Acemoglu, Johnson and Robinson: Why Institutions Matter

How three economists showed that inclusive institutions, shaped by colonial history, explain why some nations became rich and others stayed poor.

In 2024, Daron Acemoglu, Simon Johnson and James Robinson won the Nobel prize “for studies of how institutions are formed and affect prosperity”.

The big question

Why are some countries rich and others poor? Geography, culture and luck all play roles, but these economists argued that institutions, the rules that govern economic and political life, are fundamental.

Inclusive vs extractive institutions

Inclusive institutions protect property rights, enforce contracts fairly, allow broad participation in the economy and constrain rulers. They encourage investment and innovation.
Extractive institutions concentrate power and wealth in a small elite, which takes resources from the majority. They discourage investment.

Evidence from colonial history

In a famous 2001 paper, The Colonial Origins of Comparative Development, they studied European colonies:

Where Europeans faced high death rates from disease, they set up extractive institutions to take resources, without settling.
Where they could settle, such as in North America and Australia, they built more inclusive institutions for themselves.

These early institutions persisted, and they help explain differences in income today.

Reversal of fortune

They also found a reversal of fortune: regions that were relatively rich around 1500, such as parts of the Americas with dense populations, became poorer, because colonisers set up extractive institutions there.

Why Nations Fail

Acemoglu and Robinson’s 2012 book Why Nations Fail brought these ideas to a wide audience, using examples such as the stark contrast between North and South Korea.

Criticism

Critics argue the evidence on colonial mortality is contested, that culture and geography matter more than the authors allow, and that some countries, like China, grew rapidly without inclusive political institutions. The authors respond that growth under extractive institutions may not last.

AI and technology

Acemoglu and Johnson’s later book Power and Progress (2023) argued that the benefits of technology, including AI, depend on who controls it.

Two Koreas

North and South Korea share geography, history and culture. After division, the South developed inclusive economic institutions and grew rich, while the North's extractive institutions kept it poor. The contrast illustrates the power of institutions.

Thinking geography alone determines wealth

Places with similar geography can have very different outcomes because of their institutions.

Key takeaways

Acemoglu, Johnson and Robinson won the 2024 Nobel for work on institutions.
Inclusive institutions encourage investment; extractive ones discourage it.
Colonial settlement patterns shaped long-lasting institutions.
Critics question the evidence and point to cases like China.