Colonial Legacy: The Nobel-Winning Theory Behind Global Wealth Gaps
This year's Nobel Prize in Economics was awarded to Daron Acemoglu, Simon Johnson, and James Robinson for their research on the economic divide between the world’s richest and poorest nations. Their influential paper, The Colonial Origins of Comparative Development, explores how colonial institutions—either extractive or inclusive—shaped the long-term development of nations. They found that high settler mortality rates and large indigenous populations led to extractive institutions focused on resource exploitation. Conversely, more inclusive institutions, with secure property rights and pluralistic governance, fostered economic growth. This groundbreaking research has deeply influenced our understanding of global economic disparities and institutional development.
Why is there such a massive divide between the world’s richest and poorest nations? Why have some countries been able to flourish and develop while others have fallen behind? An explanation lies in the groundbreaking research of this year’s winners of the Nobel Prize in Economics: Daron Acemoglu, Simon Johnson, and James Robinson. Their paper, The Colonial Origins of Comparative Development, uses a novel approach to analyzing the ties between patterns of colonization with varying levels of modern development. They propose that the economic and political institutions introduced by colonizers centuries ago are responsible for the divergence in development between the richest and poorest nations. The paper classifies these institutions as being either “extractive” or inclusive “Neo-Europes”, these being a major contributor to their modern development (Acemoglu et. al. 2001, 1370).
They identified factors that affected the type of institutions formed in the colonies, these being the settler mortality rate, and the population of the country at the time of colonization. Mortality rates in some European colonies were much higher than others, for example in many countries in Africa due to the presence of malaria and yellow fever which was deadly to Europeans but not to the indigenous population. A high mortality rate, according to the researchers, led settlers to set up poor institutions, with the sole focus being to ‘extract’ resources and profit off of the land, not focused on long-term development. They also found that countries with large initial populations were more likely to develop extractive institutions and experience lower levels of development, as colonizers faced greater difficulty in replacing existing systems with their own. Essentially, countries with better institutions, more secure property rights, and less distortionary policies have invested more in human capital and in adopting new technologies, and have been able to achieve a far greater level of income per capita than those that did not.
Their research and institutional theory also tie into a democratic aspect of development. Inclusive political institutions, characterized by a pluralistic, strong, centralized state, would align with those of modern democratic nations. Credible checks on government power and the potential for revolutionary threats are key factors that can push a society toward democracy. These mechanisms create pressure for more inclusive political institutions, as leaders are compelled to respond to demands for greater accountability and representation. Additional research based on Acemoglu et. al. 's 2001 paper has demonstrated that democratisation in a country can be spurred by extractive political institutions faced with threats of revolution, evident with England’s revolutions.
In the context of Canada as an ex-colony of the United Kingdom, you may wonder why Canada has become developed and prosperous, unlike other ex-colonies. The institutions theory can apply to us too! Canada was initially colonized in 1608 by the French, and in 1670 by the British as well. Canada’s fairly cold climate would have been the only major contributor to settler mortality, so the feasibility of forming a new colony for permanent settlement was in the interest of the British and French. Canada’s Indigenous population at the time of colonization was approximately 200,000, but it was widely spread across the country, leading to fewer concentrated challenges for European settlers in establishing their own institutions (Hele 2023) So, in eastern Canada where the initial settlers arrived, there were not many obstacles to the imposition of “neo-European” institutions. According to Acemoglu et. al., this would explain why Canada today is prosperous and developed. Inclusive institutions allowed for credible threats to power, property rights, and better resource management in the long term.
This Nobel-winning research has allowed for so many new theories and experiments to emerge, and it has been cited by thousands of economists using it as a baseline theory for their own research in related fields. Additionally, the three authors of this paper followed with others that extend on the findings of this research. One of these is titled Reversal of Fortune: Geography and Institutions in the Making of the Modern Income Distribution. Extending on their Nobel Prize-winning theory of institutions, they then present that European colonization appears to have created an “institutional reversal”, in other words, Europeans were more likely to encourage investment in areas that were previously poor (Acemoglu et. al. 2002, 1231). The main findings of this paper build upon their initial hypothesis of small initial populations resulting in inclusive institutions, as places with small populations were likely not very affluent. These places, experiencing European colonialism, experienced more investment and development of strong institutions than those countries that were already wealthy at the time of colonization. New research on comparative development greatly benefits from the research of these three economists.
In conclusion, the divide between the world’s richest and poorest nations can be traced back to the institutions established during colonization. Countries where colonizers put in place inclusive institutions, promoting long-term investment and democratic governance, have flourished, while those with extractive institutions focused on resource exploitation have struggled to develop.