The 2024 Nobel Memorial Prize in Economic Sciences has been awarded to the dynamic trio—Daron Acemoglu, Simon Johnson, and James Robinson—collectively known as AJR! Their groundbreaking research delves into why some nations flourish while others falter, unveiling the crucial role that institutions play in shaping economic outcomes. Their findings are particularly poignant for the Global South, highlighting the need for strong and inclusive institutions to tackle wealth inequality. Not free of questions though.
So, let’s dive into a wealth of insights that could reshape the economic landscape !
Colonial past and AJR
They received the prize for their research in how institutions shape; which countries become wealthy and prosperous and what led to the establishment of the structure. The laureates delved into the world’s colonial past to trace how gaps emerged between nations, arguing that countries that started out with more inclusive institutions during the colonial period tended to become more prosperous. Awarding the Nobel Prize to AJR has created a timely opportunity to refocus attention on the implications of settler colonialism for the contemporary developmental prospects of nations, particularly for the former colonies of Global South.
Is everything already established good?
The question emerging from AJR’s work for the global south is whether the trio are right, and nations lacking inclusive institutions for their populations will ultimately fail. Or if their critics are correct in arguing that the global south (countries like India) were exploited and the wealth was “transferred” to the global north. From 1765 to 1938, the transfer of wealth from Indian colonies to the UK amounted to $45 trillion and such drain of wealth from Global South to Global North is estimated to be around $242 trillion from 1990 to 2015. For a country like India, the colonial past holds a huge significance in terms of current economic policies. Famine spree, laying down of railway tracks, everything allegedly good or bad shaped the Nehruvian style of middle path of socialist policies.
The emphasis AJR place on institutions holds crucial relevance for the Global South. In countries like Nepal, institutional frameworks are under strain, facing challenges in maintaining stability and governance. In contrast, India is witnessing a surge in liberal, Western-driven indicators—such as privatisation and market-oriented reforms—that are reshaping its institutional landscape.
What did AJR say?
“Rather than asking whether colonialism is good or bad, we note that different colonial strategies have led to different institutional patterns that have persisted over time,” Dr. Acemoglu said during a news conference after the prize was announced. “Broadly speaking, the work that we have done favours democracy,” he said.
Different hues of approach
AJR’s work assumes that the European model of “good institutions” serves as a universal pathway to development, which some scholars say is a deeply Eurocentric perspective. However, this fails to account for the diverse pathways to growth seen in different parts of the world, for example, China.
Douglass North’s concept of “adaptive efficiency” tells that institutional flexibility and responsiveness to shifting economic imperatives are more conducive to sustained growth than rigid adherence to predetermined institutional types. China’s use of Special Economic Zones in the 1980s exemplifies this, enabling decentralised policy experimentation in regions such as Guangdong, decoupled from national-level reforms. Somehow India and other global south countries are also doing that in terms of schemes like PM- DIVINE, and state-wise development approach.
State regulation v/s free institutions- Case of India
The Global South’s early economic growth often relied on state-led intervention, laying the foundation for later liberalisation. Economists like Gerschenkron argued that late-developing countries benefit from state-led “big push” investments, which provide infrastructure and industry impetus. In India, institutions like SEBI (established 1988) and Regional Rural Banks (RRBs, launched in 1975) exemplify state-driven efforts to regulate and democratise financial markets, setting the stage for a freer market economy.
As Adam Smith emphasised, markets thrive under institutional frameworks that ensure stability and trust. India’s experience aligns with Keynesian principles, where government intervention fuels initial growth and structural reforms follow as the market matures, enabling sustainable private-sector-driven growth.
Conclusion
The Economics Nobel Prize celebrates AJR’s work, but their Euro-centric framework falls short of representing the varied trajectories of the economies of the Global South. It oversimplifies history and ignores diverse development paths, limiting its relevance in explaining varied development trajectories.
The findings highlighted by the Nobel laureates can guide policy decisions in India and other Global South countries. For example, reforms in taxation, land ownership, and social welfare can be guided by the understanding that strong institutions can help mitigate inequality. And to some extent, the reforms in institutions like grievance ministries, online redressal of complaints are leading to higher efficiency in the country and in removal of red-tapism.
The question of whether strong institutions drive prosperity or if wealth allows for better institutions is at the heart of modern development economics. Neoclassical growth theory posits that poorer countries can catch up with richer ones as capital accumulates, but reality has often been more stubborn. Despite globalisation, income gaps remain entrenched, and the “catch-up” growth envisioned has proved elusive for many nations in the Global South.