Why are some nations richer?

0:01NPR

0:10One of the most fundamental questions in economics is what causes some countries to become rich while others lag behind? Is the answer climate, politics, or maybe it's geography? What about culture? There are a thousand potential explanations to why countries succeed economically, but few good ways to tease out what really matters. Are you with us, Professor Asimoglu? Yes, yes, I am. On Monday, three economists won the Economics Nobel, Daron Asimoglu, Simon Johnson, and James Robinson. And please accept our warmest congratulations. Thank you. I am delighted. They received the prize because they found an ingenious way to slice through the knots of historical contingencies.

0:54They found a way to understand why countries prosper. This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Darian Woods. Today on the show, the recipe for riches. Newly minted Nobel laureates explain.

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1:56Simplify how you stock up to get ahead. Go to AmazonBusiness.com for support. This message comes from Schwab. Everyone has moments when they could have done better. Same goes for where you invest. Level up and invest smarter with Schwab. Get market insights, education, and human help when you need it. In academic circles, the three economists, Daron Esamoglu, Simon Johnson, and James Robinson, are sometimes referred to as AJR. So that's what we're going to do today. And, you know, we got Simon Johnson's permission. Yes, strange if I use that, but yes, you can say that. So now we know the name of the group chat.

2:35And it has been going off in the last couple of days. Oh, I bet. In the 1990s, AJR had a theory. Their theory was that rich countries got that way because of well-functioning governments, free and fair markets, widespread education, and democracy. In other words, what they call inclusive institutions. But proving this was a chicken and egg problem. The chicken and egg problem is obviously quite profound, which is as your country becomes richer, you might well improve your institutions, like build a more robust democracy. So how can you say that it's democracy leading to growth if growth also leads to stronger democracy?

3:09So to separate the chicken from the egg, they went hunting for something else that might cause inclusive institutions to emerge, independent of how wealthy our place was. They won the clock back over 150 years. It's now the early 1800s, and colonialism is in full force. European powers are helping themselves to land all around the world. But what this means in practice varies a lot from place to place. During that period, they faced very different risks of death from disease in different parts of the world. Specifically, settlers in areas closer to the equator were dying at higher rates from malaria and yellow fever.

3:48AJR's hypothesis was that these higher death rates influenced colonial strategies there. Colonists there followed what Simon calls an extractive strategy. They tried to extract resources as fast as possible, confiscated more private property, and they allowed more slavery and didn't share the wealth or invest heavily in the next generation. Meanwhile, settlers in countries like Australia, Canada and here in the U.S. were dying at much lower rates. And that meant the colonists there brought in more European migrants who formed largely self-contained communities. They created institutions to serve and protect themselves.

4:25So European style courts, schools and taxation systems. They introduced checks on power. In other words, inclusive institutions. Now, to be clear, the Europeans were incredibly harsh on indigenous people everywhere. I mean, let's not beat around that bush, right? And of course, here in the U.S., there were plenty of extractive institutions. Corruption, slavery until 1865. We've never said anybody was perfect, for goodness sake. And the U.S. has a split heritage, absolutely, in institutional legacies because of what happened in the South relative to what happened in the North. But in the U.S., comparatively speaking, inclusive institutions for the long-term benefit of settlers were winning out overall.

5:07And so the big question is, did those lower disease rates lead to more inclusive institutions in places like the U.S.? And if so, did those more inclusive institutions actually cause higher economic growth? We found that there were large, significant effects of those death rates faced by Europeans on initial colonization strategy, on the institutions that the Europeans put in place at the beginning, on the way in which, how institutions had developed subsequently over several hundred years, and on institutions today. Those inclusive institutions led to stronger economic growth generations and generations later.

5:43From the egg of inclusion came the chicken of prosperity. AJR published the paper in 2001, a key paper in what would spark a body of related research, like how population density can also influence institutional development, and how countries can get trapped in extractive regimes. Simon's co-authors and now co-Nobel recipients are Daron Asimoglu and James Robinson. And those two published a book based on their research. It's called Why Nations Fail. There are critics of AJR's research, though. One common complaint is that the definition of inclusive institution is too broad. It could mean a lot of things.

6:22So let's take China, for example. It has inclusive, intensive education. It also has an opening market economy, but it doesn't have democracy. And we've seen very high rates of growth in China in recent decades. Yeah, Darian, you asked Aron Asimoglu and Simon Johnson about this right after they won the Economic Nobel. for China and other fast-growing East Asian economies in the 20th century? Do you want me to take that, Simon? Jerome will answer all the hard questions. I'll just do these. I'll follow. Well, you know, institutions are not a panacea. They provide a framework. So some of the details of good policy are, of course, things you build on institutions.

7:08But we also emphasize that democracy directly itself contributes to economic growth. Not easily, not right away. It takes a couple of years and it's a difficult business to make democracy work. But generally, countries that democratize grow faster and they grow in a way that's more equal, invest more in education and health. So both political and economic inclusion matter and they are synergistic. And yet, institutions are under siege in the U.S. right now. Take the unsubstantiated attacks on the integrity of the 2020 election. How does Simon view the prospects of the United States? Rejecting the result of a free and fair election, encouraging people to attack Congress when it's a process of formally validating that vote, that's not acceptable.

7:52Those moves, that kinds of actions could absolutely undermine, destroy any democracy. We've seen that many times around the world. It takes a long time to build strong institutions. It doesn't take long to overthrow them if you really put your mind to it. What AGR's work argues is that attacks on democracy are also attacks on long-run economic prosperity. This episode was produced by Corey Bridges with engineering by Maggie Luthar. It was fact-checked by Cyr Juarez. Kate Kincannon edits the show and the Indicators are production of NPR.

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