Planet Money - A Nobel prize for explaining why there's global inequality

Episode Date: December 14, 2024

Why do some nations fail and others succeed?In the late 1990s and early 2000s, three economists formed a partnership that would revolutionize how economists think about global inequality. Their work centered on a powerful — and almost radically obvious — idea: that the economic fate of nations is determined by how societies organize themselves. In other words, the economists shined a spotlight on the power of institutions, the systems, rules, and structures that shape society.We spoke with two of the Nobel-winning economists about their research on why some countries are rich and others are poor, why it took so long for economics to recognize the power of institutions, and what the heck those even are.This episode was hosted by Jeff Guo and Greg Rosalsky. It was produced by Willa Rubin with help from James Sneed. It was edited by Martina Castro and fact-checked by Sierra Juarez. Engineering by Gilly Moon with help from James Willetts. Alex Goldmark is Planet Money's executive producer.Help support Planet Money and hear our bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

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A quick word before the show to talk about this year and all the different kinds of stories you heard on Planet Money. This year, we brought you stories about inflation, disinflation, stagflation, skimflation, dynamic pricing. What is T-MU? Banking apps, rum taxes, the Maine potato war of 1976. So many stories about so many different things. Semiconductors.

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If so, thank you. If you're not and you sign up today, you get perks for more than 25 different NPR podcasts, sponsor-free listening to all of them, and bonus content for some of our biggest shows, including this one, and exclusive access to special Planet Money merch in the NPR shop. You get all that as a thank you

for investing in NPR and our work at Planet Money. So go to plus.npr.org to sign up. Plus.npr.org. That link is in our episode notes. And thank you. This is Planet Money from NPR. Back in the day, like 30 years ago, if you asked economists,

how did some countries end up so rich and other countries end up so poor, you know, in the grand scheme of things, a lot of them might have told you a story about technology or education or natural resources or even climate patterns. But in the early 2000s, there were these three economists who pointed out something was missing from that picture, something massive that a lot of people in their field were overlooking. Their research triggered a revolution in economics. And this year, those three economists won the Nobel Prize.

We recently met up with one of them on Zoom. Hello? Hello. Yes, this is James Robinson. Yeah. Wow, punctuality, sir. I feel like winning a Nobel Prize, you wouldn't have to show up on time anymore. Don't tempt me.

James Robinson is an economist at the University of Chicago. This year, he shared the Nobel Prize with his colleagues, Simon Johnson and Daron Asimoglu of MIT. Now, it's one thing to win a Nobel Prize, it's another to win it with your friends. What's the first thing you said to Daron after you found out? I sent him a smiley face, actually, I think. An emoji.

Of course, being hard-hitting journalists, we had to verify this fact with Daron himself. So we called him up. Hey, Greg, how are you doing? Oh, Doron. How well, you know, we talked a few weeks ago, uh, and I wasn't nervous, but somehow I, I'm, I'm nervous now with a man of you. I don't believe you. You're a pro.

I should be the one who's nervous. I'm going to get skewered here. One of our very first questions. So James Robinson told us that he did send you a smiley face emoji. Yes he did. Which is wonderful. It has been a whirlwind couple months for James and Daron and Simon. Giving lectures, signing autographs, sending emojis to people. All culminating in this week when they put on their white ties and

tailcoats and attended the official Nobel Prize award ceremony in Sweden. Now please step forward and accept the prize from His Majesty the King. This trio of economists won the prize for a monumental insight, one that helped economists understand this kind of mysterious X-factor that can determine the success or failure of a nation's economy. Hello and welcome to Planet Money. I'm Greg Rosalski and I'm Jeff Guoh. This mysterious X-factor has been one of the hottest topics in economics over the last couple decades.

Institutions. They're at the center of a powerful and almost radically obvious idea that the economic fate of nations is determined by how societies organize themselves. Today on the show, we're chatting with James and Daron about why some countries are rich and others are poor. Why it took so long for economics to recognize the power of institutions. And what the heck is an institution anyway? This message comes from WISE, the app for doing things in other currencies.

Send, spend, or receive money internationally, and always get the real-time mid-market exchange rate with no hidden fees. Download the WISE app today or visit WISE.com, T's and C's apply. This message comes from Wondery. Kill List is a true story of how one journalist ended up in a race against time to warn those on the list

whose lives were in danger. Follow Kill List wherever you get your podcasts. It's been a great year for TV, movies, and music, and we are highlighting the best of the best. We're talking about our favorite moments of the year, including some of the best pop culture you might have missed. Listen now to the Pop Culture Happy Hour podcast from NPR. For this year's winners, the path to the Nobel Prize in Economics started back in 1992. The Cold War has just ended.

The number two song on the charts is Baby Got Back, and James Robinson is just finishing up his PhD. Now, when you're a young economist, you spend a lot of time visiting different universities, presenting your research at seminars to your fellow economists. And at one of these seminars at the London School of Economics, James encounters this young guy sitting in the front row. Every slide I put up, he objected to something. Oh, look, assumption two, no, if you change that, that result wouldn't follow.

Who is that guy? Yeah, exactly follow. And who is that guy? Yeah, exactly. Who's this really irritating guy? That really irritating guy, that was Daron Asimoglu, who at the time was also a PhD student. We asked him to paint a picture of that first time he met James. Oh, I don't know. You have to ask him. He might say I was asking too many questions or something. That's exactly what he said. Did he say that? Oh, no. He used the word irritating. Oh, no, no, he didn't say that, did he?

He did. Okay, okay. You know, I know, we all know, I think, where this is going. According to the law of the romcom, meet cute, James and Daron are about to become best friends. Then the seminar ends and the chairman kind of introduces me, oh, this is Daron, that's a mobile, you know, he's going to come to dinner. I was like, oh, seriously? Now they have to bring the guy to dinner? But as they all walk out together down the narrow streets of London, James and Daron start to chat. And with just a few words, Doron gets James' economist

heart to flutter. He looks at me and he says, have you read this paper by North and Weingast? And I had read the paper. And then what do you think about it? North and Weingast? Of course! This was kind of a nerdy history paper looking at 17th century England, specifically how its economy was supercharged by changes

to its institutions. Institutions. They're like the systems, rules, and structures that shape society. So an example would be like the court system, or public schools. The Federal Reserve is an institution. So is our entire system of representative democracy. But there are also horrible institutions, like slavery or dictatorship.

And at their very first meeting, James and Duran are already bonding over their shared fascination with institutions. For both of them, this was personal. Duran, for instance, grew up in Turkey during a turbulent time for its institutions. In 1980, as I was in middle school, for instance, grew up in Turkey during a turbulent time for its institutions. In 1980, as I was in middle school, just the beginning of my seventh grade, Turkey suffered

a big military coup. There were soldiers everywhere, including in our school. So Turkey was definitely not a democratic country at the time. And it was also suffering via a series of economic problems. So I got interested in exactly these sets of issues. Meanwhile, James spent much of his youth in developing countries. His dad worked as an engineer in places like Barbados and Trinidad and Tobago, places that were grappling with their colonial history. You know, I grew up in the colonial world. It's not like rocket science. You know, you might think in retrospect to think that colonialism might have had something to do with the relative poverty of

the Caribbean. Okay, but no one talked about that in economics, like zero discussion. Yeah, at the time, the idea of institutions and their influence on wealth or poverty hadn't made it into the mainstream models that economists were working with. It was amazing how sort of fringe a lot of these ideas were, basically because it's just not presented in the way that mainstream economists do research. Right. Modern mainstream economics, it's kind of obsessed with math and data and proving things with statistics, which is why a lot of economics research focuses on small, precisely quantifiable

questions. Like, I don't know, how do grain prices change with the weather? But questions about institutions? Those questions are much harder to quantify. How could you ever prove that, you know, the difference between Hades and Sweden's economies comes down to secure property rights or the quality of their governments. The questions seemed almost too big for economics. Which is why, for a long time, the popular economic models had focused on factors more

directly associated with economic growth. Things that were measurable. Things like population growth, investment in machines and infrastructure, education of workers, technological innovation. But those models were silent on the deeper questions. Why did some countries end up with more infrastructure or education or technological innovation? Which brings us back to James and Duran, that first day they met, sitting at dinner. This is the part of the movie where their eyes meet and the intellectual sparks fly.

We almost said exactly the same thing, which was like, this is what economists study. But over there is all the things that I'm really passionate about. And then we were like, okay, you know, you only live once. Let's, let's figure out how to bring these things together. Alright, Jeff, YOLO. Let's do some economics research. Yes, YOLO. That is what happens. Fast forward a few years, they're collaborating on all sorts of papers and books, and pretty soon this dynamic duo becomes a trio.

Obviously, you and James are, you know, you have this bromance going. At what point does Simon Johnson come in the mix? So I was actually giving this talk at MIT and at the end of the seminar, he came to me and started talking and we hit it off. Simon Johnson, he's another young economist, a statistics whiz, and together the three economists start working on this huge project

that would eventually win them a Nobel Prize. Trying to prove, using the tools of economics, that institutions are the reason why some nations are rich and others are poor. And that was gonna be pretty tough. You can't just compare a rich country to a poor country and say, well, the rich one's rich because it has, like, a better court system. There are a gazillion other possible explanations. It could even be the other way around. A country gets rich first

and then it gets the better court system. In an ideal world, the economist could just do what scientists basically do in a laboratory. You know, randomly give some countries good institutions and other countries less good institutions, and then see what happens to their economies. But of course, that's impossible. So they began searching for the next best thing.

A natural experiment. A moment in history where, for kind of random reasons, different countries wind up with different kinds of institutions. The thing that we latched onto is it's got to do with colonialism. Yeah, the era of European colonization. When starting in the 1400s, a bunch of Western powers went around the world, invading and imposing different kinds of institutions. Institutions that the economists believed had lasting economic consequences.

Why are institutions in Nigeria so lousy compared to the United States or Canada, you know, well, that's got something to do with the very different types of institutions that were created in the colonial world. And just to be clear, colonization was really ugly, pretty much everywhere. We're talking things like genocide, slavery, just brutal practices of exploitation and domination. Colonizers sought to enrich themselves wherever they went. But there were also different patterns in how this all unfolded in different places, which seemed to create the conditions for the natural experiment that the economists were looking for.

Yeah. When the economists looked at this history, they saw two extremes in how Europeans colonized the world. At one extreme, Europeans themselves settled in large numbers. In these settler colonies, like in the US and Canada, they established institutions for themselves, institutions that tended to be more democratic, more egalitarian, that encouraged more investment and were more friendly to entrepreneurs and innovation. These places, of course, ended up being the richer ones centuries later. At the other extreme were colonies where Europeans did not settle in large numbers. Places like the Congo or Bolivia. There, European colonizers set up or maintained institutions aimed at helping

a small group of elites ruthlessly extract wealth from indigenous people. Instead of investing there, they sent most of their resources and wealth back to Europe. These are the places that tended to become poorer countries. Now in order for the economists to use this moment to prove anything about institutions, they had to find a random reason why some places got settler colonies with their growth-friendly institutions and other places didn't. Because if the Europeans only put settler colonies in like the most lush, most fertile places, well maybe those places were always destined to end up rich and prosperous,

which would prove nothing about institutions. So the economists began searching for some kind of random factor unrelated to a country's potential for economic growth that affected which places got settler colonies. And that's the problem I started talking to Simon about. Can we find some reasons why Europeans did one thing one place and another thing in another place with long ranging implications? And so we started reading like mad about colonialism and like trying to understand the incentives and what's explained different institutions.

Why did such good institutions emerge in the United States and why not in Nigeria? Then the economists had their big breakthrough. They found a kind of random reason why Europeans put settler colonies in some places and not others. Disease. The historical mortality environment for Europeans enormously influenced whether or not these places became settler colonies. Yeah, unlike the locals, the Europeans had little immunity to local diseases like malaria or yellow fever. When Europeans tried to settle in places with those diseases, a lot of them died. So they ended up putting their settler colonies elsewhere.

For example, the Pilgrims who founded the Massachusetts colony, they originally considered moving to Guyana in South America. But then several early colonizing attempts were basically decimated by tropical diseases and then decided like, okay, forget that, let's go to Massachusetts. It's rocky, it's kind of unappealing, but we're not all going to die of tropical diseases. The economists go searching for data so they can conduct a statistical analysis of all this. They find it in a set of books by historian Philip Curtin.

He had meticulously compiled records on how many Europeans died from diseases in colonies around the world. We were just really fortunate that Philip Curtin existed and he did this work. And it's like, I mean, looking at his tables, just the differences, you know, when you see these mortality rate differences

between different colonies, it was just mind-blowing. And that's when they start getting excited. Because this was the data that could help them prove that institutions matter for economic growth. That's because the way they saw it, the death rates of colonizers was this kind of random independent factor determining which places got growth-friendly institutions and which places did not. This was the natural experiment the economists were looking for.

The economists hole up in Daron's office at MIT and go about crunching the numbers. They know they're on to something, even though other economists found the whole thing a little out there. The very distinguished economist came in and asked us, so what are you guys up to? And Daron, like all excited, explained this idea of sort of historical mortality of European settlers and he just laughed himself silly. He thought it was the most ridiculous idea he'd ever heard in his life. But it turned out not to be ridiculous. In fact, it ended up being Nobel Prize winning research, Mr. Distinguished Economist.

Yeah, the economists found this incredibly clear relationship. Places where colonizers were more likely to die hundreds of years ago now have worse economies, and vice versa. When Simon shared this first round of results with Dharan, he was like, wait, what? I said, these are too good to be believed. They're too good. Yeah, exactly. So I said, give me the data, I'm gonna check everything.

And then, you know, no, they were right. This unlikely relationship between the rate of colonizer deaths and economic outcomes centuries later, the economists argued that the explanation for it could only be institutions. And here is a summary of the argument they made. Basically, where European colonizers were more likely to die of disease, they couldn't settle en masse.

They instead set up institutions aimed more at exploiting the indigenous population. Those institutions led to lower economic growth in the coming centuries. But where Europeans were less likely to die, they moved in and set up settler colonies with more democratic and growth-friendly institutions. The economists wrote up their results and they started going around presenting this research. The first time was at a conference in 2000 at Stanford. And you know, economists typically are a pretty skeptical bunch.

But It was electric. You know, people were just somehow so fascinated by it. And we were like, oh man, you know, we hit it out the park, basically. It just like, you could just see people loved it and they found it fascinating. It was really kind of elating. That's what I remember. This paper made a huge splash. It showed other economists this really cool new way of doing

research on big questions, using knowledge of history, the tools of statistics, and a bit of cleverness. But there were still skeptics. Some of them were like, aren't you just pointing out a geographic pattern here? Like the places that had more diseases, where the Europeans put in the bad institutions, those tended to be tropical areas. And maybe tropical areas were just doomed to have worse economies. So the economists went to work on their next blockbuster paper, aiming to shut down these sort of geographic arguments for why some nations are rich and others are poor.

And they document this startling fact in the data. They call it a reversal of fortune. Before European colonization, the richest parts of the Americas were actually what is today Mexico and parts of South America. That's where the Aztec and Incan empires were. But after colonization, the fortunes of those regions flipped. The US and Canada are now way richer than any country found further south.

We thought this was just like devastating evidence on the impact, A, of colonialism in kind of reshaping those societies, and B, showing that the geographical hypothesis can't possibly be right, you know, showing that the geographical hypothesis can't possibly be right, you know, because there isn't persistence. When colonialism comes, it reverses this picture. Then it turns out that's not just true in the Americas, it's true more generally in

this colonial world. After the break, James and Daron go even bigger. They start to sketch out a grand theory about institutions. About what makes a good institution good and a bad institution bad. And they encounter some pushback. By the mid-2000s, Duran, James, and Simon had taken the economics profession by storm. Their blockbuster papers on European colonization suggested that institutions could change the

course of a country's economy. Now they wanted to go beyond the colonial world, to weave together a grand theory of how institutions in general affect economic development everywhere. Yeah, like in general, why are some institutions so good for economic growth and other institutions so bad? In 2012, James and Daron outlined their theory in a book called Why Nations Fail. In it, they break down institutions into two categories. One of the things we tried to do in our book is come up with this sort of flexible language

to talk about institutional differences, which kind of encompasses many things. Like I can say, your society has sort of extractive institutions or it has inclusive institutions and that could incorporate all sorts of differences in the details. Okay, so inclusive and extractive institutions. This is at the heart of the theory they lay out in their book. Inclusive institutions are institutions that serve a wide swath of society. They kind of spread opportunity around incentivizing and empowering people to succeed in a free market economy.

And that's why James and Duran argue inclusive institutions are good for economic growth. So an inclusive institution could be something like the patent system. The patent system gives anyone an opportunity to be rewarded for their ingenuity. That encourages people to create new ideas and technologies that end up enriching society. Or think of like how good public education systems give everybody an opportunity to learn skills and become more productive, or how antitrust laws prevent monopolization of the economy.

Yeah, those are some examples of inclusive economic institutions. But James and Duran say when it comes to economic growth, inclusive political institutions are also super important. And sort of the ultimate inclusive political institution, it's democracy. James and Duran have found in the research that democracy, generally speaking, it's good for economic growth. We find very robust evidence that democracy is associated with better provision of public goods, better investment in education, in infrastructure, higher economic growth.

Great, okay, so that's true. But he says all democracies aren't created equal. There's many different types of democracies and there's many different types of dictatorships. So I think that's useful to know just in terms of like, is it a good idea to push for democracy? Yes. Is pushing for democracy a kind of magic wand?

No. Of course, this is a big sprawling theory and to this day, not everyone is convinced. For example, some have pointed to India and China as contradicting their theory. Back in 1980, their economies were neck and neck. They both had roughly the same GDP per capita, about $300 per person per year.

But over the last few decades, China has rocketed ahead of India. The average Chinese citizen is now five times richer than the average Indian citizen. But India is a democracy. It's supposed to have good institutions, right? China is an authoritarian communist state. This one very prominent example doesn't fit so neatly in Dharan and James's theory, but

they argue, of course, there are nuances to all this. Well, first of all, I don't think India is a poster child for good institutions. It has had a very troubled period starting way before independence, was a very exploitative colony. Independence was not easy. But more importantly, India has a social system that is very anti-inclusive. The caste-based system was very very strong upon independence. You know people are born into this caste, you know, where occupations are rigid and specified and that enormously holds back social mobility and the potential of the country.

And as for China, they argue that China also at least partly fits into their theory. James says China didn't really begin its explosive growth until it adopted some inclusive economic institutions. The transition towards economic growth in China starting in the late 1970s is clearly driven by this move to much more inclusive economic institutions, dismantling central planning and cooperative agriculture, kind of introducing incentives, getting rid of price controls, allowing people to kind of make decisions and start firms. And, you know, that's exactly, you know, our theory.

But what's tricky is how could this happen under a sort of totalitarian dictatorship? Yeah, there are still some big questions about this theory. Some have poked holes in their methodology. Others aren't quite convinced that you can boil down all institutions into two categories. Even the Nobel Prize committee, when it announced their award, they made it clear that their theory is not the final word on why some nations are rich and other nations are poor. If you read the Nobel announcement at the very end, it has this weird sentence where they say, while their contributions,

Osmoglu, Johnson and Robinson, have not provided a definitive answer to why some countries remain trapped in poverty, their work represents a major leap forward. It seems like they're kind of saying, well, these are really interesting ideas, but we're not sure if they are definitive. Yeah, I think, you know, this is social science.

I think the world is very complicated, so, and our understanding of many things, you know, is incomplete. So we should be humble about that. What is definitive is that James, Duran, and Simon have put a huge new spotlight on the power of institutions and brought statistical rigor to studying one of the biggest questions in economics. And that in itself is a historic contribution to the field. The research provides this kind of hopeful message that we can build a fairer society and a better economy through the hard work of improving our institutions.

That could mean like working to improve schools or keeping government officials accountable or like I don't know participating in an election or social movements. Unlike past theories which say a country is rich or poor because of its geography or its culture, this is a theory that gives us some agency over our nation's destinies. [♪ music playing, Tina Castro and fact-check by Sierra Juarez. Engineering by Gilly Moon. Alex Goldmark is our executive producer. I'm Jeff Guo. And I'm Greg Rizalski. This is NPR. Thanks for listening.