2024 Nobel Prize highlights role of institutions in global development

Growth is driven by technological dynamism even more than by security for private capital

The 2024 Nobel Prize in Economics was awarded to Daron Acemoglu, Simon Johnson, and James Robinson for their groundbreaking research on how political and economic institutions shape long-term prosperity. The substance of their argument is found in a seminal article by them on colonial impact on development, which argues that the extent of settler mortality, or to put it more colloquially, the death rate of immigrant settlers, determined the difference between colonies like the US, Canada, Australia and New Zealand and the other colonies, particularly in Africa and Asia. The North American and Oceania colonies became settler colonies where European institutions relevant for property rights were established and led to upward growth. However, in the Asian and African colonies, institutions supportive of growth were not introduced and the colonial rule was essentially extractive. 

 

This argument is oversimplified when it comes to colonialism in India and Southeast Asia. There, the absence of settler settlements is a product not just of climate-related mortality threats to the Europeans, but also their incapacity to overwhelm, eliminate, and isolate the local inhabitants and their rulers as they did with the indigenous people in North America and Oceania. Moreover, their interest in Asia certainly was largely extractive rather than for settlement purposes.

 

They go on to argue that the difference in settler intentions based on threatened mortality experience explains even the current difference in income, except that the current estimate they use is for 1995. Surely, the famous Table 1 from their paper, which correlates current gross domestic product (GDP) adjusted for purchasing power parity with their estimate of “settler mortality” during colonial times will look substantially different with today’s GDP and will most likely challenge their explanation for current difference by 2050.

 

The imperialist European countries that moved into colonial rulership went through a process of democratisation during this period of colonial expansion and, with the Industrial Revolution developing fast, they did develop new institutions. The view of the authors of the seminal article about institutions supportive of growth is very precise. In their paper, they inform us that: “Since our focus is on property rights and checks against government power, we use the protection against “risk of expropriation” index from Political Risk Services as a proxy for institutions.” In essence, the institutions they value are those that curtail the power of monarchic and aristocratic rulers on the business sector.

 

How useful is the argument regarding the importance of institutions developed in a democratising Europe for growth performance? Does it explain the development of Japan, which advanced in modernism after the Tokugawa shogunate was replaced by the Meiji Restoration, when political institutions imitative of the West were established, but where economic transformation depended heavily on the support of an oligarchic government? Will it explain the emergence of a single party-led China as the dominant producer and exporter of manufactured goods in our times?

 

What really made a difference between the colonisers and the colonised was the difference between individualism and clan or community loyalty. Human society began as a small clan, perhaps only about 150 persons of birth-related individuals who recognised and accepted their responsibility to clan members. But they also did not accept any sense of responsibility to other clans and often indulged in battles with them. This changed overtime as society groups became larger and larger and included many who were not related necessarily by birth. However, even then, some notion of community connectivity did emerge. For instance, in India, the connectivity through caste. The primary beliefs about rules that should be obeyed were kinship- and community-related, a belief that perhaps continues to date in India. What drives economic behaviour in such a society is how it will be perceived in the eyes of the community rather than the possibility that it may not be permissible under the law.

 

This changed radically in Europe when the dominant Catholic Church imposed a series of reforms in the Middle Ages that banned cousin marriage and altered inheritance rules, encouraging individuals to choose their own spouses. This weakened kinship sentiments and encouraged individualistic morality. The Reformation that followed reinforced this. The radical transformation of Europe after the Middle Ages is very much a product of this. One can attribute to this shift to individualism the emergence of people-based politics as a challenge to monarchic rights, business based on contracts rather than community loyalties. The Industrial Revolution came at a time when monarchic dispensation became largely irrelevant.

 

From the perspective of growth, the change that is most important is the emergence of individualism in science research and technology development that freed it from religious beliefs or assumptions. Yes, there were episodes of the assertion of older dogmas, such as the attack on Galileo; however, these did not last long.  Scientific research in Europe, particularly after AD 1500, liberated itself from religious dogmas, such as those concerning the genesis of the Earth and humanity. The technological advancements that drove the Industrial Revolution emerged from individuals rather than institutions, and many of these innovators were moderately educated workers.  In Asia, particularly in India and China, the results of science in areas like mathematics and astronomy and a variety of technological and medical innovations did take place in the pre-modern world of Asia, particularly in India and China. However, the post-medieval flourish of science engendered by the liberation from religious dogmas came to Asia only in the colonial period.

 

An even more convincing example of the importance of liberating science from religion is the loss of objective science research in the world of Islam, which was the major centre of scientific advance in the Middle Ages. This vigorous scientific development was put to an end with the belief voiced by the theologian al-Ghazali, who argued that seeking causation in nature contradicts the Islamic belief that it is God who determines the behaviour of nature. This illustrates the importance of liberating science and technology development from theological preconceptions and religious beliefs.

 

India today is only partially on the path towards a growth-positive institutional structure fostered by individualism. We do have people-based politics in the democracy that we have established and an economic system based on contractual laws. However, our politics is still under the influence of kinship loyalties based mainly on caste and an individualistic approach to party loyalties has not yet spread widely among voters. Our scientific research is not much under the influence of religion, despite some recent attempts. What is more disturbing is the inadequacy of our science and technology activities relative to our needs and our targeted position in the world economy.

 

This year’s Economics Nobel Prize winners explanation of the institutional structure of the European colonising states as a sound basis for accelerating growth is not entirely convincing when it comes to the success of growth in East Asia.  Nevertheless, it is prudent to assume that accelerating growth in a democracy requires the dilution of kinship loyalties, the emergence of individualism, the separation of property and economic rights from the power of rulers, the secularisation of natural and social sciences, and, most importantly, the generation and maintenance of an ethos of innovation by individuals that challenges existing methods of production, distribution, communication, and consumption.

 

desaind@icloud.com

 

1. The Colonial Origins of Comparative Development: An Empirical Investigation by Daron Acemoglu, Simon Johnson, and James A Robinson, American Economic Review , December 2001