In 1973, economist Abba Lerner famously remarked that “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.” While economic transactions may indeed represent “solved political problems,” policies often do not. This complexity is at the core of the research recognized by the 2024 Nobel Memorial Prize in Economic Sciences, awarded to Daron Acemoglu, Simon Johnson, and James Robinson. Their groundbreaking work provides a broader understanding of why some countries persist in adopting policies that hinder their own development.
Exploring Inefficient Institutions and Historical Path Dependence
The laureates’ research addresses two pivotal questions:
Why do inefficient institutions persist, and why do leaders resist growth-enhancing policies? Leaders may fear that policies focused on growth could erode their political power, leading to the persistence of inefficient institutions. Those who benefit from the current system often have the power to block reforms, resulting in what the laureates term “extractive institutions.” These institutions allow elite groups to extract resources from society, impeding broader economic development. Despite this, development progress has occurred under various institutional arrangements worldwide.
How do historical events shape current institutions, and why is change difficult? Path dependence explains how historical events mold institutions, making them resistant to change even when better alternatives exist. This phenomenon is exemplified by the divergent economic paths of North and South Korea. Once an institutional path is established, it can become self-reinforcing, complicating efforts to shift to more beneficial trajectories.
From Diagnosing Problems to Illuminating Pathways for Change
The Nobel laureates’ work not only diagnoses problems but also highlights potential pathways for positive change. Their research shows how shifts in power dynamics can create opportunities for institutional reform. For example, the end of apartheid in South Africa in the early 1990s facilitated significant changes that have shaped the country’s development trajectory.
The Nobel Committee’s Scientific Background paper emphasizes how key concepts from the laureates’ research can transform development practice. The World Bank’s 2017 World Development Report on Governance and the Law, cited in the paper, offers three guiding principles that align with the laureates’ findings:
Focus on the function of institutions, not just their form: Policies must guarantee credible commitment, support coordination, and promote cooperation. Effective institutions perform their expected functions, as seen in the contrasting management of natural resource revenues by Mongolia and Chile.
Address power asymmetries, not just capacity building: Power dynamics shape policy outcomes and broader economic development. Rwanda’s early 2000s coffee sector reforms, which balanced power among stakeholders, demonstrate the importance of addressing power imbalances.
Consider the role of law in shaping behavior, not just establishing rules: Institutions shape incentives, behavior, and policy outcomes beyond simply setting rules. Brazil’s introduction of electronic voting in the late 1990s increased participation by less-educated voters, leading to policies more favorable to the poor.
Embracing New Approaches to Development Thinking and Practice
As global challenges like persistent poverty, widespread inequalities, and climate change persist, the Nobel Committee’s recognition of this work calls for deeper engagement with the political economy of development. Development practitioners are urged to incorporate power analysis into program design and implementation, ensuring interventions are politically viable for long-term, sustainable change. Understanding local power dynamics, historical contexts, and the interplay between formal rules and informal norms is essential for achieving positive development outcomes.