The Economics Nobel

In their 2012 book Why Nations Fail, Daren Acemoglu and James Robinson discussed how institutions determine the success or failure of democracies. Last month Acemoglu and Robinson, along with Simon Johnson, won the 2024 Nobel Prize for economics for work on much the same subject. Acemoglu and Johnson are professors at the Massachusetts Institute of Technology. Robinson is a professor at the University of Chicago.

Their conclusions in brief: those geographies Europeans colonised to settle in and where Native populations were sparse, developed better long-term institutions of democracy. In geographies where the local population was large, permanent settlement by European colonists was difficult. These regions developed imperfect institutions of democracy.

This is a version of the Great Divergence that took place in 1700-1900. Relatively backward Europe overtook China and India even as it colonised thinly populated territories (North America, South America and Australia) as well as densely populated territories (India and Hong Kong).

The economic outcomes diverged. As the Royal Swedish Academy of Sciences said pointedly in a statement announcing the 2024 Nobel Prize for economics: “The laureates demonstrated that the places that were the richest at their time of colonisation are now among the poorest.”

The three 2024 economics Nobel laureates examined successful colonial settlements in the United States, Canada, Australia and New Zealand. All four have robust democratic institutions. The Native populations were exterminated or marginalised in Reservations, allowing European colonists free rein over their newly conquered territories.

The Nobel laureates don’t dwell on the plight of indigenous peoples in the successful democracies colonised by European-settlers – Native Americans, Native Canadians, Australian Aborigines and New Zealand’s Maoris. They acknowledge, however, that geographies with large existing populations were based on “extractive” colonialism. These countries (India, for example) were once rich. After they were colonised, they were reduced to penury.

Densely populated geographies – mainly in Asia and South America – developed exploitative colonial institutions designed to serve the coloniser and a tiny elite in the local population (landowners and maharajas, for example, in India). So while European colonist-settlers in the United States, Canada, Australia and New Zealand had property rights and the rule of law, those in Asia, South America and Africa did not till they became independent centuries later. The conflict between elites and masses in newly de-colonised countries is well established. It led to institutions that had promoted inequality and poverty.

The understated message of the work of the three 2024 Nobel laureates is this: if you want to build prosperous, inclusive societies, colonise geographies like North America, South America, Australia and New Zealand. Their Native populations are too few and too weak to resist you. Meanwhile, in populated ancient civilisations like India, engage in “extractive” colonisation, exploiting the poor and co-opting the elite for as long as such extractive policies are possible. The outcome: poverty and undemocratic postcolonial institutions. These are evident even today in former European colonies across Africa, South America and Asia.

Indian Exceptionalism
India stands out as an exception. Despite being exploited for nearly 200 years by British colonialism, India succeeded in building robust postcolonial institutions. Its democracy is often chaotic but so is America’s. Its judiciary is slow but effective.

Arvind Subramanian, India’s former chief economic advisor (CEA), wrote in Business Standard shortly after the 2024 Nobel economics prize was awarded to the three US-based academics: “When I first read the ‘Colonial Origins of Comparative Development’ (COCD) by Daron Acemoglu, Simon Johnson and James Robinson more than 20 years ago, I was smitten. So much so that I told several colleagues at the International Monetary Fund (IMF) that the paper would one day win the Nobel Prize.

“The critical difference between good and bad development outcomes was whether the colonisers stayed to build good institutions or always came with the intention of leaving after rapaciously exploiting the colonies’ natural resources, leaving behind awful and damaging institutions. The morality of settlers was their clever-conceit-cum-imaginative-data to tease out in some causal fashion where they stayed and where they did not.

“My related, and perhaps biased, gripe is of the Acemoglu and Robinson book on ‘Democracy and Development’, which in its hundreds of pages does not have a single world to say about the most unique and successful democratic experiment in the last 100 years, namely that of India.

What the three economics laureates do not focus on is the global inequality that colonisation has produced. As economists it is important they examine institutional differences between settler-colonies like the US, Canada and Australia and extractive-colonies like India whose economy was severely damaged by 190 years of British colonialism. In their published work an analysis of the injustice of both kinds of colonisation is markedly absent.

Settler-colonies like the US have not only impoverished and marginalised their Native population but built wealth on the back of a slave economy. The 250-year-long transatlantic slave trade from Africa to North America helped build the US economy with free labour for its cotton plantations and factories that had a significant role to play in the rise of the US as a global superpower.

Extractive colonies like India were meanwhile reduced from accounting for 23 per cent of global economic output in 1757 to 3 per cent of global economic output in 1947, after 190 years of British extractive colonialism.

Western economists skirt around these facts. Focusing on them would make a future Nobel Prize in economics even more noteworthy. It is good, however, that the work of the three 2024 economics laureates on why certain countries became rich and others did not now will receive renewed examination by global academics. Some of their findings will reveal historical truths for the West. That is why a Nobel prize for the three economists is welcome.