Acemoglu, Johnson and Robinson highlight the importance of having the right economic institutions for development, writes Juan Lara.
Permanent Secretary for Science Hans Ellegren, center, Jakob Svensson, left, and Jan Teorell, Nobel Assembly, announce the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel to Daron Acemoglu, Simon Johnson and James A Robinson, on screen, during a press conference at the Swedish Academy of Sciences in Stockholm, Sweden, Monday, Oct. 14, 2024.. (Christine Olsson)
Three economists from the United States were recently awarded the Nobel Prize in Economics for their contribution to the study of how institutions influence a country's economic development. They are Daron Acemoglu, Simon Johnson and James A. Robinson. The first two are from the Massachusetts Institute of Technology (MIT) and the third from Harvard.
The work of these researchers starts from one of the most fundamental questions in the study of Economics, which is why some countries have reached an advanced level of development and many others have not. The answer they give to this question is that the difference between success and failure in economic development lies in whether or not societies manage to adopt economic institutions that promote and support initiative, innovation and competition. This, in turn, depends on power plays between groups with diverse interests.
Acemoglu, Johnson and Robinson are not the first economists to point out the importance of having adequate economic institutions for development. There is an institutionalist school of economics that was very influential more than a century ago and one of its exponents was Rexford Tugwell, who left an important legacy of transformation in his tenure as the last U.S. governor of Puerto Rico. For those interested, economist Francisco Catalá analyzes Tugwell's work in a book entitled Broken Promise.
What earned these authors the Nobel Prize was their elaboration of a formal theory of the political dynamics by which societies construct and adopt different types of economic institutions that are not always favorable to economic development. In one of their most widely disseminated works, the authors indicate that the institutions of the most successful countries have been those that impose effective restrictions on political and economic power holders and limit the benefits that these groups can capture at the expense of the rest of society. This type of institution supports equality of opportunity and widespread access to property. In contrast, the least successful countries are those that have enthroned institutions that favor privileged groups and perpetuate inequality in access to the economy's resources.
For countries like ours, struggling to find an effective path of sustained development, this vision is much more than a theoretical exercise. Many scholars of the Puerto Rican reality have pointed to the deterioration of the island's institutions as one of the main causes, if not the main cause, of the poor performance of our economy. Two major problems of an institutional nature are well known: corruption and what in economic theory has been called rent-seeking.
Corruption has the effect of corroding the institutions that promote competition and protect fundamental economic rights such as equality before the law and respect for contracts. Another consequence is that it undermines the confidence of citizens and honest entrepreneurs in the transparency and fairness of ordinary economic processes. This, in turn, inhibits investment and entrepreneurship.
So-called rent-seeking is not the same as corruption, but it can lead to corruption. It involves taking advantage of opportunities to obtain benefits that are not available to everyone, such as special tax treatment or access to certain types of contracts. When existing institutions facilitate rent-seeking, it diverts the efforts of many entrepreneurs towards cultivating political influence rather than focusing on innovation, investment and productivity. The effect on economic development can be very negative.
Before the current election campaign began, some of us thought that the issue of economic development would dominate the political debate leading up to the general election. This has not been the case. Rather, the economic issue has been relegated to marginal and superficial mentions. This is a further reflection of the fraying of our economic and political institutions, which are not conducive to the search for broad consensus on issues critical to our future. The message of these three Nobel Prize winners in economics is addressed to ears like ours.
This article was published originally in Spanish by El Nuevo Dia.
