Post date: Tue, Oct 22, 2024
Category: Economic literacy
By: Leo Kipkogei Kemboi,

Daron Acemoglu, Simon Johnson, and James A. Robinson won the 2024 Nobel Prize in Economics for their research on how a country’s institutions significantly impact its long-term economic success.[1] Their work emphasizes that it’s not just about a nation’s resources or technological advancements but rather the “rules of the game” that truly matter. Countries with strong institutions that promote fairness, protect property rights, and effectively limit corruption tend to experience greater prosperity.

Their findings are significant for several reasons. They challenge traditional economic thinking, which often posits that economic growth primarily comes from market forces. Instead, Acemoglu, Johnson, and Robinson highlight the crucial role of good governance in fostering economic growth. Their research has important policy implications. It encourages countries to prioritize investments in strong and inclusive institutions as a key driver of sustainable growth. I take this to mean that investing in good governance charters (Constitutions, Laws). Their work provides a compelling explanation for global inequality. It helps us understand why some nations remain trapped in poverty despite receiving aid or possessing natural resources, underscoring the detrimental impact of weak or corrupt institutions.

Acemoglu, Johnson, and Robinson have made significant contributions to our understanding of economic development. One key contribution is their provision of compelling empirical evidence demonstrating that differences in institutions, rather than other factors, play a crucial role in explaining the persistent income gap between rich and developing countries. This challenges previous assumptions and highlights the importance of institutional quality for economic prosperity. AJR has developed a theoretical framework that explains why some societies become ensnared in a trap of “extractive institutions” that hinder development. These institutions, characterized by a concentration of power and resources among a small elite, create barriers to economic growth and perpetuate inequality. However, their framework also sheds light on the challenges and possibilities of escaping these institutional traps, emphasizing that change toward democracy, the rule of law, and, ultimately, reduced poverty is attainable. This provides a glimmer of hope and a roadmap for countries seeking to break free from the shackles of extractive institutions.

One of the most popular Acemoglu, Johnson, and Robinson key papers cited as AJR 2001 explains how Institutions affect prosperity.[2] Acemoglu, Johnson, and Robinson’s big idea in their 2001 paper was to demonstrate that a country’s past institutions, particularly those established during colonization, have a lasting impact on its current economic prosperity, even more so than geographical factors.

Acemoglu, Johnson, and Robinson’s influential 2001 argument centers on how colonization strategies have profoundly shaped long-term institutional development and, as a result, economic outcomes for nations. They identify two primary colonization strategies employed by European powers. The first, “Extractive States,” focused primarily on resource extraction with minimal investment in institutions or the welfare of the local population, as exemplified by the Belgian Congo. The second, “Neo-Europe,” involved large-scale European settlement and the establishment of institutions that mirrored those of the colonizers, with examples including the US, Canada, and Australia. A key determinant in the chosen strategy was the feasibility of European settlement, primarily dictated by disease environments. Regions with high mortality rates for Europeans were less likely to become “Neo-Europe” and more susceptible to extractive institutions. This underscores the significant role environmental factors played in shaping colonial approaches.

AJR 2001 emphasizes the concept of “Institutional Persistence,” where colonial institutions, once established, tended to endure even after a nation gained independence. This persistence significantly shaped the long-term economic and political trajectories of former colonies, highlighting the path-dependent nature of institutions. AJR’s work underscores the enduring impact of historical factors, particularly colonization strategies, on a country’s institutional development and, consequently, its economic prosperity. Their findings provide a valuable framework for understanding the complexities of global development and inequality.

To prove this, they cleverly used the historical death rate of European settlers in a colony as a proxy for the type of institutions established. Their logic was that in colonies with high settler death rates, such as those in disease-ridden tropical regions, Europeans were less likely to settle permanently and instead focused on extracting resources. This resulted in the formation of corrupt, extractive institutions that lasted over time. Europeans were more inclined to settle in colonies with lower death rates, often those in more temperate climes. They brought with them their systems of administration, which often included property rights and the rule of law. These institutions, while initially benefiting the colonizers, also laid the groundwork for future economic growth. AJR’s findings were significant because they provided strong evidence that institutional differences, rather than geography, could explain why some nations prosper while others remain poor. This challenged the prevailing view that simply providing aid to developing countries was sufficient for economic development. Instead, AJR’s work highlighted the importance of institutional reform, a much more complex and challenging task.

What does the Nobel Prize 2024 in Economic Prize 2024 mean for Constitutional Development?

 The laureates’ work emphasizes the importance of institutions in shaping economic outcomes. They argue that countries with inclusive institutions – those that distribute power broadly, uphold the rule of law, and protect property rights – tend to experience more sustainable economic growth and prosperity. This understanding of inclusive institutions provides a valuable lens through which to view the Constitution of Kenya 2010.

The CoK 2010 emphasis on checks and balances, devolution of power, and citizen participation aligns with the concept of inclusive institutions. By limiting the arbitrary exercise of power and promoting accountability, these provisions create a more level playing field for economic actors, fostering an environment conducive to investment and growth. Furthermore, while not explicitly mentioned, the Bill of Rights likely includes provisions for protecting property rights, a cornerstone of inclusive institutions. Secure property rights incentivize investment, entrepreneurship, and long-term economic planning, all of which are vital for sustained economic development.

The work of Acemoglu, Johnson, and Robinson also highlights how corruption and lack of accountability can hinder economic development. The Constitution of Kenya 2010 separated powers between the Executive, Judiciary, and Parliament. The powers of Each arm of government and officeholders have been constrained with the aim of curing a historical problem of abuse of power. The Constitution of Kenya 2010 established independent offices and Constitutional commissions and gave it emphasis on transparency aimed at combatting these issues, fostering a more stable and predictable economic environment. However, the Nobel laureates also caution that establishing inclusive institutions is a complex process. Simply having these provisions in the Constitution doesn’t guarantee their effectiveness.

To fully realize the economic potential of its Constitution, Kenya needs to translate constitutional principles into tangible actions and policies, ensuring effective implementation. Strengthening institutions by providing adequate resources and capacity to independent commissions and oversight bodies is also crucial. Promoting a culture of accountability by encouraging citizen engagement and holding leaders accountable for upholding constitutional principles is paramount.

Conclusion

The work of Acemoglu, Johnson, and Robinson, as highlighted by the 2024 Nobel Prize in Economics, provides a powerful framework for understanding the importance of inclusive institutions in fostering economic development. Their research demonstrates that it’s not enough to establish these institutions on paper simply; they must be actively implemented and upheld to create a truly inclusive and prosperous society.

The Constitution of Kenya 2010, with its emphasis on checks and balances, devolution of power, and citizen participation, aligns with the principles of inclusive institutions (Acemoğlu et al., 2001). However, the true test lies in translating these principles into tangible actions and policies. Strengthening institutions, promoting accountability, and fostering a culture of respect for the rule of law are ongoing challenges that require sustained effort from both citizens and leaders. By learning from the insights of AJR and actively working towards a more inclusive society, Kenya can strive to achieve its full economic potential and create a brighter future for all its citizens.

References

[1] The Committee for the Prize in Economic Sciences in Memory of Alfred Nobel. “Scientific Background to the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2024,” 2024. https://www.nobelprize.org/uploads/2024/10/advanced-economicsciencesprize2024.pdf.

[2] Acemoglu, Daron, Simon Johnson, and James A Robinson. “The Colonial Origins of Comparative Development: An Empirical Investigation.” American Economic Review 91, no. 5 (December 2001): 1369–1401. https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.91.5.1369.

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