Nobel Prize in economics awarded to trio for explaining why some nations are rich and others poor

By Christian Edwards, CNN

London (CNN) — Three economists were awarded the Nobel Prize Monday for their research into how the nature of institutions helps explain why some countries become rich and others remain poor.

Daron Acemoglu, Simon Johnson and James Robinson will share the prize, which carries a cash award of 11 million Swedish kronor ($1 million).

The Nobel Committee praised the trio for explaining why “societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better.”

“When Europeans colonized large parts of the globe, the institutions in those societies changed,” the committee said, citing the economists’ work. While in many places this was aimed at exploiting the indigenous population, in other places it laid the foundations for inclusive political and economic systems.

“The laureates have shown that one explanation for differences in countries’ prosperity is the societal institutions that were introduced during colonization,” the committee added.

Countries that developed “inclusive institutions” – which uphold the rule of law and property rights – have over time become prosperous, while those that developed “extractive institutions” – which, in the laureates’ words, “squeeze” resources from the wider population to benefit the elites – have experienced persistently low economic growth.

In their 2012 book “Why Nations Fail,” Acemoglu, a Turkish-American professor at the Massachusetts Institute of Technology (MIT), and Robinson, a British professor at the University of Chicago, argue that some nations are wealthier than others because of their political and economic institutions.

The book opens with a comparison of living standards in two towns called Nogales – one in Arizona and one south of the border in Mexico’s Sonora region. Whereas some economists have argued that differences in climate, agriculture and culture have huge impacts on a place’s prosperity, Acemoglu and Robinson argue that those living in Nogales, Arizona, are healthier and wealthier because of the relative strength of their local institutions.

Last year, Acemoglu and Johnson – a British-American professor at MIT – published “Power and Progress,” a study of how technological innovations over the past 1,000 years, from agricultural advances to artificial intelligence, have tended to benefit the elites, rather than creating prosperity for all.

The authors warned that “the current path of AI is neither good for the economy nor for democracy.”

Democracy equals growth?

Asked whether their research simply argues that “democracy means economic growth,” Acemoglu said “the work we have done favors democracy” but added that democracy “is not a panacea.”

“Our argument has been that this sort of authoritarian growth is more unstable and does not generally lead to very rapid and original innovation,” Acemoglu said in a phone interview during the announcement ceremony.

In “Why Nations Fail,” he and Robinson argued that China, because it lacks inclusive institutions, would not be able to sustain its economic growth. More than a decade since the book’s publication, Acemoglu said China has posed a “bit of a challenge” to that argument, as Beijing has been “pouring investment” into the innovative fields of AI and electric vehicles.

“But my perspective is generally that these authoritarian regimes, for a variety of reasons, are going to have a harder time in achieving long-term, sustainable innovation outcomes,” he said.

The economics prize is officially known as Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. Unlike the prizes for physics, chemistry, medicine, literature and peace, it was not instituted by the Swedish industrialist but rather by Sweden’s central bank in 1968.

Last year, the prize went to Claudia Goldin, a professor at Harvard University, for her research into women in the labor market.

Using more than 200 years’ worth of US data, Goldin showed how the nature of the gender pay gap has changed over time. Historically, much of the gap could be explained by differences in education and occupation. But in more recent history, she found, the bulk of the gap has been between men and women in the same occupation, and it largely emerges when a woman has her first child.

This story has been updated with additional information.

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