The many books and articles by Daron Acemoglu and Simon Johnson (both of MIT), and James Robinson (University of Chicago), this year’s winners of the Nobel Prize in Economics, demonstrate the importance of societal institutions for a country’s prosperity. Nations with poor rule of law and institutions that exploit the people do not create growth or change for the better.

Working alone and together, the three economists highlight the distinction between inclusive institutions, which promote widespread economic participation and growth, and extractive institutions, which concentrate power and wealth in the hands of a few.

Exploitation by political or economic elites for personal or regime interests may produce short-term gain, as under Stalin’s five-year plans or Deng Xiaoping’s get-rich strategy (which followed Mao Zedong’s excesses in the other direction), but over time leads to diminishing returns and stagnation.

The opposite of such zero-sum exploitation is an orientation that seeks mutual gain — for all citizens and for allies, such as the Marshall Plan for European Recovery.

Acemoglu and Robinson find that Karl Marx and the influential left-leaning French economist Thomas Piketty were “led astray” by their disregard for “the key forces shaping how an economy functions: the endogenous evolution of technology and of the institutions and the political equilibrium that influence not only technology but also how markets function and how the gains from various different economic arrangements are distributed.”

According to Acemoglu, authoritarian countries face three obstacles to economic growth:

• a tendency to become more authoritarian;
• a tendency to repress what Joseph Schumpeter termed “creative destruction”; and
• Their persistent instability due to internal conflicts.

China has managed to achieve significant economic growth because it “picked the low-hanging fruit from the world technology frontier,” he writes. That kind of growth, however, may not last unless economic institutions in China lift restrictions on economic creativity.

Some countries, such as Saudi Arabia and post-Soviet Russia, became trapped in a cycle of extractive institutions producing low economic growth. Without oil, Saudi Arabia would be like a poor African country, while the only things that keep Russia afloat are high prices for natural resources and clever handling of the media.

The introduction of inclusive institutions would create long-term benefits for everyone, but extractive institutions provide short-term gains for those in power. Elites become reluctant to share their wealth and perks unless they feel very secure — or unable to suppress mass unrest.

As long as the political system guarantees today’s elites will remain in control, skeptics will distrust regime promises of future economic bounty. This is why no improvement occurs.

This inability to make credible promises of positive change can also be used to explain why democratization might occur. When there is a threat of revolution, the people in power face a dilemma over whether to try to placate the masses by promising economic reforms when they know the population may reject them.

This impasse could leave the regime with no choice but to transfer power and establish democracy. But this has not happened in Vladimir Putin’s Russia or Xi Jinping’s China. Nor does it seem imminent in Iran, North Korea, or lights-out Cuba.

In the 1980s and 1990s, I found many people in Russia/USSR wanted reforms that would make their country more like Sweden. But Acemoglu, Robinson, and Thierry Verdier in Paris caution that “it may be precisely the more ‘cutthroat’ American society that makes possible, the more ‘cuddly’ Scandinavian societies based on a comprehensive social safety net, the welfare state and more limited inequality.”

Many “countries may want to be like the ‘Scandinavians,’ with a more extensive safety net and a more egalitarian structure,” but if the US shifted from being “cutthroat” capitalist, the economic growth of the entire world would shrink.

The Scandinavian systems are not conducive to the creative destruction that ignites and sustains innovation. For now, the Putin and Xi systems are certainly cutthroat, and their dictatorships smother economic growth as well as human freedom and development.

Walter Clemens is an Associate at the Davis Center for Russian and Eurasian Studies, Harvard University, and Professor Emeritus at the Department of Political Science, Boston University. He wrote Blood Debts: What Putin and Xi Owe Their Victims (Washington DC: Westphalia Press, 2023).

Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

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