We often talk about developed and developing countries. But what is the difference between these countries that causes some to live in extreme poverty and others to thrive?
Many people put forth theories to explain these differences that rely on external factors such as geography or cultural traditions, but Daron Acemoglu, Professor of Economics at the Massachusetts Institute of Technology and member of the Canadian Institute for Advanced Research, believes that the answers lies in things we can control. Acemoglu studies the trends behind why some countries decline, and how we can prevent this from happening in other cases. He advocates the institutional view.
Institutions are not necessarily what you may think, a building or a group of people. Rather Acemoglu defines them as “the rules, both formal and informal, under which a society functions”. It is these rules that determine whether a society, a country prospers.
Institutions create incentives and opportunities for people to bring forth new ideas and innovate which, in turn, brings value and create economic progress.
If these institutions are poorly built, we miss out.
“You can have, you know, dozens of Einsteins but none of them are going to become innovators because they’re too busy, you know, picking rice or cleaning shoes or something like that,” says Acemoglu.
A classic example of this is slavery, “the most extreme form of an extractive system that pigeonholed a significant fraction of society into a role in which they had no ability to exercise their creativity, their initiative.” Because of this, we were missing out on the ideas and talent of a large fraction of the population. It’s no accident that once these rules and institutions were changed, our society prospered.
