary people's property and spread political power, or instead let a small elite seize the gains for itself.

Predict first

Why would European colonisers build fair, inclusive institutions in some colonies but harsh, extractive ones in others?

It often came down to how deadly the place was for the colonisers themselves. Where disease killed many Europeans, few settled, so they set up institutions to extract resources from afar. Where it was safer, many settled, and they built rules that protected their own property and political rights. Those early rules tended to stick for centuries.

The colonial natural experiment in one picture: how dangerous a place was for settlers shaped the institutions it got, and those institutions still shape its wealth.

Imagine two towns with the same land, the same weather, and equally clever people. In one town, anyone who works hard gets to keep what they earn and has a say in the rules. In the other, a few powerful bosses grab most of what everyone makes, and nobody else gets a vote. Give it a hundred years. Which town do you think ends up richer?

The first one. When people can keep what they build and help write the rules, they work harder, invent more, and take chances. Fair rules like these are called inclusive institutions. The unfair kind, where a small group grabs everything, are called extractive institutions.

The big idea in one line

It is the rules, not the luck

Two countries can have the same land and weather and still end up rich or poor, depending on whether their rules include everyone or just a powerful few.

Three economists won this prize for showing that rules set up long ago, even back in colonial times, still help decide which countries are rich today.

An institution, in this research, is one of the basic rules a society runs on: who owns what, who holds power, who gets a say, and whether those rules are actually enforced. The laureates argue these rules are the deepest reason some countries are rich and others poor, deeper than geography, climate or culture.

Two kinds of rules

Inclusive versus extractive

Inclusive institutions protect the property rights of broad sections of society, let ordinary people take part in the economy and keep what they earn, and spread political power widely. They reward work, investment and new ideas. Extractive institutions do the opposite: they let a small elite seize resources and power at everyone else's expense, so most people have little reason to invest or innovate.

Why do countries end up with such different rules? To find out, Acemoglu, Johnson and Robinson turned to the centuries of European colonisation. Colonisers imposed very different systems in different places, and that gave history something close to a natural experiment.

Settler mortality

How dangerous a place was shaped its rules

Where it was deadly for Europeans to settle, mostly because of disease, few of them came, and they built extractive institutions to pull resources out of the colony. Where they could survive and settle in large numbers, they built more inclusive institutions to protect their own property and rights. The laureates found that the higher the early death rate among colonisers, the lower a country's income tends to be today, because those early institutions stuck around.

This produced a reversal of fortune. Around five centuries ago the richest, most densely populated colonies, such as Aztec Mexico, were wealthier than sparsely settled regions like the future United States and Canada. Today the ranking is reversed, and the flip lines up with the industrial revolution, whose new technologies took hold mainly where institutions rewarded the wider population.

16th to 19th century

Europeans colonise much of the globe, imposing or keeping very different institutions from place to place.

Around 1500

Densely settled empires such as Aztec Mexico are more urban and prosperous than the sparse lands that become the USA and Canada.

Early 1800s

As the industrial revolution spreads, the ranking reverses; growth takes hold where institutions are inclusive.

2001

Acemoglu, Johnson and Robinson publish the settler-mortality study isolating institutions as a cause of income.

2010s

Acemoglu and Robinson's book Why Nations Fail brings inclusive versus extractive institutions to a wide audience.

2024

The three share the prize in economic sciences.

The hard part is causation, not correlation. Rich countries do have better institutions, but perhaps wealth buys good institutions rather than the other way around, a view associated with modernization theory. To break this loop, the laureates needed variation in institutions that was not itself caused by income. They found it in the history of European colonisation.

The natural experiment

Settler mortality as an instrument

In their 2001 study, the laureates used the mortality that European soldiers, settlers and missionaries faced during early colonisation as an instrument for institutions. The logic runs in a chain: where disease made settlement deadly, few Europeans came and set up extractive institutions to extract resources; where they could survive, many settled and built inclusive institutions that protected property and political voice; and those early institutions tended to persist into the present. Because past settler mortality plausibly affects income today only through the institutions it shaped, a two-stage (instrumental-variable) regression can isolate the causal effect of institutions on present-day GDP per capita, and the estimated effect is substantial.

A second strand of evidence works against a purely geographic story. If hot climates or tropical disease directly doomed economies, the world's wealth ranking should stay roughly stable over time. Instead the laureates document a reversal of fortune: regions that were relatively rich and densely populated when colonised, such as Mughal India or Aztec Mexico, are now relatively poor, while once-sparse regions like North America grew wealthy. The reversal coincides with the industrial revolution. As late as the mid-eighteenth century industrial output in India exceeded that of the United States, and the gap opened only from the early nineteenth century, when new technologies could take hold mainly where institutions rewarded broad investment.

Why bad rules survive

The commitment problem

If inclusive institutions make everyone richer in the long run, why do extractive ones survive? The laureates' answer is a commitment problem. Extractive institutions deliver short-term gains to the elite who control them, and reform threatens that control: handing economic power to the wider population invites demands for political power, and the creative destruction that growth brings can topple incumbents. The elite would, in principle, promise reform in exchange for stability, but as long as they keep political power those promises are not credible, so the population does not trust them. The result is a trap in which no one moves first and the society stays poor.

What the work established

Institutions, the rules governing property, power and participation, are a fundamental cause of long-run prosperity rather than just a by-product of it.
Inclusive institutions protect broad property rights and spread political power; extractive institutions concentrate both in a narrow elite.
Colonial history supplies a natural experiment, with settler mortality serving as an instrument that addresses the reverse-causality problem.
The reversal of fortune, and its timing around the industrial revolution, argues against geography or climate as the deep cause.
Persistent poverty is often a political trap, sustained by elites who cannot credibly commit to share power.

Worth knowing

The map of wealth was redrawn

Around the time of colonisation, the Aztec heartland of Mexico was more urban and prosperous than the lands that became the United States and Canada, and as late as the mid-1700s industrial output in India outstripped that of the USA. Within roughly a century the ranking flipped. The laureates argue the cause was institutional: the technologies of the industrial age could take root only where institutions protected and rewarded the wider population.

Check yourself

What did Acemoglu, Johnson and Robinson identify as the main driver of why some nations are rich and others poor?

Why: The laureates argued that a country's institutions, the rules deciding who holds power and whose property and effort are protected, are a fundamental cause of long-run prosperity, deeper than geography, climate or culture.

Why did the laureates use settler mortality from the colonial era in their study?

Why: Higher settler mortality meant few Europeans settled, which led to extractive institutions. Because that early death rate plausibly affects income today only through the institutions it shaped, it works as an instrument that separates cause from effect.

What is a 'reversal of fortune' in this research?

Why: Places that were richest and most densely populated around 500 years ago, such as Aztec Mexico, are often relatively poor today, while once-sparse regions grew wealthy. The flip points to institutions rather than geography as the deep cause.

Key terms

Inclusive institutions: Rules that protect the property rights of broad sections of society, let ordinary people take part in the economy, and spread political power widely, rewarding work, investment and new ideas.
Extractive institutions: Rules that let a narrow elite concentrate power and seize resources at the expense of everyone else, leaving most people little incentive to invest or innovate.
Reversal of fortune: The finding that many regions which were relatively rich when colonised are relatively poor today, and the reverse, which points to institutions rather than geography as the cause.
Settler mortality: The death rate Europeans faced when colonising a region. The laureates used it as a natural-experiment measure of how likely colonisers were to build extractive rather than inclusive institutions.
Instrumental variable: A statistical technique that uses an outside factor, here historical settler mortality, to untangle cause from effect and isolate the impact of institutions on income.
Commitment problem: A reason extractive institutions persist: a ruling elite cannot credibly promise lasting reform while it keeps political power, so trust and change never take hold.

The laureates

Daron Acemoglu

Massachusetts Institute of Technology (MIT), Cambridge, MA, USA

Born in Turkey in 1967 and based at MIT, Acemoglu helped build the theory of inclusive versus extractive institutions and led the empirical work using colonial settler mortality to argue that institutions, more than geography or culture, are a deep cause of why some nations are rich and others poor.

Photo: MeJudice, CC BY 3.0 (via Wikimedia Commons)

Simon Johnson

Massachusetts Institute of Technology (MIT), Cambridge, MA, USA

Born in the United Kingdom in 1963 and based at MIT, Johnson is a co-author of the 2001 study that used settler mortality during colonisation as a natural experiment, helping to isolate the effect of early institutions on present-day income per person.

Photo: New Economic Thinking, CC BY 3.0 (via Wikimedia Commons)

James A. Robinson

University of Chicago, Chicago, IL, USA

Born in 1960 and based at the University of Chicago, Robinson co-wrote Why Nations Fail with Acemoglu, arguing that inclusive institutions which protect property rights and spread political power are what let a society sustain growth, while extractive institutions trap it in poverty.

Photo: https://www.kmu.gov.ua/, CC BY 4.0 (via Wikimedia Commons)

Sources

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