Why Some Nations Prosper While Others Struggle?

Daron Acemoglu, Simon Johnson, and James Robinson, winners of the Nobel Prize for Economic Sciences in 2024 are popularly known as the AJR trio. They revealed how institutional structures—not geography or capital—drive economic disparities between nations. In the second part of this series, we shall explore further the impact of institutions, technological innovation, and political structures in the context of economic development across various nations.

AJR argues that local environmental conditions and immunity differences also shaped colonial approaches. For instance, in India, diseases like malaria and cholera severely impacted British settlers, whose mortality rates far exceeded those of Indian soldiers—reaching 70 to 170 per 1,000 compared to 10 per 1,000 among Indian troops. In Britain, the mortality rate was only 15 per 1,000. Facing high death rates and unlikely to settle permanently, Europeans opted for exploitative policies in India and Africa. In contrast, British convicts were sent to Australia, where they settled and demanded rights, which led to constitutional reforms fostering inclusive institutions. AJR concludes that regions with higher British mortality rates tended to develop more extractive institutions, whereas areas with lower mortality rates saw the emergence of more inclusive systems.

After gaining independence, former British colonies struggled to transform their systems, as the political elites were unwilling to relinquish their power. This "commitment problem" arises when the elite refuses to cede control, fearing a dilution of their supremacy, promising reforms to appease the people, only to use the peace to reassert dominance. If the threat of revolution strengthens, they promise democracy and yet manage to maintain the upper edge due to their better economic conditions. Although democracy may be established, control often remains with the elite class, leading to a complete stagnation of development and progress. Many former British colonies, particularly in Africa, are experiencing internal conflicts, and the plight of their citizens continues to worsen daily. Even the conditions in Pakistan and Bangladesh are not so different.

AJR argues that inclusive democracy and institutions are essential for national growth, noting that while authoritarian regimes may spur growth, they are unstable, less innovative, and unsustainable long-term.

The AJR theory aligns closely with India’s growth story. Once an economic powerhouse, India’s decline under British rule severely damaged its economy. Post-independence, it took time for India to regain its strength. Liberalisation in 1991 was a response to avoid bankruptcy, not a political consensus. Initially focused on services, India fell behind China, which prioritised manufacturing. However, post-liberalisation, the rise of institutions like the RBI, SEBI, and TRAI fostered a competitive business environment and fuelled India’s growth. This sets India apart from neighbours like Bangladesh and Pakistan, where military authoritarian regimes hinder inclusive development.

This logic does not apply to China. Despite lacking democratic institutions, China has become the world’s leading manufacturing hub and the second-largest economy. Under an authoritarian regime with limited inclusive institutions and a biased legal system, China offers significant value to global manufacturers, giving it a competitive edge. While labour practices are exploitative, monopolies have raised average income levels for workers. The AJR hypothesis doesn't hold here. Despite inclusive institutions in India, China’s economic dominance challenges AJR's conclusions, a point also criticised by former IMF economist Arvind Subramaniam and others.

While inclusive institutions are vital, AJR overlooks the importance of research capabilities and technology adoption for national progress. The U.S. for example, owes much of its success to research and technological innovation. This is true for Japan and South Korea, which became American protectorates after World War II. However, their building of research capabilities and embracing innovative technology played a key role in their prosperity. The development of many Southeast Asian economies was also driven by embracing technology and innovation. Even today, several of these countries lack inclusive institutions, with some still under strict military rule.

The rise of economic powers in the Middle East is largely due to their exclusive access to crude oil. Despite being authoritarian states, countries like Saudi Arabia, the UAE, and Iran have achieved significant economic prosperity. With crude oil reserves depleting, Saudi Arabia has begun adopting more inclusive policies to remain competitive—a shift that aligns with the findings of AJR’s research. While AJR advocates for inclusive democracy, it is also evident that excessive freedom of speech has sometimes posed challenges to development in the modern world.

There can be endless debates and counterviews to support and speak against the research work of AJR. When discussed constructively, debates on developmental politics can reinforce the importance of AJR’s work, which underscores the critical role of inclusive institutions in the development of modern nations. Their contributions have significantly explained the correlation between institutional quality and its impact on economic growth, earning them a well-deserved Nobel prize.

(The author is a Chartered Accountant and works at Authomotive Division of Mahindra and Mahindra Limited. Views personal.)