Nobel Prize in Economics 2024

Context: The Royal Swedish Academy of Sciences on Monday awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2024 to three US-based economists “for studies of how institutions are formed and affect prosperity”. The Nobel citation states the three economists “have helped us understand differences in prosperity between nations”.

The Big Question?

• Why are some nations rich and others poor? Why do some nations fail while others succeed in achieving prosperity? These are questions that have puzzled economists for decades.
  • For instance, the richest 20% of the world’s countries are now around 30 times richer than the poorest 20%. 
  • Moreover, the income gap between the richest and poorest countries is persistent.
  • Although the poorest countries have become richer, they are not catching up with the most prosperous. 
• Over the years, many explanations have been put forward — everything from biology to geographical location to climatic conditions to evolution has been offered as the reason why some nations have done better than others. 

Answer to this Inter-Nation Inequality

• This year’s laureates in the economic sciences have demonstrated the importance of societal institutions for a country’s prosperity. By institutions, the laureates refer to the broad set of rules that govern the behaviour of individuals in a society or a country. 
• They held that societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better.
• The three laureates have distinguished between inclusive and extractive institutions.
  • An inclusive institutional framework refers to the existence of democracy, law and order, protection of property rights, etc.
  • By contrast, an extractive institutional framework typically refers to a lack of rule of law, of power being concentrated in the hands of a few (autocracy or dictatorship), and the associated risks of expropriation.
  • These two opposite types of institutional frameworks lead to very different incentives for people in an economy or society.
• For instance, if people are assured that their property will not be taken away at will, or that their incomes and profits will be protected for generations, they tend to focus on boosting long-term growth and prosperity. 
• In the absence of an inclusive institutional framework, the incentives collapse, undermining longer-term prosperity.

Arguments to Support Their Findings

• The laureates examined the European colonisation of large parts of the world.
• They found that one important explanation for the current differences in prosperity is the political and economic systems that the colonisers introduced, or chose to retain, from the 16th century onward.
• In some colonies, the purpose was to exploit the indigenous population and extract natural resources to benefit the colonisers. Their decisions were driven by the factor of “mortality”.
  • If the chances of their being killed were high, either because the local population was large in numbers and capable of killing or because the region was home to diseases like malaria, the colonisers chose extractive institutions because they were unwilling to settle down in the colony. 
• While in other cases, the colonisers built inclusive political and economic systems for the long-term benefit of European settlers.
  • In these colonies, the mortality rate was low. Hence, they chose inclusive institutions that gave people a say, an ability to build a future, and possibly even a fortune.

This effect can be understood in relation to what happened in India under British rule, as the colonisers chose to exploit the nation’s population and natural resources.