Does the 2024 Nobel Prize-winning economic study tell the whole story?

Sun 27 Oct 2024 12:00 Last Updated Sun 27 Oct 2024 12:00

Several criticisms have been made of the three awardees’ research. VISUAL: ALIZA RAHMAN

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Several criticisms have been made of the three awardees’ research. VISUAL: ALIZA RAHMAN

The 2024 Nobel Prize in Economics has been awarded to three American economists whose research explained why some countries are rich and others are poor. They used theory as well as empirical evidence to argue that differences in economic institutions are a fundamental cause of differences in long-term economic growth. Simply put: economic growth is a consequence of good governance, respect for property rights, constraints on those in power, and relatively lower rent seeking on the part of those in power. However, there are some doubts about their conclusions.

The award winners were Daron Acemoglu and Elizabeth and James Killian Professor of Economics in the Department of Economics at the Massachusetts Institute of Technology (MIT); James Robinson, a political scientist and economist who teaches at the University of Chicago; and Simon Johnson, Ronald A. Kurtz 1954 Professor of Entrepreneurship at the MIT Sloan School of Management.

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The work of Acemoglu, Johnson and Robinson divides institutions into two categories: “inclusive” and “extractive”. Inclusive institutions include property rights, democracy, the rule of law and order, and control of corruption, while extractive institutions lead to high concentrations of power and restrictions on political freedom, tend to concentrate resources in the hands of a small elite and thus suppress economic activity. development.

Acemoglu and Robinson’s book Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012) analyzes why some countries grow while others fall behind. They raise the question: “What forces or institutions promote or hinder economic growth?” They acknowledge that in some cases GDP growth appears to be driven by nature’s gifts, but in general strong and “welfare-promoting” social institutions are a precondition for long-term prosperity. India is an example. During the Mughal period, per capita income here was higher than in European countries, but this lasted only for a few centuries. It is favorable political and economic institutions that can explain long-term growth in per capita income and well-being for the majority.

Of minor interest is the fact that all three laureates were born outside the United States, where they studied and spent most of their lives. Acemoglu was born in Turkey, and the other two were born in the UK (by the way, Robinson grew up in Barbados). I wonder if their migration to the US could have played a role in the choice of topics: in the differences in economic growth in different countries. In addition, all of them had to study at one of the best universities in the United States during their careers, which some academics note with concern.

Three economists examined the European colonization of large parts of the globe. In 2001, they wrote a seminal article in the American Economic Review entitled “The Colonial Origins of Comparative Development: An Empirical Study.” As is well known, a critical explanation for current disparities in wealth lies in the political and economic systems that colonialists introduced or chose to develop, beginning in the sixteenth century, in Asia, Africa, and the Americas.

Several criticisms have been made of the three awardees’ research. First of all, they have a very narrow point of view. Their theory legitimizes the processes of imperialism and colonialism and, at worst, justifies racism. Where Europeans settled they created good institutions, but in Africa and Asia they prevented the growth of autonomy and democracy.

Second, researchers from Harvard and Yale University note that institutions do not lead to economic growth. Rather, economic growth supports institutions. Taiwan, South Korea and Singapore all had authoritarian governments when they reached the peak of economic growth. China grew up without democratic institutions. Third, their work points to a bias against capitalist institutions that inevitably leads to the concentration of wealth and political power among a select few.

Other economists have also questioned the cause-and-effect relationship. Do political institutions cause economic growth, or do economic growth and human capital development lead to institutional improvement? As stated above, the cause-and-effect relationship could be the opposite of what the trio claims.

Mushtaq Khan, professor of economics at the School of Oriental and African Studies at the University of London, argues that the studies by Acemoglu, Johnson and Robinson mainly show that today’s high-income countries score higher on Western indices of institutions, not that these countries have achieved economic development , because they were the first to create inclusive institutions.

Moreover, we lack reliable estimates of the “impact of institutions on economic performance.” However, this year’s Nobel Prize in Economics will stimulate research into the role of government, wealth inequality and research into the persistence of poverty.

Regarding the relevance of the study to Bangladesh, although the country has experienced significant economic growth, its institutional framework is not considered to be fully conducive to sustainable long-term growth. Bureaucratic obstacles, corruption, lack of transparency and weak regulatory authorities often hamper business operations and investment potential. The recent uprising in July-August demonstrated that improving the quality of governance and the institutional environment is critical for Bangladesh to realize its full economic potential. In the past few years, some have hailed Bangladesh as a “tiger economy,” but it is now clear that all these slogans amount to praising the “emperor without clothes.”

Dr. Abdullah Shibli An economist by profession, he works for Change Healthcare, Inc., an information technology company. He is also a senior fellow at the International Sustainable Development Institute (ISDI) in the USA.

The views expressed in this article are those of the author.

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