A few days ago it was announced that the winners of this year’s popularly called “Nobel in Economics” are three academics who have made contributions to the study of the role of institutions in economic development. Many people have commented on this and have linked it with arguments for or against certain institutions in Mexico. I think, however, that very few people have referred to one of the most important institutions: the market.
Professors Daron Acemoglu, Simon Johnson and James Robinson have shown in their studies how countries with a poor rule of law and without “inclusive” institutions tend to exploit the population and affect the possibilities of economic growth and prosperity of nations. To grow, countries need solid institutions that ensure development over time. According to the Swedish Academy of Sciences that awards the prize, these authors “have helped us understand the enormous long-term difference between countries that create institutions to extract rents from societies for the benefit of a few and countries that create institutions to in turn generate political and economic opportunities for all.”
One of the best and most famous examples of the contributions of two of these university professors is the book “Why countries fail”, which interestingly illustrates the plot with the story of two cities on the border between Mexico and the United States: Nogales, Arizona and Nogales, Sonora. With the study of this case, the authors intend to debunk development theories based on geography, culture or knowledge, since they are basically two cities with the same characteristics in these aspects and reduce the explanation of their enormous differences in quality of life. health, education and crime, to the differences in the institutions that govern on each side of the border. The authors in this work defend the need for inclusive democratic institutions for economic development, arguing that the excessive concentration of power normally affects the economic development of a country, including economic or political power, which, in Mexico, according to these authors , has seriously affected economic development prospects for many decades.
The studies of these professors are not free from criticism. From my point of view, one of the most interesting is what Bill Gates made about that book, and who has described its vision as simplistic and vague. Gates argues that the authors have left aside the clearest and most compelling theory of economic growth: the adoption of a market economy, regardless of the political system in question. Gates argues that when a country focuses on building infrastructure and improving education and uses market mechanisms for the distribution of resources, then growth is triggered. Obviously with the understanding that there are clear property rights and the rule of law, but without necessarily considering that the political settlement is decisive.
In any case, both in the studies of those now awarded, as well as their critics, a common theme is implicit: the protection and promotion of competition in the markets is a central part of the requirements for development. The market is one of the main institutions in a country and has a positive impact, not only on the well-being of consumers, but on the entire economy. The functioning of competition in the economy reinforces productivity and competitiveness and promotes dynamic markets and economic growth, which has been demonstrated with countless case studies.
The award committee mentions that reducing the enormous income differences between countries is one of the greatest challenges of our time and that the winners have demonstrated the importance of social institutions in achieving this goal. One of the main institutions to protect then to reduce the income gap must be the market.
