As long as political institutions favor only the elite and neglect the general public, they will face credibility problems.

By Sushanta Kumar Mahapatra, AV Vedpuriswar

The 2024 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, awarded to Daron Acemoglu, Simon Johnson and James A. Robinson, reflects the fact that among Americans who have received the Nobel Prize in Economics since 2000 , approximately 28% are immigrants. the United States. However, it is important to note that they have the same opinion on the role of a country’s institutions in economic development.

The laureates found that the persistent gap between rich and poor countries is due to the institutions of those countries’ societies. While assessing the importance of institutions for the prosperity of a country, they revealed that weak laws and institutions of society hamper the growth of the country, thereby limiting the chances of improving the living conditions of the population .

Two aspects

They widely discussed two aspects of institutions: firstly, they assessed the importance of institutions for the progress of a society or a country, and secondly, they discussed the reason behind the change of political institutions. As defined, economic institutions or inclusive institutions enforce the property rights of a broad group of the population, provide investment opportunities, and enable various segments of the population to participate in economic activities. Good political institutions empower citizens to participate in the role of governance and support the goal of democracy. Furthermore, good political institutions play a crucial role in shaping economic institutions.
On the other hand, bad or extractive institutions lack the essential rule of law for the population and lack appropriate property rights. When political powers are controlled by narrowly defined elite groups, this results in the formation of extractive institutions.

Rules and Policies

An in-depth study of the colonial era can be seen as a natural experiment to find details about institutional rules and political changes. When Europeans founded their colonies in various parts of the globe, they either changed the institutions of those societies or they influenced those societies, leading to a change in the institutions. However, the change varied depending on the original settlements and society existing in that location. Regions, where colonizers created inclusive political and economic institutions for their own long-term benefit, have changed for the better.

When political powers are controlled by narrowly defined elite groups, this results in the formation of extractive institutions.

Contrary to this, in some countries, the colonizers only aimed to exploit the natives and capture the resources of those countries. They used an extractive economy to gain short-term benefits as they controlled the indigenous population. Although progress was made for a time in these regions, the standard of living of the population subsequently deteriorated considerably. Institutions therefore play a decisive role in influencing many aspects of the country, such as education, profession and the political system.

Influencing factors

Many influencing factors determine the type of institutions that develop in a colony. Population density is one of the key aspects: the denser the population of a region, the stronger the resistance of the population to the formation of any kind of new institution. As a result, fewer European settlers settled there. In sparsely populated areas, Europeans managed to dominate the natives and their resistance.

In places where resources were abundant, colonizers developed such institutions so that they could exploit the local population and extract resources. The main objective was to offer advantages to a few elites of the places to benefit from the maximum number of people living there. Due to the control over democratic, electoral and political rights, these extractive economic institutions have become the cause of the decline in the social and economic standards of the population.

Places that were rich and prosperous before the colonization phase have experienced decline in various aspects and today are among the poorest countries in the world. Compared to this, less densely populated and poor places at that time became the favored choice of the colonizers to create inclusive economic institutions which they had planned for their long-term benefits and which ultimately resulted in the prosperity of the country.

Extractive institutions

Contrary to the popular belief that countries closer to the equator are poorer because people there are less productive than those in countries with temperate climates, the laureates discovered that it is the societal institutions of these countries that are responsible for productivity. . Furthermore, the approach of colonizing nations to the colonies became another determining factor in the type of institutions developed in these places.

Extractive institutions only benefit a small elite group. However, introducing as many inclusive institutions and the rule of law as possible is likely to generate long-term benefits for all members of society. When political institutions prioritize the interests of a selected elite while neglecting the general public, they undermine their own credibility, leading to an erosion of public trust in economic reforms. Sometimes people in non-democratic countries take revolutionary paths to transition to democracy. Paths can be violent or peaceful. However, peaceful demonstrations bring together the largest number of people.

As the model developed by the winners explains, there are compelling reasons why some countries move from democracy to non-democracy and vice versa.

(Sushanta Kumar Mahapatra teaches in the Department of Economics, ICFAI School of Social Sciences, ICFAI Foundation for Higher Education, Deemed University, Hyderabad. AV Vedpuriswar is an independent researcher based in Hyderabad)