Economics Explained: The 2024 Nobel Prize in Economics: Explained

The Nobel Prize in Economic Sciences, officially the Sveriges Riksbank Prize, honors economists who have made significant contributions to social sciences. Unlike other Nobel prizes, it was established later by the Swedish Central Bank, not Alfred Nobel himself.

This year's laureates—Daron Acemoglu, Simon Johnson, and James A. Robinson—are renowned economists whose work has deeply influenced policies in vulnerable and prosperous economies alike. Acemoglu is among the most cited economists globally.

Their award-winning research addresses a fundamental macroeconomic question: Why are some countries rich while others remain poor? The richest 20% of countries are 30 times wealthier than the poorest 20%, and this gap persists despite global growth.

The laureates found that natural resources, geography, or population size don't explain economic success. Instead, the key factor is the stability and reliability of a country's institutions—those systems that allocate resources and enforce rules fairly.

Conversely, countries with weak or corrupt institutions discourage investment and specialization, leading to economic stagnation. This explains why resource-rich countries like Venezuela struggle economically, while resource-poor countries like Ireland thrive.

Good institutions encourage people to invest in specialized skills and businesses by ensuring their efforts are rewarded and protected. For example, an engineer in a country with strong institutions can trust their qualifications and contracts will be honored.

The laureates traced historical patterns, showing that colonial legacies shaped institutions. Regions wealthy before colonization often ended up poorer due to exploitative institutions, while settler colonies developed institutions supporting economic growth and political liberties.

A striking example is the divided city of Nogales, split between the US and Mexico. Despite shared culture and geography, the US side enjoys high incomes and good institutions, while the Mexican side faces poverty and corruption, illustrating institutional impact.

The research also highlights the challenge of reform: elites benefiting from unfair institutions resist change, fearing loss of power. Effective transitions to better institutions historically occur through peaceful, nonviolent transfers of power rather than revolutions.

Ultimately, the laureates demonstrated a causal link between good institutions and economic prosperity, providing actionable policy recommendations. Their book 'Why Nations Fail' offers detailed case studies and is a must-read for understanding these dynamics.

For those interested, an interview with Daron Acemoglu explores why Africa's economic potential remains untapped, emphasizing the importance of institutional reform. The full discussion is available on Spotify and other streaming platforms.