Last week, the 2024 Nobel Prize in Economic Sciences was awarded to three prominent economists— The MIT’s Daron Acemoglu and Simon Johnson, and the University of Chicago’s James Robinson—for their studies on the central role political and economic institutions play in determining a nation’s prosperity.
Acemoglu and Robinson are perhaps best known for their co-authored book, Why Nations Fail, which argues that inclusive institutions—those that provide equitable economic opportunities, enforce property rights and uphold the rule of law—are the foundation for sustained prosperity. In contrast, extractive institutions, which concentrate power and wealth in the hands of a few, stifle innovation and hold back economic development. Johnson has co-authored research with Acemoglu and Robinson on the same topic, which served as a foundation of the book.
Real-world examples of their work litter our planet. The people of Nogales, Ariz.—a town split by the U.S. and Mexico border—share a long history and similar culture. And yet, the U.S. half of the town sees its people enjoying far longer life expectancies, higher incomes and higher educational levels than their counterparts over the border, in the Mexican state of Sonora.
The reason, according to this year’s Nobel laureates, is that Mexico developed extractive institutions— largely attributable to its colonial past where European powers used immense native populations as forced labor—while the U.S. was able to create more inclusive ones. The U.S. ranks above Mexico in both the World Justice Project’s rule of law index and the Economic Intelligence Unit’s democracy index.
Extractive institutions vs. inclusive institutions
Extractive and inclusive institutions are often shaped by a nation’s colonial history, they argue. In regions where colonizers focused on resource extraction, such as mining or plantation, they created centralized, authoritarian structures to maintain political control and wealth, leading to extractive institutions. These persist post-independence, concentrating power among elites.
Ironically, many of today’s poorer nations in Africa, South Asia and South America are rich in natural resources, which once gave them a significant economic advantage. However, it was precisely this abundance that fueled exploitation. Landowners relied on forced labor to cheaply extract resources, while European empires were drawn to colonize these regions, setting up institutions that prioritized wealth extraction over development. Political economists today refer to this phenomenon as the “resource curse,” highlighting the common trend where historically resource-rich nations end up becoming low-income countries in modern times.
By contrast, nations with smaller-scale, distributed agriculture and less lucrative crops, like in parts of North America and Europe, saw more inclusive institutions emerge. The widespread ownership of land and decentralized economic activity fostered participatory governance and equal opportunity, promoting inclusive institutions that encourage innovation, property rights and economic growth in the long term.
Why their work matters today
The lessons from Acemoglu, Johnson and Robinson are particularly salient for developing nations. Countries like India , Brazil and South Africa, which have seen rapid economic growth but still struggle with inequality and weak institutions that often fall short of protecting property rights, could benefit from their findings. Their research suggests that, without the development of more inclusive political and economic systems, these nations risk falling into the “middle income trap,” where growth stalls before achieving high-income status.
Yet, it is difficult for countries to grow out of their institutions because of a phenomenon described as “institutional inertia.” The three economists have found that those who hold economic power will leverage it for political power to protect their extractive economic practices, which causes a vicious self-fulfilling cycle.
It’s worth noting that developed nations with inclusive institutions are not without risks. As polarization and political gridlock plague advanced economies like the U.S. and several European countries, the erosion of inclusive institutions—and especially the declining trust in them—could have long-term consequences for economic growth. Their research suggests that when power becomes concentrated and opportunities are limited, economic stagnation often follows.