ISLAMABAD – The 2024 Nobel Prize in Economic Sciences has brought renewed global attention to the theory that a nation’s prosperity is determined not by geography, culture, or religion, but by the nature of its political and economic institutions.
The scholarship, known as the New Institutional School in economics, posits that countries fail when a powerful minority captures the government to create a system that benefits its own interests rather than the broader population. This process of political exclusion inevitably leads to economic exclusion through the creation of extractive institutions that shield the wealth of the elite by stripping resources from the general public.
These findings are the central thesis of the influential work Why Nations Fail: The Origins of Power, Prosperity and Poverty, authored by Massachusetts Institute of Technology (MIT) economists Daron Acemoglu and James Robinson. Along with Simon Johnson, Acemoglu and Robinson were awarded the Nobel Prize for their research into how institutions shape the economic trajectory of nations.
The Mechanism of Institutional Failure
The New Institutional School argues that the divide between prosperous and failing states is defined by the distinction between inclusive and extractive institutions, and by the political coalitions that keep each model in place.
Inclusive political systems are characterized by pluralism and the broad distribution of power through competitive elections, constraints on the executive, and an independent judiciary. These systems typically foster inclusive economic institutions, which include the rule of law, universal property rights, and protections for intellectual property. These conditions encourage competition, technological innovation, and both domestic and foreign investment by giving citizens and firms confidence that the rules of the game will not be arbitrarily changed.
Conversely, extractive institutions are designed to transfer resources from the majority of society to a small, politically connected elite. This dynamic often creates a “vicious spiral” in which the elite maintain power by ensuring the population remains economically marginalized, using the legal system, regulation, and control of state-owned enterprises as instruments of rent extraction rather than public service.
Comparative Case Studies in Development
To isolate the impact of institutions, Acemoglu and Robinson utilize comparative analysis of regions with broadly similar geography, shared history, and overlapping culture, but sharply different political settlements.
The Korean Peninsula
Divided in 1953, North and South Korea provide a stark contrast in institutional outcomes:
- South Korea: Over time established regular elections and a more inclusive society, eventually embedding constraints on authoritarian power and opening space for market-oriented reforms. This has underpinned rapid industrialization, export-led growth, and a current per capita income of roughly $35,000-$40,000.
- North Korea: Maintained single-party and single-family rule for over 70 years, with tight control over markets, information, and mobility. The result is a per capita income estimated at $700-$2,000, chronic food insecurity, and heavy dependence on external assistance.
The Nogales Border
The authors highlight the city of Nogales, which is split by a fence and a road between Arizona (United States) and Sonora (Mexico). Despite sharing the same physical environment, the two sides exhibit vast differences in income, schooling, and life expectancy. Residents on the U.S. side live under the protections of the U.S. Constitution and federal regulatory framework, while those on the Mexican side contend with weaker enforcement of property rights and public services. The divergence, Acemoglu and Robinson argue, is driven less by geography than by the quality and accountability of political and economic institutions.
Regional Divergence: Pakistan and Bangladesh
In the context of South Asia, the divergence between Pakistan and Bangladesh since 1971 illustrates how shifts in governance structures can show up, over decades, in social and economic indicators. The question for policymakers in both capitals is no longer whether institutions matter, but which coalitions and rules can lock in more inclusive growth.
| Indicator | West Pakistan (1971) | East Pakistan (1971) | Pakistan (Current) | Bangladesh (Current) |
|---|---|---|---|---|
| Per Capita Income | $180-$200 | $90-$130 | $1,600-$1,800 | $2,500-$2,800 |
| Adult Literacy | 20-25% | 15-20% | 60-62% | 75-77% |
Bangladesh’s relative gains in income and literacy are frequently attributed by development economists to a gradual widening of access to education, health and finance, and to stronger accountability for social outcomes. Pakistan, by contrast, has struggled to broaden its tax base, reform loss-making state-owned enterprises, and insulate public spending decisions from narrow patronage networks, all of which are symptoms of the extractive-inclusive tension highlighted in the Nobel-winning work.
The Role of Political Equilibrium
Economists and reformists argue that economic fixes are ineffective if the underlying political power structure remains unchanged. Dr. Ishrat Husain, in his book Governing the Ungovernable: Institutional Reforms for Democratic Governance, notes that changing the formal laws (de jure power) without addressing the actual sources of power (de facto power) often yields little result.
Husain writes:
“Just as reforming economic institutions without changing the political equilibrium may not improve the institutional equilibrium, and therefore changing de jure power while leaving the sources of de facto power intact, may have little impact on economic performance. It is because even if de jure and de facto power change, those who acquire the power in the new political equilibrium may themselves not have the correct incentives.”
For Pakistan’s policymakers, this raises a direct governance challenge: constitutional and legislative changes, including amendments and new regulatory bodies, will struggle to deliver growth if party finance, civil service appointments, and oversight institutions remain dominated by the same narrow interests.
Historical Precedents of Inclusive Growth
The rise of Great Britain is cited as a primary historical example of institutional evolution leading to industrialization. This transition began with the Magna Carta in 1215, which limited the power of the monarchy in favor of the barons, and culminated in the Glorious Revolution of 1688, which established parliamentary prevalence over the monarch.
These political shifts created a more predictable legal order, stronger protection of private property, and wider access to finance – the inclusive economic environment necessary for the Industrial Revolution to occur. For emerging economies today, the lesson is less about copying specific institutions than about sequencing: durable growth followed only once constraints on arbitrary power were embedded in law and respected in practice.
In Pakistan, current debates regarding the national budget and petroleum levies continue to center on whether policies are designed to maximize aggregate welfare or to facilitate the transfer of resources to politically powerful groups. How Parliament exercises its constitutional control over taxation and public expenditure in upcoming budget cycles will be an important test of whether the country can move from an extractive equilibrium toward a more inclusive one.
