Has this year's Nobel laureate in economics found an answer to one of the world's biggest problems – that countries are stuck in poverty? Maybe not fully, but certainly their research should be important to everyone who deals with development issues and poverty alleviation, writes Karl-Anders Larsson, retired development economist and freelance writer.
Sweden's Riksbank's prize in economic science in memory of Alfred Nobel is awarded this year to the three economists Daron Acemoglu, Simon Johnson and James Robinson for their explanations of why there are differences in prosperity between countries. One starting point has been to seek an explanation for why some formerly colonized countries have not developed according to the Western model. With their interdisciplinary approach, they differ from most economists by, among other things, including historical and political science explanatory models in their research.
The essence of the prize winners' argument is that the nature of the countries' economic institutions has governed how their economic development has turned out. They believe that in countries such as Great Britain, France, the United States and Sweden, economic development has taken place through inclusive institutions, which allow and encourage public participation in economic processes and utilize people's talents and skills.
However, the same development was not normally promoted by colonial powers in other territories. Instead, exploitative institutions were developed with the aim of exploiting people's resources to benefit those in power. These institutions were then taken over and maintained by the new rulers after the countries' liberation.
Furthermore, Acemoglu, Johnson and Robinson believe that the economic institutions are in turn controlled by the political institutions. In their view, there is a clear positive relationship between inclusive economic institutions and democratic political institutions. Similarly, there is a connection between exploitative economic institutions and authoritarian political institutions.
China – the example that disproves the laureates' theory?
The laureates argue that the interplay between inclusive economic and political institutions usually leads to a virtuous circle of inclusive economic development, while an interplay between exploitative economic and political institutions leads to a vicious circle of stagnant development.
A difficulty in their reasoning is determining which institutions are inclusive and which are exploitative. It is easy to slip into traditional thinking where liberal, market-oriented and democratic institutions are always good, and where authoritarian and planning-oriented institutions are always bad. In that case, no new insight is gained.
But I also don't think that the Nobel laureates' thinking is so simplistic. In my opinion, the main message of their research is that if we want to understand a certain country's economic development, we need to understand how its institutions work in that particular country.
The example that perhaps most clearly seems to disprove their theses is without a doubt China, whose institutions are clearly exploitative, but which nevertheless exhibited an incomparable economic and social development. The awardees have maintained that China's development is not sustainable and that a turnaround is underway. A counterargument is, of course, that the Chinese system is completely different from the Western one and that it is therefore difficult to assess China's development and long-term sustainability.
The relevance for international development cooperation
The laureates' conclusion about international development cooperation is that it normally starts from a misunderstanding of the causes of poverty and therefore often fails. But that the same also applies to all types of "modernisation", regardless of how it is financed.
The basic problem is that external resources alone cannot create the virtuous circle of inclusive institutions. Increased power from below within countries – in civil society and at the grassroots level – is the only thing that could help make exploitative institutions inclusive. Two of the prize winners (Acemoglu and Johnson) point to the new book, for example Power and Progress, on the importance of strengthening the role of trade unions, especially in relation to technological developments.
But in that case, this is a long, difficult and uncertain process, which in my opinion can hardly be affected by aid. Institutional reforms in development aid have often failed and in many cases the governance of recipient country governments has not improved despite decades of reform. One reason for this is probably that the aid's projects and programs were designed based on experiences and models from the donor countries, regardless of the conditions that prevail in different recipient countries.
There has developed a dominant view of what is “best practice” in the implementation, while less consideration was given to how the purpose and project fit in the context where the aid is to be implemented. It is easy to see how this should be remedied, for example with more context-specific aid.
Regarding the methods of the aid, the conclusions of the awardees are unclear. Given their conclusions about the importance of institutions, a fundamental question should be how donors should act when a recipient country's political structure risks countering the aims of the aid.
I think the laureates share my view that, as a result of diplomatic and commercial interests, Western aid has been too focused on cooperation with the regimes. But setting political conditions for aid is also difficult and has proven ineffective. Merely supporting civil society is also not a solution and can further complicate necessary dialogues with governments.
This year's Nobel laureates may not provide an answer to the question of how global inequality can be reduced, but they nevertheless point to important contributing factors. Effective aid must be based on a better understanding of the institutions, the local power structures and the demand for democracy that exists in most countries. Donors must also become more involved in local processes through close contact with local actors in civil society and the private sector.
In short – successful Western aid that contributes to inclusive economic development requires new contact surfaces, ways of thinking and starting points and, last but not least, a more long-term perspective.
This is a guest analysis. The author is responsible for analysis and opinions in the text.
Do you also want to write a guest analysis for Development Magazine? Contact us at opinion@fuf.se