VU Experts Help Understand: Nobel Prize in Economics – For Unveiling the Importance of Societal Institutions

Today, the Nobel Prize in Economics crowned the entire week of awards. This year's laureates of the Nobel Prize in Economics are U.S. scholars Dr. Daron Acemoglu, Simon Johnson, and James Robinson, who evaluated the importance of societal institutions for a country's well-being. According to Associate Professor Arūnas Burinskas, Head of the Department of Economic Policy at the Faculty of Economics and Business Administration at Vilnius University (VU), these researchers have proven that one of the reasons for differences in prosperity among countries is the societal institutions established during colonization and their effectiveness.

In their work Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012), the future Nobel laureates studied the colonial period. They noted a difference: in some colonies, inclusive institutions were created, while in others, they were not. This divide ultimately determined the subsequent economic growth dynamics of these countries," explains Associate Professor A. Burinskas.

According to him, even during colonization, poor countries where inclusive institutions were established eventually became prosperous. This is a significant reason why former colonies that were once rich are now poor (e.g., countries that were part of the Aztec Empire) and vice versa (e.g., the present-day United States, Canada, Australia, New Zealand).

"Where inclusive institutions were created, economic activity was promoted, and society was engaged in economic exchanges. Property rights were guaranteed and protected, the rule of law was implemented, and public goods and services were provided—things that the market economy alone could not ensure. Countries with such institutional structures experienced better economic development.

In contrast, countries with institutions focused on protecting the interests of a narrow elite failed to achieve stable economic growth. As a result, the labor and resources of the majority, exploited solely to serve the interests of a minority, did not create the necessary economic stimulus," says the economist.

According to Burinskas, the Nobel laureates' research also highlights the role of disease prevention in economic growth. In places where diseases were not combated and sufficient investment in healthcare was lacking, economic development was slower. The economists also emphasize the connection between innovation and economic growth.

"It was important that when inclusive institutions were established, property rights were guaranteed, educational institutions were developed, and entrepreneurship was encouraged. All of this contributed to technological progress and overall growth. Although not a panacea, democratic processes were also linked to the creation of inclusive institutions," the expert says.

In his view, this is bad news for the modern Chinese economy: "Historical data shows that a democratic system guarantees greater stability, certainty for future investments, and more balanced national development. Although non-democratic countries can experience rapid growth in the short term, it is more difficult for them to maintain stable growth in the long term. Regarding China, it may struggle to sustain its growth rate even by investing in innovation or new technologies. In the long run, it may become difficult to maintain a stable system that guarantees respect for property rights and ensures freedom for creative and entrepreneurial members of society."

As a positive example, the expert cites South Korea: "A country that was once authoritarian has recently become democratic and experienced an economic boom associated with industrialization, the creation of inclusive institutions, the introduction of innovations, and rapid economic growth."

Associate Professor A. Burinskas emphasizes that creating successful states with effective economies requires the inclusion of a large portion of society in economic exchanges. "Compare the economic growth in the early 20th century, when only men worked in most Western countries, with later times, when women's entry into the labor market provided a significant boost to economic growth. The more people participate in a country's economic life, the greater the impetus for development. Of course, the state's role in creating an effective legal framework for economic circulation is also important. In a successful system, production volumes increase, consumption grows, opportunities arise to establish businesses and create new jobs, advanced and innovative ideas are realized, productivity increases, and so on," recites Associate Professor A. Burinskas.

According to him, this also affects the welfare economy. It is important how the state contributes to the creation and redistribution of wealth—setting market economy rules and standards, ensuring social justice. In Lithuania, EU membership contributed to this, bringing progressive regulation along with it.

"Reflecting on the significance of the Nobel Prize laureates' work today, one can find parallels with Lithuania's current situation. As government and political agendas change, it's worth considering how we will continue to create or improve inclusive institutions ourselves. This requires political leadership. It is essential to understand and decide what our strategic national goals are and how politicians can contribute to creating more inclusive institutional structures that promote innovation and attract new investments (especially as we will soon receive less support from EU funds). These are some of the questions that need to be answered to ensure that institutions contribute to Lithuania's economic growth," concludes Associate Professor A. Burinskas.

The laureates will receive a gold medal, a diploma, and will share a cash prize of 11 million Swedish kronor (approximately 0.972 million euros). The Nobel Prize in Economics is officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. This award has been given since 1969 and is considered one of the Nobel Prizes. 

Last year, the Nobel Prize in Economics, which marks the end of the awards season, was awarded to Harvard University Professor Claudia Goldin for her work in understanding women's role in the labor market.