Institutions and development

WHY are some countries rich and others poor? An age-old question in economics, with numerous hypotheses suggested as answers. It is clear that being richly endowed with natural resources is not a reliable indicator; D.R. Congo lies atop substantial mineral wealth, yet its people are among the poorest in the world. Conversely, Japan is noted for lacking natural resources and ranks among the highest income per capita countries in the world. Culture is another non-starter; North and South Korea share the same language and heritage, yet at present one country is economically impoverished and the other is an economic superpower.

- By Reihshan Deen

This is more surprising given that, while the territories of both countries were ravaged by the Korean war, post-war North Korea was considered to be better off economically vis-à-vis South Korea since the vast majority of initial heavy industry and natural resources were located in the North. Historically, East and West Germany held similar circumstances and outcomes. The common climate between such countries rules that out as being a determinant. Perhaps, then, the answer lies not in how resource-rich a country is, nor its cultural background or climactic features, but how effectively and efficiently they use the resources that they do have.

According to the 2024 Nobel Laureates in Economic Sciences, Daron Acemoglu, Simon Johnson, James A. Robinson, such use is determined by political and economic institutions.

Rules of the game

Institutions are the rules of the game in economic, social, and political interactions that citizens of a society abide by. They are the written laws and unwritten norms that govern what can or cannot be done, the constraints that bind adherents from performing certain actions and that incentivise them to perform others. Institutions can be separated by type on what they influence: economic institutions are those that shape economic incentives and the distribution of economic resources, such as property rights and the type of economic system; whereas political institutions are those that shape political incentives and the distribution of political power, such as the form of government, constitutional law, independence of judiciary, and level of political accountability (politics itself can be said to be the process by which a society chooses the rules that will govern it).