The Role of Inclusive Institutions in Scaling Trust: 2024 Nobel-Winning Insights into Economic Growth
Written By Siby Cristopher
TLDR:
Nobel Insights on Trust: Acemoglu, Johnson, and Robinson's research links trust to the success of inclusive institutions and long-term economic growth.
Extractive Institutions: Found in high-mortality colonies like the Democratic Republic of Congo; marked by corruption, weak governance, and resource exploitation. Result: Persistent underdevelopment and low trust.
Inclusive Institutions: Found in low-mortality colonies like the U.S. and Canada; characterized by democratic systems, property rights, and public goods investment. Result: High trust and economic prosperity.
Reversal of Fortune: Wealthy pre-colonial societies (e.g., Peru) declined under extractive institutions, while poor regions (e.g., New Zealand) thrived with inclusive governance.
Trust as a Foundation: High-trust societies reinforce strong institutions, while low-trust systems struggle to escape cycles of corruption and inequality. Trust drives lasting economic and institutional success.
The Nobel Prize in Economics this year celebrates the work of Daron Acemoglu, Simon Johnson, and James Robinson, whose research delves into how political institutions shape economic prosperity. At the heart of their studies is the role of trust in determining whether institutions foster long-term prosperity or inhibit growth. Trust, as a binding force, influences how inclusive or extractive institutions are formed. This commentary explores the key findings of their work and links it to the crucial role of trust in building institutions that last, using examples of countries where different colonial strategies shaped their present-day prosperity.
1. Extractive Institutions: Low Trust, Short-Term Gains
One of the most influential contributions from AJR’s research is the concept of extractive institutions. These were established in colonies where settlers faced high mortality rates, such as in sub-Saharan Africa and parts of Southeast Asia. For example, in countries like the Democratic Republic of Congo (formerly Zaire) and Angola, European settlers, deterred by the high risks of disease and death, set up extractive systems designed to plunder resources for the benefit of the colonizers, with no intention of building long-lasting, inclusive governance structures.
In these regions, trust was severely lacking—between the settlers and the local population as well as within the governance systems themselves. The absence of trust resulted in the establishment of highly centralized governments, which prioritized short-term wealth extraction over long-term development. The consequence? Even today, countries with such institutional legacies struggle with corruption, weak governance, and low levels of public trust, making it difficult to implement reforms that would spur growth.
Extractive Institutions (Leading to Short-Term, Low Trust):
Concentration of Power: Centralized authority in the hands of a few, leading to corruption and distrust.
Wealth Extraction for Elites: Prioritizes the interests of a small elite over the broader population, leading to inequality and instability.
Weak Property Rights: Discourages investment and long-term economic planning due to insecurity.
Neglect of Public Goods: Leads to underinvestment in education, healthcare, and infrastructure, increasing inequality and discontent.
Opaque and Corrupt Governance: Erodes public trust as decisions are made behind closed doors, fostering cynicism and disengagement.
Example:
The Democratic Republic of Congo, rich in natural resources, continues to suffer from poor governance and a lack of trust in public institutions. Extractive institutions set up during the colonial period created an elite class that monopolized wealth and political power. As a result, despite its wealth of natural resources, the country remains one of the poorest in the world.
2. Inclusive Institutions: High Trust, Long-Term Investment
In contrast, AJR’s research highlights how inclusive institutions were set up in colonies where European settlers could survive in the long term, such as in the United States, Canada, Australia, and New Zealand. These countries, with lower settler mortality rates, allowed Europeans to replicate the institutional frameworks of their home countries, including systems of checks and balances, property rights, and democratic governance.
What distinguishes these countries is the foundation of trust upon which institutions were built. Settlers, feeling confident in their ability to remain and thrive, developed systems that reflected long-term thinking, protecting rights, and promoting public goods. Trust became the bedrock upon which these inclusive institutions were formed, ensuring that governance was responsive to the needs of the broader population, not just a privileged elite.
Inclusive Institutions (Leading to Long-Term, High Trust):
Protection of Property Rights: Ensures security and stability for individuals and businesses to invest in the future.
Checks on Government Power: Prevents abuse of power and ensures accountability, fostering trust in the political system.
Broad Political Participation: Empowers citizens, leading to higher legitimacy and trust in governance.
Investment in Public Goods: Prioritizes education, infrastructure, and healthcare, reducing inequality and increasing social mobility.
Transparent Governance: Reduces corruption and builds trust by making government actions clear and accountable.
Example:
The United States and Canada are two prominent examples of countries where inclusive institutions have thrived. The long-standing trust in political systems, property rights, and rule of law created a fertile environment for investment, innovation, and growth. Today, these countries rank among the most prosperous in the world, underscoring the enduring impact of high-trust institutions on national prosperity.
3. Reversal of Fortune: How Trust Can Explain Economic Divergence
AJR’s "Reversal of Fortune" paper provides further evidence of the importance of trust in institutional development. Their research shows how countries that were prosperous before European colonization, such as India, Peru, and Mexico, became some of the poorest post-colonization. The reason? In these regions, European colonizers implemented extractive institutions designed to exploit the wealth of already prosperous societies, leading to a long-term erosion of trust in governance and political stability.
In contrast, countries that were relatively poor at the time of colonization, such as Australia or New Zealand, became some of the wealthiest in the modern world. This reversal can be explained through the lens of trust: in extractive colonies, trust in government was undermined by exploitative practices, while in settler colonies, trust fostered collaboration and the development of inclusive institutions.
Example:
Peru, once home to the wealthy Inca Empire, is a striking case of reversal of fortune. Spanish colonizers established extractive institutions, exploiting the region's wealth while offering little in return in terms of inclusive governance. The lasting legacy of this is a society where trust in government remains low, and inequality and corruption continue to hinder development.
4. The Persistence of Institutions: Trust as a Self-Reinforcing Mechanism
One of AJR’s key insights is that institutions, once established, tend to persist over time. This persistence is closely tied to trust. In high-trust societies, where inclusive institutions are the norm, governments are more accountable, and the public has confidence in the political process. This creates a virtuous cycle where trust reinforces the strength of institutions, and institutions in turn continue to build trust.
Conversely, in low-trust societies with extractive institutions, governance remains opaque, corruption is rampant, and citizens are disengaged from the political process. Without trust, it becomes difficult to reform or improve institutional frameworks, creating a vicious cycle of underdevelopment.
Example:
Botswana stands as an exception in sub-Saharan Africa. Despite sharing the region’s history of colonization, the country managed to build inclusive institutions after independence, largely due to its leadership’s focus on fostering trust and collaboration between the government and its citizens. Today, Botswana is one of the most stable and prosperous countries in Africa, demonstrating how trust can break the cycle of extractive institutions.
Conclusion: Trust is the Key to Lasting Institutions
The research of Acemoglu, Johnson, and Robinson underscores the deep connection between trust and the development of institutions. Countries that fostered trust in governance and public institutions have seen their economies flourish, while those where trust was eroded by extractive practices continue to struggle with weak institutions and underdevelopment. As modern nations grapple with the challenges of governance in the digital age, the lessons from AJR’s work remain more relevant than ever. Trust is not just a byproduct of strong institutions; it is the foundation upon which they are built, shaping the path to long-term prosperity.
References:
Acemoglu, D., Johnson, S., & Robinson, J. A. (2001). The Colonial Origins of Comparative Development: An Empirical Investigation. The American Economic Review
Acemoglu, D., Johnson, S., & Robinson, J. A. (2002). Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution. The Quarterly Journal of Economics
Acemoglu, D., & Robinson, J. A. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Publishing.
Transparency International. (2022). Corruption Perceptions Index (CPI).
United Nations Development Programme (UNDP). (2022). Human Development Index (HDI).
World Inequality Database. (2022). Gini Coefficient Data.
Economic Growth (GDP per capita): World Bank GDP per capita data
All artworks are designed by Yosha Waghela.
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