The Nobel Committee awarded the Sveriges Riksbank Prize in Economic Sciences to Daron Acemoglu, Simon Johnson, and James Robinson (hereafter, AJR) for “studies of how institutions are formed and affect prosperity”. There are many good summaries of this work already written. This is not going to be another. It is the idiosyncratic view of an applied economic theorist who was lucky enough to have been a (rather proximate) fly on the wall as it unfolded.
Their most cited paper “The Colonial Origins of Comparative Development: An Empirical Investigation” is undeniably historical. And the way AJR made their core argument relies heavily on claims regarding the persistence of historical institutions’ effects to today. It is tempting to think their contributions are somehow about the history, but this would be a mistake. Their ‘identification strategy’ utilises historical persistence, but it is not the main show.
Here are a number of other things the work is not really about: They are not the first social scientists to highlight the importance of institutions for prosperity. Nor even the first to be awarded a Nobel prize for this. Nor do they claim to be able to provide solid numbers regarding the relative contribution of institutions vis-à-vis other factors in advancing prosperity. They did not come up with new techniques that could allow us to ask questions about the causal effect of institutions on outcomes. These techniques were already used by labour economists, and well-known to econometricians.
Is the evidence they provided fully convincing regarding institutions playing a causal role in advancing prosperity? That is debatable. There has been criticism. Much is misguided, based on a surface reading, and easily dismissed – for example, that this work celebrates colonialism, or is indifferent to its damages, or that it is Western-centric. But other critiques are deeper and may prove to be important. Some have argued for an alternative coding of the variables, some that different model specifications yield different outcomes, some that omitted confounding variables invalidate the whole empirical strategy. And as befits work cited tens of thousands of times, there will probably be more to come.
So, why all the fuss?
In a nutshell: Prior to their work, discussion on institutions would proceed something like this (I am caricaturing a little): As a proponent of the ‘institutions matter’ view, I would present my narrative (impressions, examples, stories) that would make my case. I might point to the example of North versus South Korea – as many have (and AJR themselves do at times). Clearly these are two regions that were extremely similar prior to the Korean War, and their prosperity diverged dramatically thereafter. You, favouring some other causal factors, such as geography, might counter that there were many things that differed between these two states after the Korean War (for example, one state favoured by the largesse of the West, another by more limited benefactors) and you would present to me your favourite example of countries – say tropical Africa – cursed with a hostile disease environment, where geography clearly seemed to play a role in perpetuating poverty. I might counter your examples, by pointing to Singapore, a place with similar geographic endowments, that ended up much more prosperous. Then double down on the relative unimportance of Western support in the Korea’s example. The world is rich with examples, and each example admits multiple explanations that we can mine to make our cases. We could go on and on.
Also read: AJR’s Work Has Limitations, But Their Economics Nobel Is Deserved
AJR’s work shifted debate onto much more productive ground. Instead of pointing to a specific set of examples, it specified a coherent theory. A theory which suggested where we might look to clarify the mechanisms by which institutions could affect prosperity, and how we might be able to quantify these effects. The theory linked aspects of distant history to outcomes today. And if that theory were right, AJR argued, we should see certain patterns playing out through time. For example, we should see that former colonies where initial settlers died in high numbers exhibited early institutions that were more oppressive than where early colonists found a more hospitable environment. We should see the character of those institutions persist – once in place, they follow a logic of self-replication that sees their early attributes reflected way beyond independence too.
Aspects of such a theory can be validated. Do the inter-temporal correlations they suggest hold up (they seem to)? Other aspects of the theory are harder to assess. Could there be other factors we have not measured that may be causing these historical patterns? Are there alternative channels which may be causing the same patterns? Is there a different reading of the same history? Are there other examples from history (perhaps in very different times and places) that we can scrutinise in a similar way? Utilising a similar theory, or an alternative causal theory, are we able to generate similar predictions? Or can we creatively generate different predictions that might even fit the record better?
These questions are productive ground to traverse. And they have occupied much of the blizzard research that has been written utilising their approach, or variants of it, since. Recall that the question we are trying to answer is simple and direct: how do the institutions of a country affect its economic prosperity? Instead of pointing to specific countries that fit (or do not fit) our particular story, researchers weighing in on this now follow AJR’s lead and sometimes point to factors that we could not, in our wildest dreams, have thought would be relevant for this debate. Factors like historic land tenure systems, the location of missions, labour tithing systems (to name a few) become relevant to arguing that institutions cause or do not cause prosperity all over the world today. Following on from the influential early papers, the scope of what is admissible and relevant for the debate on whether and how institutions matter for prosperity has been expanded immensely.
Reasonable people can debate, and have debated, whether AJR’s arguments are compelling. And alternative mechanisms for the correlations they propose have been put forward – for example, culture could be an avenue of persistence, or early human capital may have set in motion self-perpetuating forces that are reflected today. But unlike us competing with cherry-picked examples, these are fruitful debates for academics to have. In each case, people take the initial facts, acknowledge a possible interpretation, and put forward what they claim is a better one. Thinking through AJR’s arguments and positing their own, they suggest alternative data that might resolve the issues.
This is the aspect of their work that we should all celebrate. It is precisely how academic discourse should proceed. Nobody, in the social sciences at least, ever has the evidence at hand to provide a definitive ‘slam dunk’ account of a social phenomenon (certainly not one as momentous as why some countries are rich and others poor). We make progress by opening up new vistas to scrutinise and debate. And AJR’s contribution was to crack open a whole new set of facts from history that were to be put on the table to help us see the world in a new way. The facts were not new, the methods were not new, and even the story was not new. What was new was their approach: it took the facts, developed a theory from them, used econometric methods to infer causal relationships from correlations (under some assumptions), and provided a novel argument and evidence for why institutions affect prosperity.
The case of China
Of course, the prize is not a celebration of just one paper, but of a body of ideas. The book Why Nations Fail, written by Acemoglu and Robinson (hereafter, A&R), brings a lot of these ideas together. It fleshes out the hypotheses that are the core of their research paradigm and illustrates them with a set of historical accounts. Are they comprehensive accounts? No. Are they selected to support/illustrate their points? Yes. But doing it that way (a way which academics sometimes sneer at as “journalistic”) allowed them to reach a ridiculously large (non-academic) population. And unlike a lot of the academic crossover bestsellers that somehow end up on erudite non-economist’s bookshelves – which I would venture have not been read carefully (for example, Rawls’ Theory of Justice or Piketty’s Capital in the Twenty-First Century) – readers seem to have pored over Why Nations Fail.
And there are many things that even academic economists can learn from doing so. I recall Ashok Kotwal (I4I’s founding Editor-in-Chief) being particularly intrigued by the book’s accounting of China. As far as I can tell, A&R are not in the business of prediction, but at the time they were unfashionably pessimistic about China. Proponents of the “modernisation hypothesis” interpreted China as on a steady march towards institutional betterment. In explaining China’s dramatic late 20th century growth experience, A&R acknowledged the Communist Party having taken their foot off the throat of China’s economy long enough to allow incentives to improve and for growth to start up. But they demurred on the inevitability of institutional change and economic progress continuing.
The question, which was still very much open at the time of their writing, was whether the shifts that heralded China’s economic transformation were permanent, that is, a new direction for China. Or merely a blip. To those subscribing to a “modernisation hypothesis” view of the world, they seemed likely to persist. The changes would beget economic improvement. Such improvement would, in turn, call for more institutional freedom – a shift towards more inclusiveness, inducing yet more economic growth –leading to greater inclusiveness, and so on in a virtuous circle. Others thought that even without institutional change, there was no reason for the impressive economic performance to stop.
But A&R’s work on institutional change suggested an inherent stasis to elite-centred institutions, absent external shocks or threats. The reasons for this were made explicit in their book Economic Origins of Dictatorship and Democracy – another piece that was to be transformational in its impact, this time in political science. The logic to this is that temporary threats by those opposed to a regime are really the key to institutional change. If those opposed can mount permanent threats, then the regime will have every incentive to accommodate their demands without any need for institutional change. But if the threats are temporary, then the opposition’s chance to strike will soon pass, so even if accommodated now there is no guarantee they will be in future. To guarantee their future, they may need to strike now. Knowing this, the regime will either have to repress (which, though preferable, is not always possible) or placate with something that can guarantee the opposition benefits in the future too. Institutional change, putting the opposition in charge, or at least giving them credible means to be so in future, might do the trick.
But no such changes had appeared in China’s liberalising era, and there was little sense that the opening was driven by opposition threats – temporary or otherwise. Their theory thus suggested no great cause for optimism. The reversion towards ‘extractiveness’ in China that was to come, and be institutionalised by Xi Jinping, was at best only a twinkle in Xi’s eye in 2010. And few others predicted the next decade’s closing down of the baby steps of inclusion taken by the party, nor the degree to which Xi would dismantle Deng Xiaoping’s ‘collective leadership’ model. But A&R presciently said the following: either China’s political institutions will fundamentally change, or this period of prosperity would end up looking like just another temporary surge of autocratic growth. From the vantage point of 2024, they look more right than wrong.
Concluding thoughts
Their ideas have mattered – they have changed the way we think about one of the biggest of the ‘big questions’ in economics: Why are some places rich and others poor? They have moved the literature forward from an uninteresting battle of cherry-picked examples and counterexamples, on to a much richer domain. They have ignited discussion well beyond the academy. And within it, we are still debating what this all means. There could be no better choice for the Nobel prize.
Patrick Francois is Professor in the Vancouver School of Economics (University of British Columbia).
This article was originally published on Ideas For India.
