The idea that institutions must conform to Western ideals risks overlooking viable alternative paths to prosperity

China's growth has occurred in an environment marked by widespread corruption and limited political freedoms, suggesting that alternative institutional frameworks can also produce positive outcomes. The extraordinary transformation of China's economy, achieved within such a context, poses a significant challenge to the laureates’ thesis.

This year’s Nobel Prize in Economic Sciences has been awarded to Daron Acemoglu, Simon Johnson, and James Robinson for their significant contributions to understanding the role of institutions in shaping economic outcomes. Their influential work on the role of institutions in shaping economic development has generated substantial discourse, earning them accolades as pioneers of a critical area of economic inquiry. However, as we celebrate their achievements, it is imperative to critically assess the limitations and implications of their findings, particularly in light of historical and contemporary contexts.

At the heart of Acemoglu, Johnson, and Robinson’s argument is the dichotomy between “inclusive” and “extractive” institutions. Inclusive institutions—characterized by the enforcement of property rights, democratic governance, and accountability—are posited as fundamental to fostering economic growth. In stark contrast, extractive institutions, which concentrate power and resources in the hands of a select few, are seen as detrimental to economic development. This framework suggests a linear relationship between the quality of institutions and economic prosperity, a perspective that merits closer scrutiny.

The laureates argue that the political and economic systems established during the colonial period have had lasting effects on today’s global inequalities, a perspective encapsulated in their influential paper, “The Colonial Origins of Comparative Development.” This work offered a compelling counter-narrative to the geographic determinism popularized by Jared Diamond in "Guns, Germs, and Steel." By focusing on the role of institutions, Acemoglu, Johnson, and Robinson established a framework that suggests the quality of governance significantly shapes economic outcomes. They contend that the intentions of the colonizers—whether they established inclusive institutions or exploited resources for short-term gain—determined the economic trajectories of their former colonies. This mono-causal emphasis on institutions has proven both groundbreaking and problematic.

Beyond the Binary

The framework presented by Acemoglu, Johnson, and Robinson has undeniably influenced the discourse on economic development, it is not without its limitations. The reliance on a binary classification of institutions raises critical questions about causality and oversimplification. Can we truly assert that institutions are the primary drivers of prosperity, or could it be that wealthier nations merely adopt the institutional forms that have proven successful after the fact?

A central critique of the prevailing scholarship concerns the assumption that inclusive institutions are a prerequisite for economic development. Mushtaq Khan of SOAS, University of London, astutely notes that the evidence predominantly indicates a correlation between high income levels and Western-style institutions, rather than establishing a direct causal relationship. The historical record provides ample evidence of countries achieving rapid economic growth without initially possessing inclusive institutions. The East Asian Tigers—Singapore, South Korea, and Taiwan—serve as compelling case studies of nations that have experienced remarkable growth under various governance models, many of which do not align with the principles outlined by the Nobel laureates. Furthermore, China's recent economic ascent challenges the notion that inclusive institutions are the sole pathway to prosperity.

As Yuen Yuen Ang has highlighted, China's growth has occurred in an environment marked by widespread corruption and limited political freedoms, suggesting that alternative institutional frameworks can also produce positive outcomes. The extraordinary transformation of China's economy, achieved within such a context, poses a significant challenge to the laureates’ thesis. This raises critical questions regarding how we interpret the experiences of countries that do not fit neatly into the inclusive-extractive framework. The idea that institutions must conform to Western ideals risks overlooking viable alternative paths to prosperity. Yuen Yuen Ang’s examination of China’s unique institutional evolution reinforces this argument, demonstrating that developmental success can arise from complex, non-linear trajectories that defy the binary classification proposed by the Nobel laureates.

A critical oversight in the laureates’ analysis is their treatment of colonialism itself. The historical context of colonization is pivotal in understanding the origins of many extractive institutions around the globe. Acemoglu, Johnson, and Robinson’s categorization of settler and non-settler colonies implicitly reinforces a narrative that overlooks the violent histories of colonialism. Even in societies where inclusive institutions eventually emerged, the processes of colonization often involved significant brutality, displacement, and dispossession of indigenous populations.

The laureates’ dismissal of the normative implications of colonialism is troubling. When Acemoglu states that they are uninterested in whether colonialism is "good or bad," it reflects a broader trend within economics to eschew moral questions in favor of technical analysis. This apolitical stance renders the discipline increasingly insular, disconnected from the ethical dimensions of economic development. The consequences of colonialism—social dislocation, economic disenfranchisement, and cultural erasure—are not merely historical footnotes; they continue to shape the institutional landscapes of former colonies today. This detachment also obscures the enduring legacies of colonialism in contemporary economic discourse.

The Institutional Fallacy

The focus on institutional quality often sidelines the systemic inequities that persist as a result of colonial histories. For example, the challenges faced by countries in Africa and Asia are not simply the result of extractive institutions, but also the lingering impacts of colonial exploitation, economic dependency, and global power imbalances. The failure to address these issues risks perpetuating a form of neocolonialism in economic thought, where the path to development is framed solely in terms of adopting Western models, thereby undermining local contexts and histories.

The laureates’ framework can also be interpreted as a justification for the promotion of Western-style governance as the universal solution to economic challenges. This prescriptive approach, rooted in a specific historical and cultural context, may neglect the diverse institutional arrangements that can also lead to successful outcomes. While the desire for democratic governance and robust property rights is laudable, it is essential to recognize that these concepts do not operate in a vacuum. Local traditions, cultures, and socio-economic realities play an equally vital role in shaping institutions that can foster growth.

The insularity of the economics discipline further compounds these issues. The concentration of awards in the field of economics within a handful of elite institutions—predominantly in the Global North—highlights a systemic bias that limits the scope of inquiry. The Nobel Prize committee in Economics has consistently favored scholars who operate within a rather constrained intellectual framework, often neglecting alternative perspectives that challenge prevailing orthodoxies. This insularity not only diminishes the richness of economic discourse but also perpetuates a worldview that prioritizes certain forms of knowledge and methodologies over others. The contemporary challenges confronting democracies—spanning rising authoritarianism to declining public trust—highlight the urgent need to reconsider our approach to economic development and governance. As Acemoglu himself has observed, there is a troubling trend of weakening institutions worldwide. The rise of authoritarianism, declining public trust in democratic institutions, and the erosion of civil liberties signal a profound crisis that demands urgent attention.

This critique does not negate the importance of institutions in economic development. Rather, it emphasizes the need for a more nuanced understanding of the myriad factors that contribute to prosperity. The binary classification of institutions can obscure the complexities and historical contexts that shape economic trajectories, potentially leading to oversimplified conclusions that may mislead policymakers and economists alike. It is vital for economists and policymakers to engage with the broader implications of their work, recognizing that the principles of governance and economic development are inextricably linked to issues of justice, equity, and historical accountability.

While the Nobel laureates’ contributions to understanding the role of institutions in economic development are significant, their analysis falls short of addressing the complexities of historical injustices and contemporary realities. The distinction between inclusive and extractive institutions provides a useful framework, yet it must be contextualized within the broader narratives of colonialism, power dynamics, and localized economic histories. To genuinely advance the discourse on economic development, we must embrace a more nuanced understanding that transcends simplistic binaries, recognizing the rich tapestry of experiences that shape our world today. It is only through such an approach that we can hope to address the challenges of our time and forge pathways toward a more equitable and prosperous future for all.