THE CONTEXT: The 2024 Nobel Prize in Economic Sciences was awarded to Daron Acemoglu, Simon Johnson, and James A Robinson for their groundbreaking research on the role of institutions in shaping national prosperity. Their work addresses the fundamental question of why some nations thrive while others struggle economically.
DEFINITION OF INSTITUTIONS: Institutions refer to the broad set of rules and norms that govern the behavior of individuals within a society or country. These rules encompass political, economic, and social systems that shape interactions among citizens and between the government and the populace.
INCLUSIVE VS. EXTRACTIVE INSTITUTIONS:
INCLUSIVE INSTITUTIONS
- These institutions are characterized by democratic governance, the rule of law, the protection of property rights, and equal opportunities for all members of society.
- Inclusive institutions encourage widespread participation in economic activities and decision-making processes.
- They incentivize individuals to invest in their future, innovate, and contribute to economic growth, as they can trust that their efforts and investments will be protected over the long term.
EXTRACTIVE INSTITUTIONS
- Extractive institutions lack the rule of law and concentrate power in the hands of a few, often leading to autocratic or dictatorial governance.
- Property rights are insecure, and there is a significant risk of expropriation of assets and income. These institutions are designed to extract resources from the majority to benefit a small elite.
- They discourage investment and innovation among the broader population, undermining economic growth and perpetuating poverty and inequality.
RESEARCH METHODOLOGY: It focuses on understanding the long-term economic impacts of colonial institutions on present-day prosperity among nations. The methodology is structured around two main components, empirical investigation of European colonization patterns and establishing a causal link between colonizer mortality rates and the institutional choices made during colonization.
STUDY OF EUROPEAN COLONIZATION: They collected extensive historical data on European colonies established from the 16th century onward. This included information on the nature of colonization, policies implemented, and the types of institutions established.
By comparing different colonies, they examined how the type of institutions established affected long-term economic outcomes. They analyzed the persistence of these institutions over time, assessing how colonial institutions influenced post-independence governance and economic structures.
LINK BETWEEN COLONIZER MORTALITY RATES AND INSTITUTIONAL CHOICES:
- Colonizer mortality rates were used as an instrumental variable to establish a causal relationship between institutions and economic development.
- The methodology demonstrates that higher colonizer mortality rates led to the establishment of extractive institutions, which resulted in poorer long-term economic performance.
- The analysis provided strong evidence supporting the hypothesis that institutions have a significant causal effect on economic prosperity.
PERSISTENCE OF INCOME GAPS BETWEEN RICH AND POOR COUNTRIES: Despite global economic growth, the income disparity between the richest and poorest nations remains persistent. The richest 20% of countries are approximately 30 times wealthier than the poorest 20%. While poorer countries have experienced economic growth, they are not closing the gap with the wealthiest nations.
GLOBAL TRENDS IN INSTITUTIONAL QUALITY: The global trend shifts toward weakening institutions, affecting countries across different regions and income levels. This decline contributes to persistent income disparities between nations as the poorest countries struggle to catch up with the most prosperous ones.
CURRENT WEAKENING OF INSTITUTIONS WORLDWIDE: Data from international organizations like Freedom House and the Varieties of Democracy Institute (V-Dem) reveal that institutional robustness is deteriorating worldwide. This weakening is evident in various forms:
- Erosion of Democratic Norms: There is a rise in authoritarian tendencies, with some governments undermining democratic processes such as fair elections and checks and balances.
- Diminished Rule of Law: Judicial independence is being compromised in certain regions, leading to a lack of accountability and transparency.
- Concentration of Power: Power is increasingly centralized in a few’s hands, reducing public participation in governance.
- Suppression of Civil Liberties: Restrictions on freedom of speech, assembly, and the press are becoming more common, limiting societal openness and innovation.
DECLINING SUPPORT FOR DEMOCRACY: Factors contributing to this decline include:
- Economic Discontent: Persistent economic inequalities and lack of opportunities can lead to disillusionment with democratic systems that are perceived as ineffective.
- Political Polarization: Deepening social divisions can erode trust in democratic processes and institutions.
- Rise of Populism: Populist leaders often exploit economic and social grievances to challenge democratic norms and institutions.
- Misinformation: The spread of misinformation undermines informed public discourse, which is essential for a functioning democracy.
INDIA UNDER BRITISH RULE:
- India’s experience under British colonial rule exemplifies the impact of extractive institutions on economic development. In the mid-18th century, India had a thriving industrial sector, surpassing that of the United States.
- However, by the 19th century, India’s prosperity declined significantly. The British established extractive institutions aimed at exploiting India’s resources and labour for the colonizers’ benefit. These institutions did not support local innovation or industrialization.
RELEVANCE TO MODERN INDIA:
- India has established a constitutional democracy with inclusive institutions. The country upholds regular and fair elections, an independent judiciary, and a vibrant media landscape. These institutions are designed to protect individual rights, promote the rule of law, and ensure government accountability.
- However, India’s economic growth has not fully matched its potential. The economic prosperity from such a framework has been moderate.
OPPORTUNITIES FOR INDIA TO STRENGTHEN ITS INSTITUTIONS:
- Enhancing Governance: Improving bureaucratic efficiency and reducing corruption can make institutions more effective.
- Promoting Equality: Ensuring equal access to resources and opportunities can enhance the inclusivity of institutions.
- Strengthening Rule of Law: Consistent and fair enforcement of laws can build trust and encourage investment.
- Encouraging Innovation: Supporting education and research can foster innovation and technological advancement.
THE CONCLUSION:
The research highlights the importance of inclusive institutions in fostering long-term economic growth and prosperity. As global democracies face challenges, it underscores the need for strong, inclusive institutions to deliver on the promise of economic development for all.
UPSC PAST YEAR QUESTION:
Q. In the integrity index of Transparency International, India stands very low. Discuss briefly the legal, political, economic, social and cultural factors that have caused the decline of public morality in India. 2016
MAINS PRACTICE QUESTION:
Q. Critically examine the relationship between institutional frameworks and economic development, particularly in relation to India’s experience.
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