A fence separates two cities—both called Nogales—on opposite sides of the border that separates the United States and Mexico. But the disparity in economic conditions is stark. On the north side, Nogales residents have access to quality education and healthcare. Meanwhile, south of the fence, poverty runs rampant, and public services are shoddy.
The search for answers as to why some countries are rich and others are poor led three economists to be conferred one of the world's highest honours this year: The Nobel Prize in Economics. The work of Daron Acemoglu—the first Turk to win it—along with Simon Johnson and James Robinson, both Americans of British descent, primarily focuses on the impact of European colonialism on development. They examined the history—linking their findings with economic and political theories—and discovered that different colonial roots on either side of the now-famous fence between the US and Mexico could explain the Nogales wealth disparity.
Pattern discovered
Through their research, they discovered a pattern that could be applied to other countries, offering a broader understanding of the importance of institutions and the rule of law in fostering development and prosperity.
The two Nogales were divided in 1918 when the fence was erected to separate the US-Mexico border after repeated conflict, injuries, and deaths on both sides. Over time, the economic gap between the two cities grew wider. The laureates analysed the patterns established in the colonial era to gain insight into why.
When European armies spread across the globe, they sought new areas to settle and natural resources to exploit. In sparsely populated areas, European colonial settlers faced minimal resistance. They had ample space, and these regions had a higher influx of Europeans, who built robust institutions that ensured political and economic rights for all citizens.
But in areas with dense indigenous populations, resistance was stiffer, which meant fewer Europeans came to settle there. Fewer colonists meant fewer institutions, and fewer institutions meant less development and social and political rights, making it easier for these areas to fall into poverty. And so it was these differences—initially population density and subsequently how colonisers dealt differently with the land and its people—that went on to shape the futures of different parts of the world.
Importance of institutions
For Nogales, Spain colonised the south, establishing Spanish institutions that became part of Mexico. The north fell under American sovereignty and developed strong institutions and political freedom. Prosperity soon followed.
The importance of institutions really started to show with the advent of the Industrial Revolution at the beginning of the 19th century. Where they were more firmly established, development came more quickly, which helped boost prosperity via industrial progress.
Democracy also was a huge factor in economic development, the researchers found. Political systems that have to answer to the public at the ballot box are more likely to earn public trust and enact economic reforms. In this system, leaders who don't perform can simply be voted out. But in undemocratic countries, people often take to the streets to pressure their rulers to effect change. While protests can be peaceful, they oftentimes are met with violence.
And finally, the laureates highlighted three factors that help determine the right environment for prosperity.
1. Whether the government is for the people or the ruling class.
2. The extent to which the people can gather and protest and ultimately have a say in government decisions.
3. Governments' commitment to follow through on promises
This model explains the spread of democracy in Western Europe during the late 19th century and why it has flourished in some countries and not in others. The laureates' work provides invaluable insight into the causes of global wealth disparities, the colonial roots of these inequalities, and the importance of democracy in promoting economic growth and national development.
