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This year’s Nobel Prize laureates in Economic Sciences—Daron Acemoglu, Simon Johnson, and James Robinson—have shed light on the critical role of societal institutions in determining a nation’s prosperity. Their research underscores that countries burdened by poor rule of law and exploitative institutions struggle to achieve sustainable growth and improvement.

The scholars trace the roots of these institutional disparities back to the era of European colonization, where the establishment of institutions varied significantly. In some regions, colonizers aimed to extract resources and exploit indigenous populations, while in others, they created inclusive political and economic systems benefiting both the colonizers and the local populace.

The laureates illustrate that the type of institutions introduced during colonization can explain the stark differences in prosperity among nations. Countries that adopted inclusive institutions during colonial times—often those that were impoverished at the onset—tended to experience long-term economic growth and improved living standards. Conversely, nations that were wealthy at the time of colonization but established extractive institutions have faced prolonged economic stagnation.

Acemoglu, Johnson, and Robinson argue that societies trapped in extractive institutional frameworks often experience low economic growth, as the ruling elite prioritize short-term gains over long-term benefits for the populace. Without credible commitments to reform, the trust necessary for economic progress is undermined, perpetuating the cycle of stagnation.

Yet, the potential for democratization can arise as a response to widespread discontent. When faced with the threat of revolution, leaders may attempt to appease the populace by promising reforms. However, the skepticism surrounding these promises often leads to a political impasse, forcing a transfer of power and the establishment of democratic governance.

“Reducing the vast differences in income between countries is one of our time’s greatest challenges,” stated Jakob Svensson, Chair of the Committee for the Prize in Economic Sciences. “The laureates have demonstrated the importance of societal institutions for achieving this.” Their work not only enhances our understanding of economic disparities but also paves the way for potential pathways to reform and growth in struggling nations.

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