Why are some countries rich while others remain poor? This year’s Nobel laureates in economics, Daron Acemoglu, Simon Johnson, and James A. Robinson, have shed light on this persistent question. Their research points to differences in political and economic institutions as a key explanation for these disparities.

The income gap between the richest 20% and the poorest 20% of countries is vast, with the wealthiest nations about 30 times richer. While the world’s poorest countries have grown wealthier over time, they remain unable to close this gap. The laureates' work explains that the institutions a society inherits - particularly from European colonization - play a decisive role in its long-term prosperity.

By analyzing the colonization of various parts of the world, Acemoglu, Johnson, and Robinson found that colonizers’ choices in political and economic systems have lasting effects. Extractive institutions, aimed at exploiting the local population for short-term gain, are associated with long-term poverty, while inclusive institutions, which fostered economic freedoms and the rule of law, enabled growth and prosperity.

Their findings are exemplified in the divided city of Nogales, split between the U.S. and Mexico. Despite shared geography and culture, residents in Nogales, Arizona enjoy better living conditions, education, and political rights, a reflection of the inclusive institutions in the U.S. Meanwhile, across the border in Nogales, Sonora, institutions limit economic and political freedoms. The laureates' work illustrates how history shapes today's global wealth disparities and underscores the importance of promoting inclusive, democratic institutions to achieve economic development and reduce poverty.

Last December, one of the three Nobel Prize winners, Simon Johnson, was a guest in our New Economy Short Cut – to discuss the book ‘Power and Progress’, which he wrote with his current co-Nobel Prize winner Daron Acemoglu. The full Short Cut with Simon Johnson (MIT) and Achim Wambach (ZEW) in the re-live here.