Gratitude: Nobel Prize Awarded for Wealth Inequality Research

Evelyn Jacks

With the feasts of Thanksgiving behind us in Canada, we begin the fall with gratitude for so much, not the least of which is that we live in a peaceful democracy.  Notably there is a connection between that and the Nobel Prize for economic sciences, awarded on Thanksgiving Day this year.  It recognized three laureates for their research into why some countries are rich and some are poor.  Their conclusions could have implications for the advice tax and financial advisors give as well. 

British-Americans Simon Johnson and James Robinson, and Turkish-American Daron Acemoglu were lauded for the conclusions of their research: “Societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better.” 

They reached this conclusion by looking into various political and economic systems that were introduced by various colonizers.  They found that while some had the objective of exploiting the people and the natural resources of the colonies they dominated (which made those rich countries poorer for the short-term gain of European powers).  However, those that set up inclusive political and economic systems, established long term economic gains for the countries they colonized as well as governments back home.

Fast forward to today when the richest 20 percent of countries are 30 times richer than the poorest 20 percent.   Reducing these vast differences between nations is a significant challenge.   It turns out that neither culture or geography have as big an influence in closing the income and prosperity gap as societal institutions do, according to the laureates’ research.  Amongst their findings:

Colonization Created A Reversal of Fortune.   “One important explanation for the current differences in prosperity is the political and economic systems that the colonisers introduced, or chose to retain, from the sixteenth century onwards.”  The laureates demonstrated that this led to a reversal of fortune. “The places that were, relatively speaking, the richest at their time of colonisation are now among the poorest.”

But something else also happened.  Where settlers then introduced “inclusive institutions” the countries that were poor when they were colonised, over time, generally had in a more prosperous population.

Settler Mortality Thwarted Economic Prosperity.   The researchers also noted that “The more European settlers, the greater the probability of establishing economic systems that promoted long-run economic growth. The places where diseases were most dangerous for Europeans are where we now find dysfunctional economic systems and the most poverty, as well as the greatest corruption and weakest rule of law.”

Political Reforms are Difficult. It could therefore be said that, “powers that promoted fundamental economic freedoms and the rule of law were good,” and that “a new political system, which allows the population to replace leaders who do not keep their promises in free elections, would allow the economic system to be reformed.”   The difficulty lies in convincing those in power to give it up.     

For these reasons, there are few quick fixes for countries that lag behind.  According to Professor Johnson, in an interview with the Nobel Foundation, “So much of that poverty (in countries that lag behind) is unfortunately the result of long standing institutional arrangements, political and economic.” 

Professors Acemoglu and Robinson co-wrote the bestseller, “Why Nations Fail:  The Origins of Power, Prosperity and Poverty while Acemoglu and Johnson “Power and Progress:  Our One-Thousand Year Struggle Over Technology and Prosperity”.

Bottom Line.  Reading about this award provides some fascinating insights that have relevance for many of the political and economic issues of the day.   The Nobel Laureates have demonstrated a link between societal institutions and the degree to which they provide the opportunity for education, the freedom to choose one’s profession and to have political rights influences economic prosperity could assist in accelerating income growth between the richest and poorest nations.

Back home, meanwhile there are similarities in planning for the prosperity of individuals and families, and here tax and financial advisors can be of assistance. Helping people save for education to attain their desired professions and as well as encouraging people to exercise their rights to vote, all are part of future economic prosperity in our society. 

Educational Resources:  It’s a great way to give back – to teach, to advocate and to steward wealth potential.  Consider becoming a Real Wealth Manager  - an educator, an advocate and a steward of wealth potential – can be of assistance with at least the initial steps to a prosperous future.