NOBLE PRIZE ANALYSIS
By Chitrakshi Singh

The world is your oyster— or is it?

Being born in a prosperous country is a dream many of us cherish. While some relentlessly chase their ambitions, others, despite lacking this privilege, choose to emigrate. They seek better opportunities, security, improved quality of life, a cleaner environment, and greater satisfaction. Living under an institution that inspires dreams and empowers individuals to realize them is crucial. The world is your oyster, but only in a society that enables such empowerment. While this privilege isn’t something one can control, this year’s Nobel laureates in Economic Sciences provide insight into how such institutions are shaped.

The Nobel Prize for Economic Sciences this year has been awarded for “studies of how institutions are formed and affect prosperity.”

Our laureates — Daren Acemoğlu, Simon Johnson, and James Robinson — emphasize the significance of inclusive institutions in bridging the income gap between countries.

A dive into the past.

The laureates demonstrated how institutions introduced during European colonization impacted the prosperity of the colonies. Countries thriving in the pre-colonial era were exploited for the benefit of the colonizers, who established extractive institutions designed solely to "extract" wealth. These systems drained resources, leaving the colonies impoverished. With dense populations, colonizers avoided permanent settlement, compelling locals to serve as laborers. Political rights were nearly non-existent, and elections were unheard of.

Conversely, colonizers faced less resistance in poorer pre-colonial regions with sparse populations and established inclusive economic and political systems. These systems laid the foundation for future development.

The research highlights a “reversal of fortune” among former colonies. Regions flourishing before colonization are now among the poorest, while previously poor areas are more prosperous. Inclusive systems fostered democracy, legal protections, and economic liberties, enabling sustainable growth and better living standards. This transformation stems from democratic governance and legal safeguards introduced by the colonizers.

The stifling effects of extractive systems have had a larger-than-anticipated impact. The laureates discovered that the richest 20% of countries today are approximately 30 times wealthier than the poorest 20%.

Problem Of Credibility

If inclusive institutions drive economic prosperity, why don’t poorer nations adopt them? According to the laureates, the issue lies in the lack of trust between citizens and the ruling elite. Citizens doubt promises of economic growth, as elites historically prioritize self-interest. Meanwhile, elites fear losing power if economic opportunities are provided to the populace.

Despite a clear chain of causation, exploitative institutions persist, hindering long-term development. This problem of credibility traps societies in cycles of inequality, with impoverished citizens and wealthy elites.

And so, the gap remains—widening with every generation and perpetuating a legacy of misfortune.

Change is possible

“True, genuine, inclusive democracy matters, very clearly”

~ Simon Johnson, economic sciences prize 2024

Every dark cloud has a silver lining. Change is not impossible. Even in non-democracies, citizens, though lacking formal power, can unite to create revolutionary pressure. History shows that when elites face such threats, they often cede power to avoid rebellion. The choice becomes stark: lose power—or lose their heads.

The lessons of history and research underscore that institutions hold the key to unlocking prosperity. This year’s Nobel laureates remind us that while the path to equality and prosperity is challenging, change is always possible.