Why are some countries rich and others poor? This question, deceptively simple, stands at the heart of economic inquiry. It is often said that an individual’s living standards are not solely determined by talent or hard work, but rather by the circumstances of their birth. The disparity between nations’ wealth is one of the most critical issues in economics, and over time, various models have sought to explain it by focusing on factors like labor, capital, and, more recently, technology and ideas. Yet, these models left an important gap—why do some countries manage to accumulate these factors more successfully than others?
This year’s Nobel Prize in Economic Sciences, awarded to Daron Acemoglu, Simon Johnson, and James Robinson, addresses this very question. Their research focuses on the quality of government institutions as the key determinant of national success or failure. In 2001, the trio published the highly influential paper “The Colonial Origins of Comparative Development: An Empirical Investigation.” In this work, they introduced the concept of “inclusive” and “extractive” institutions. Inclusive institutions, which distribute prosperity among the population, encourage investment and growth, while extractive institutions, dominated by an elite class, hinder development by concentrating wealth and power.
Their approach used an “instrumental variables” method to tackle the causality problem—whether liberalism fosters development or vice versa. The economists found that historical variations in settler mortality provided a natural experiment. In regions where European settlers faced high mortality rates, colonial powers resorted to exploiting local populations through forced labor systems, such as the encomienda system in South America or rubber plantations in the Belgian Congo. In contrast, in places where Europeans could safely settle, such as America, Australia, and Canada, colonial governments promoted property rights and inclusive institutions to attract settlers.
This institutional divergence led to a “reversal of fortune” among colonies. The wealthiest regions in 1500, as measured by urbanization, became the poorest in modern times. Even when excluding the settler colonies of North America and Australasia, the pattern held: the greater wealth of once-rich colonies had fostered the development of extractive institutions, while larger populations provided a workforce that could be coerced into labor for elites.
The scholars extended their research by examining the modern-day consequences of these historical dynamics. For example, in their study of Ghana’s cocoa boom, they demonstrated how extractive institutions persisted even after decolonization. Under British rule, the colonial government delegated power to local chiefs rather than fostering private property rights. The infrastructure built by the British—railways, for example—was designed to benefit the mother country, not to promote domestic development. After independence, Ghanaian elites inherited these extractive institutions, continuing the exploitation of farmers.
The broader significance of this research lies in its break from deterministic models of modernization, which often assumed that nations would follow the trajectory of Western Europe. Acemoglu, Johnson, and Robinson’s work emphasizes the role of historical specificity and institutions in shaping economic outcomes. While their theories have sparked debate—such as criticisms over their methodology or questions about the division between extractive and inclusive institutions—their contribution remains a cornerstone in development economics.
Critics, such as David Albouy of the University of Illinois, have questioned the accuracy of the settler mortality estimates used in their analysis, suggesting that the data was selectively cited to support the authors’ hypotheses. Others, like Edward Glaeser of Harvard, have argued that factors beyond institutions, such as the introduction of education by European settlers, also influenced development. Furthermore, historians have pointed to cases like South Korea’s development under a military dictatorship and America’s history of slavery to challenge the simplicity of the extractive-inclusive dichotomy.
Despite these critiques, the work of Acemoglu, Johnson, and Robinson has reshaped our understanding of why nations succeed or fail. By highlighting the critical role of institutions and historical context, they have provided future economists with a solid foundation for exploring one of the most pressing issues in global economics today. Their contributions represent a major shift from abstract growth models to a more nuanced appreciation of how history and governance shape economic trajectories.
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