How Power Shapes Policy: Lessons From The 2024 Nobel Prize In Economics

Some leaders fear that growth-focused policies will erode their political influence, which can foster the persistence of inefficient institutions. Those who benefit from the current system, even if it is economically inefficient, often have the power to block reforms. This can then lead to what the laureates call“extractive institutions,” those that allow elite groups to extract resources from society at the expense of broader economic development. While this argument is relevant, it's also true that societies across the world have seen development progress under many different types of institutional arrangements.

Path dependence explains how historical events can mold institutions in ways that make them resistant to change, even when there are better alternatives. This can be seen, for example, in the divergent economic trajectories of North and South Korea, despite their shared history before separation. Once a particular institutional path is chosen, it can become self-reinforcing, making it hard to shift to a different trajectory even when it's more beneficial.

From problems to pathways

The laureates' work doesn't just diagnose problems; it also illuminates pathways for positive change. They show how shifts in power dynamics can create opportunities for institutional reform. The end of apartheid in South Africa in the early 1990s, for instance, opened the door for significant changes that have shaped the country's development trajectory.

The Scientific Background paper from the Nobel Committee explores how key concepts from the laureates' work could also transform development practice. It cites the World Bank's 2017 World Development Report on Governance and the Law , which offered three guiding principles for development practitioners, each of which resonates with the Nobel laureates' findings:

Focus on the function of institutions, not just their form

This idea aligns with Acemoglu, Johnson, and Robinson's research findings on how what seems like good economics doesn't always translate into good politics. To be effective, policies must guarantee credible commitment, support coordination, and promote cooperation. Consider, for example, the contrasting cases of Mongolia and Chile on how they manage their natural resource revenues. Despite similar institutional rules on paper, Chile's actual expenditure patterns reveal a stronger commitment to compliance. This is consistent with the laureates' work that shows it's not enough to just have the right institutional forms; what matters is how these institutions actually perform their expected function.

Address power asymmetries, not just capacity building

This concept reflects the laureates' emphasis on how power dynamics shape policy outcomes. The distribution of power in the policy arena can be a fundamental enabler of – or constraint to – policy effectiveness, impacting broader economic development. For example, in the early 2000s, Rwanda implemented reforms in its coffee sector, shifting from a state-controlled to a market-oriented system. The government carefully managed this transition by creating farmer cooperatives and providing support to smallholder farmers. This approach helped balance power between farmers, processors, and exporters, leading to improved coffee quality and higher incomes for farmers.

Consider the role of law in shaping behavior, not just establishing rules

This principle echoes the laureates' work on how institutions can shape incentives, behavior, and policy outcomes that go beyond simply setting rules. A powerful example is the introduction of electronic voting in Brazil in the late 1990s . This seemingly technical change in voting procedure led to increased participation by less-educated voters, which ultimately resulted in policies that were more favorable to the poor, such as increased health spending.

Taking power seriously

As we confront global challenges like persistent poverty, widespread inequalities, and climate change , we must embrace new approaches to both development thinking and development practice that engage seriously with notions of power.

The recognition of this work by the Nobel Committee challenges us to think more deeply about the political economy of the countries we work in and to design interventions that not only make economic sense but also address the root causes of persistent development concerns.

For development practitioners, this means actively incorporating power analysis into program design and implementation, making them politically viable for long-term, sustainable change. To do this, we must have a nuanced grasp of local power dynamics, historical contexts, and the intricate interplay between formal rules and informal norms. As we push for positive development outcomes, our work can no longer be isolated from the microeconomics of power.

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