Sveriges Riksbank Prize in Economic Sciences 2024: Showing Why Countries Are Rich or Poor Today

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to three United States-based professors for their demonstration of the importance of societal institutions for a country’s prosperity.

Daron Acemoğlu, 57, Simon Johnson, 61, and James Robinson, 64, will share the prize of 11 million Swedish kronor equally for showing “how institutions are formed and affect prosperity,” the Royal Swedish Academy of Sciences said.

“Reducing the vast differences in income between countries is one of our time’s greatest challenges. The Laureates have demonstrated the importance of societal institutions for achieving this,” said Jakob Svensson, Chair of the Committee for the Prize in Economic Sciences.

Impact of European Colonization on Economic Disparities

The Laureates looked at the political and economic systems introduced by European colonisers from the 16^th century onwards. Colonial settlement patterns have had a lasting impact on modern economic disparities between nations, they found.

In places that were relatively poor during colonisation, colonisers often established more participatory and equitable institutions. Over time, these inclusive systems helped foster broad-based economic development.

This historical pattern helps explain an interesting reversal: some territories that were wealthy at the time of colonisation are now relatively poor while certain places that were initially poor have become more prosperous.

The key factor appears to be the type of institutional framework that was put in place during the colonial period. They highlighted the divide between Mexico, where Spanish colonialists plundered the Aztec economy, and the southern US where settlers put political and economic institutions in place.

On the theoretical side, their research explains why extractive economic institutions and dictatorships often persist, even though reforming them would benefit the country the most. Extractive institutions provide short-term gains for the people in power and as long as the political system guarantees they will remain in control, no one will trust their promises of future economic reforms.

The Laureates have also shown that the inability to make credible promises can explain why transitions to democracy do sometimes happen. A government facing a potential uprising must choose between two paths. While rulers naturally wish to preserve their authority by offering economic concessions, such promises often lack credibility – the public may reasonably suspect these reforms would be reversed once stability returns. Ultimately, transitioning to democratic rule may be the only viable solution.

Transformation of Institutions

Acemoğlu, speaking at a press conference after being named one of the winners of the prize, said that colonialism was a “good test” because it transformed the institutions and the organisation of many societies around the world, starting sometime from around the year 1500.

“These were both different outcomes within the colonial world, and because they were so deeply affecting the organisation of these societies, they had very persistent effects,” he said, adding that the work the Laureates had done “favours democracy”.

He said the Laureates’ argument was that authoritarian growth was often more unstable and did not generally lead to very rapid and original innovation. He acknowledged China was “a bit of a challenge” given it had recently started pouring investment into sectors such as AI. “But I think my perspective is that these authoritarian regimes, for a variety of reasons, are going to have a harder time in achieving sort of long-term, sustainable innovation outcomes,” he said.

Statements From the Scientific World

Their award won plaudits from across the academic world. Paul Krugman, the Distinguished Professor of Economics at the Graduate Center of the City University of New York who won the Economics Prize in 2008, said their work on how colonial regimes focused on resource extraction inflicted long-term damage was “clever and important and also of some current relevance”.

According to Dani Rodrik, Ford Foundation Professor of International Political Economy at the John F. Kennedy School of Government at Harvard University, the Laureates had “revived and made cool again the study of institutions in mainstream economics”. He said: “Their work stimulated a huge literature that grows by the day.”

Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London, picked up on Acemoğlu’s reference to sustainability, saying tackling the biggest challenges of today required countries to have solid institutions. “And we need to design these to be inclusive – and sustainable,” she said.

In a conversation on the MIT Shaping the Future of Work Initiative’s YouTube channel, Johnson and Acemoğlu said that, together with Robinson, they were drawn to links between institutions and human behaviour because of the failure of traditional macro- and microeconomics to explain the outcomes in economies such as the Türkiye’s former military dictatorship and post-communist eastern Europe.

“For me, part of the thrill of this work has always been attempting to connect it to policy and to think about how we can get to a better world,” Johnson said. “It’s not always direct, it’s not always immediate and obvious, but it’s a good question to push on.”

Acemoğlu said he was working on a project with Robinson on rethinking the conceptualisation of democracy in the 21^st century, and on another with Johnson on what makes humans distinctive in an era of artificial intelligence. “It turned out that we had similar passions and similar dissatisfaction with the narrowness of the questions, especially in macro. So that started a long collaboration.”

Daron Acemoğlu

… is the Elizabeth and James Killian Professor of Economics and an Institute Professor at Massachusetts Institute of Technology, Cambridge, USA. He was born in Istanbul, Türkiye, in 1967 and was awarded his PhD from the London School of Economics and Political Science, UK, in 1992. He received the John Bates Clark Medal in 2005 and was elected a Fellow of the Econometric Society in the same year.

Simon Johnson

… is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at the MIT Sloan School of Management in Cambridge, USA. He was born in Sheffield, UK in 1963 and was awarded his PhD from the Massachusetts Institute of Technology, Cambridge, USA in 1989. In 2007–08, Johnson was director of the Research Department at the International Monetary Fund. He currently co-chairs the CFA Institute Systemic Risk Council.

James A. Robinson

… is the Reverend Dr Richard L. Pearson Professor of Global Conflict Studies at the University of Chicago, USA. He was born in 1960 and was awarded his PhD from Yale University, New Haven, USA in 1993. He directs the Pearson Institute for the Study and Resolution of Global Conflicts at the Harris School of Public Policy.