Nobel Prize in Economics: Do Democracy and Prosperity Really Go Hand in Hand?

This year’s Nobel laureates link democracy to economic success, but their theory ignores autocratic growth and rehashes old ideas.

This year’s Alfred Nobel Prize in Economics has been awarded to Daron Acemoglu, James Robinson, and Simon Johnson. Not only are these three highly successful, exceptionally productive, and highly acclaimed researchers, but it is also to their credit that they have published not only in academic journals but also in books that are accessible to the general public.

Nevertheless, some questions can be raised about this award. The justification for the prize is that they have shown that what they call “inclusive” political institutions and democracy give rise to economic prosperity. Let’s start with what counts as “inclusive”, as opposed to “extractive”, political institutions. One definition they present is that these are institutions that “allow and encourage the majority of people to participate in economic activities that make the best use of their talents and skills and that enable individuals to make the choices they desire.”

The first problem is that the nature of these institutions is extremely unclear and ill-defined. They do not provide a clear answer regarding the basic norm that characterises them, making it difficult to determine when an institution shifts from being inclusive to being extractive.

Secondly, it has been argued that, historically, inclusive and extractive institutions have not been opposite “modus operandi” for nations’ economies. Instead, they have presupposed each other. Slavery went hand in hand with the establishment of what they call inclusive institutions, such as property rights and legislative assemblies, which had a limited but gradually expanding franchise.

The third problem is that this is a bit like saying that the good society creates the good society. As the official motivation from the Royal Swedish Academy of Science puts it: “good political institutions are a precondition for good economic institutions.” There is thus not much theoretical distance between what explains and what is to be explained. One could say that this way of reasoning is merely a repetition of data—much like stating that how voters vote is determined by which party they like best.

The fourth problem is that recognising the importance of institutions is not a new perspective. In 1992, the economic historian Douglass North was awarded this prize precisely for the insight that institutions are crucial to understanding economic development. While this may seem obvious now, at the time North received his award, social science research was largely divided into two camps. One camp emphasised the significance of basic social structures: Marxists focused on class structure, feminists highlighted the gendered power order, and proponents of modernisation theory pointed to culture as a fundamental structuring phenomenon. The other camp concentrated on individual behaviour, influenced by various psychological factors. North’s novel approach was to emphasise institutions, as they serve to connect individual behaviour with structural factors through (formal and informal) rule systems, such as laws and constitutions, as well as established social codes. Though this perspective was relatively new at the time, it has unfortunately become yesterday’s news today.

A key issue lies in the laureates’ assertion that democracy fosters economic prosperity. This perspective fails to account for the remarkable economic development of Communist-ruled China, which has lifted an unprecedented number of people out of extreme poverty in a remarkably short period. Nearly fifteen years ago, Amartya Sen, also a recipient of this prize, published a widely discussed article comparing Communist China to democratic India. Although Sen, being of Indian descent, was reluctant to draw such a conclusion, he ultimately found that China surpassed India in nearly every metric of human welfare at that time.

The current laureates’ inability to explain China’s economic success stems from their lack of understanding regarding the country’s unique state apparatus—an administration that manages to combine high levels of professionalism and meritocracy with strong political and ideological control. This organisational model, although relatively rare, is not exclusive to China; I have observed similar structures, as exceptions, in the post-war period in both Sweden and the USA. While this type of system can be highly effective, it is not particularly democratic.

That democracy in itself is not a main cause of economic prosperity can also be illustrated by comparing small countries. In the 1960s, the small island nations of Jamaica and Singapore were both impoverished. They had similar populations and were simultaneously liberating themselves from British colonial rule. At that time, an assessment of their development would likely have led most observers to predict a promising future for Jamaica. The country boasted extensive arable land, abundant natural resources, no ethnic conflicts, proximity to the world’s largest market (the United States), a budding democracy, and the potential for a thriving tourism industry, particularly as Cuba was stepping back from this sector.

In contrast, Singapore was at a significant disadvantage: it had very little arable land, no natural resources (including those for tourism), no democratic development, was far from major markets, and faced notable ethnic divisions within its population. Fast forward sixty years, and the contrast is striking. Singapore now enjoys a much higher GDP per capita than Sweden and performs exceptionally well on standard measures of human well-being. In comparison to Jamaica, Singapore’s GDP per capita is now twelve times greater.

The crux of the matter is that Jamaica has been a functioning democracy during this period, according to various measurements, while Singapore operates as an autocracy, albeit one that is not particularly brutal. The key difference lies not in the presence of democracy, but in the fact that authoritarian Singapore has largely succeeded in eradicating corruption and significantly enhancing the quality of its public administration and judicial system—achievements that democratic Jamaica has failed to attain. Unfortunately, democracy does not guarantee a remedy for corruption and ineffective public administration; in fact, the opposite can often be true, especially in newly democratised countries.

In summary, this year’s Economics Nobel Prize can be encapsulated by the phrase: What is true is not new, and what is new is not true.