Acemoglu, Johnson & Robinson (2024): Why Some Nations Are Rich and Others Are Poor

The Most Important Question in Economics

Why is Norway 70 times richer per capita than Niger? Why is South Korea a technological powerhouse while North Korea starves? Why did Western Europe pull ahead of the rest of the world, and why did some former European colonies become wealthy democracies while others remained trapped in poverty?

This is the central question of development economics — and for centuries, the answers pointed to geography (tropical climates make people poor), culture (some societies value hard work more), or resources (countries with oil get rich). These answers are intuitive. They are also, as the 2024 Nobel laureates demonstrated, largely wrong.

Daron Acemoglu, Simon Johnson, and James Robinson showed that the fundamental driver of long-run prosperity is institutions — the rules, laws, norms, and organizations that structure economic and political life. Countries with inclusive institutions that protect property rights, enforce contracts, provide public goods, and allow broad participation in economic and political life become rich. Countries with extractive institutions that concentrate power and wealth in the hands of a few remain poor — no matter how favorable their geography or abundant their resources.

Their evidence came from an unexpected source: the history of European colonialism.

The Colonial Natural Experiment

How do you prove that institutions cause prosperity, rather than the other way around? Rich countries might develop good institutions because they can afford them. You need a way to isolate the causal effect of institutions — and that requires a natural experiment.

Acemoglu, Johnson, and Robinson found one in colonial history.

The key insight: Europeans colonized different parts of the world in radically different ways, and these different colonization strategies created radically different institutions — differences that persist to this day.

Where Europeans could settle, they built inclusive institutions:

• In places with temperate climates and low disease burdens — North America, Australia, New Zealand — large numbers of Europeans settled permanently
• Settlers demanded the same rights they had at home: property rights, rule of law, political representation, constraints on government power
• These inclusive institutions created incentives for investment, innovation, and broad-based economic participation
• Over centuries, these institutions generated sustained economic growth

Where Europeans couldn’t settle, they built extractive institutions:

• In places with tropical diseases — much of sub-Saharan Africa, parts of Central America and Southeast Asia — European mortality rates were devastating. Settlers couldn’t survive in large numbers
• Instead, Europeans set up extractive institutions: forced labor systems, plantation economies, mining operations designed to extract resources and ship them back to Europe
• Power was concentrated in a tiny colonial elite. Property rights existed only for the rulers. The majority population had no economic or political rights
• After independence, local elites inherited these extractive structures and had every incentive to maintain them

The instrument: Acemoglu, Johnson, and Robinson used European settler mortality rates as an instrumental variable. Where mortality was high, Europeans couldn’t settle, so they built extractive institutions. Where mortality was low, they settled and built inclusive institutions. Because mortality rates were determined by disease environments — not by the indigenous economy — they provide a clean source of variation in institutional quality.

The result: even after controlling for geography, climate, religion, culture, and every other factor, institutions explain the vast majority of the income differences across former colonies.

The Reversal of Fortune

The most striking evidence for their theory is what they called the reversal of fortune.

Among countries colonized by Europeans, the places that were richest in 1500 are now among the poorest, and vice versa.

• The Aztec and Inca empires were among the most advanced civilizations in the world in 1500, with large populations, sophisticated agriculture, and wealthy cities. Mexico and Peru are now middle-income countries
• The Mughal Empire in India presided over perhaps a quarter of global GDP. India today has a per capita income far below the world average
• North America and Australia in 1500 were sparsely populated with limited agriculture. They are now among the richest places on earth

Why the reversal? Because colonizers created inclusive institutions in places that were poor (where few indigenous people meant less to extract and more reason to build settlements with rights) and extractive institutions in places that were rich (where large populations could be coerced into forced labor and valuable resources could be plundered).

This reversal cannot be explained by geography (geography didn’t change), culture (the same European colonizers created both types of institutions), or resources (resource-rich colonies often ended up poorer). Only institutions explain the pattern.

Inclusive vs. Extractive: The Framework

Acemoglu and Robinson developed this framework most fully in their bestselling book Why Nations Fail (2012, translated into 49 languages):

Inclusive economic institutions:

• Secure property rights for the broad population — not just elites
• Enforce contracts impartially
• Allow and encourage entry of new businesses
• Provide public goods: education, infrastructure, rule of law
• Enable individuals to choose their own occupations and investments

Inclusive political institutions:

• Distribute political power broadly — pluralism
• Constrain executive power through checks and balances
• Allow peaceful transitions of power
• Give citizens voice through elections, free press, and civil society

Extractive economic institutions:

• Property rights exist only for the elite, or are insecure for everyone else
• Markets are rigged: monopolies, cartels, barriers to entry
• Forced labor, restricted occupational choice
• Public goods are provided to the elite only

Extractive political institutions:

• Power concentrated in a narrow elite — an autocrat, a junta, a party
• No checks on executive power
• No peaceful mechanism for change
• Dissent is suppressed

The critical insight: economic and political institutions reinforce each other. Extractive political institutions enable extractive economic institutions (the elite writes rules that benefit itself). Extractive economic institutions fund extractive political institutions (the elite uses its wealth to maintain power). This creates a vicious cycle — an institutional trap — that is extremely difficult to escape.

Conversely, inclusive institutions create a virtuous cycle: broad economic participation generates a prosperous middle class that demands political participation, which produces policies that further broaden economic opportunity.

Why Bad Institutions Persist

If inclusive institutions produce prosperity and extractive institutions produce poverty, why don’t all countries adopt inclusive institutions?

Because the people in power benefit from extraction. Reforming institutions would benefit society as a whole but harm the current elite. And the elite controls the political system — the very mechanism through which reform would have to occur.

This creates a commitment problem: the elite could promise to reform institutions, but once reform threatens their power, they have every incentive to renege. Citizens know this, so they don’t trust promises of reform. The result is institutional stagnation — a poverty trap maintained by rational self-interest.

Change requires critical junctures — moments when the balance of power shifts enough to create an opening: a revolution, a war, a plague, an external shock. At these moments, institutions can be reshaped. But which direction they move — toward inclusion or deeper extraction — depends on the specific historical circumstances.

Examples of critical junctures:

• The Black Death (1348) killed so much of Europe’s population that surviving peasants gained bargaining power, eventually breaking feudalism in Western Europe — but in Eastern Europe, the same shock led to harsher serfdom
• The Glorious Revolution (1688) in England constrained the monarchy and empowered Parliament, setting the stage for inclusive institutions and the Industrial Revolution
• The Atlantic trade enriched merchant classes in Western Europe, who demanded political rights — but in Africa, the same trade fueled the slave trade and empowered extractive elites

The Korea Example

Perhaps the cleanest test of the theory is the Korean peninsula. In 1945, Korea was split into North and South along the 38th parallel — an arbitrary line drawn by foreign powers. Same geography. Same culture. Same history. Same ethnic composition. Same starting point.

• South Korea developed inclusive institutions: property rights, market competition, eventually democratic governance. It became one of the world’s most prosperous nations
• North Korea developed maximally extractive institutions: total state control, no property rights, no political freedom. It became one of the world’s poorest

The income gap between the two Koreas is now among the largest between any two neighboring countries on earth — a gap that can only be explained by institutions.

Their 2024 Nobel Prize was awarded “for studies of how institutions are formed and affect prosperity.”

Explain It to a Child

Imagine two classrooms with the same students, same books, same building. In Classroom A, the teacher makes fair rules: everyone gets a turn, good work is rewarded, and students can pick their own projects. Kids work hard because they know their effort pays off. In Classroom B, the teacher’s favorite students get all the prizes, they can copy others’ work, and the rest of the students get punished if they complain. Kids in Classroom B stop trying — why bother if the game is rigged? Over time, Classroom A becomes amazing while Classroom B falls apart. That’s what Acemoglu, Johnson, and Robinson discovered about countries. Countries with fair rules (they call them “inclusive institutions”) — where everyone’s property is protected, anyone can start a business, and the government serves all the people — become rich. Countries with unfair rules (“extractive institutions”) — where a small group takes everything and everyone else has no rights — stay poor. They proved this by studying what happened when Europeans colonized different parts of the world: where they settled and built fair systems, those places became rich. Where they just grabbed resources and left unfair systems behind, those places stayed poor — even centuries later.