What creates prosperity?

Shanghai is part of one of the most innovative, and prosperous, regions in the world. Getty

It isn’t an easy task to articulate what a vision for prosperity looks like in an era marked by trends such as climate change, advances in generative AI and entrenched conflicts. Disruptive forces make forecasting almost impossible, because it becomes increasingly difficult to rely on past performance as a guide.

We have, however, had another strong reminder of the importance of trying to understand what creates prosperity. This year’s Nobel laureates for economics have been recognised for their research on the impact of the nature of national institutions on levels of prosperity. Essentially, what Daron Acemoglu and Simon Johnson from the Massachusetts Institute of Technology and James Robinson from the University of Chicago have shown is how the economic path that European colonisers set their colonies on continues to have a profound effect on these countries’ levels of prosperity today.

According to the Royal Swedish Academy of Sciences, the laureates found that when inclusive institutions were introduced in countries that were poor, over time this resulted in a generally prosperous population. However, some countries became trapped in a situation with extractive institutions and low economic growth (although this latter situation sometimes led to revolution in those nations).

“Reducing the vast differences in income between countries is one of our time’s greatest challenges,” said Jakob Svensson, chair of the Committee for the Prize in Economic Sciences. “The laureates have demonstrated the importance of societal institutions for achieving this.”

James Robinson of the University of Chicago is sharing the Nobel prize with Daron Acemoglu and Simon Johnson. AFP

Prosperity is about more than just landing on the best-sounding policies and rhetoric

How do we meet this challenge then, when we cannot be sure of the exact strategies that will work? The truth is that there is no one-size-fits-all approach. The lessons of globalisation have taught us this. Each country must seek its ideal way forward. The good news is that for every nation that might not have worked out a formula for prosperity, there is another that is making progress.

According to Zsuzsanna Hargitai of the European Bank for Reconstruction and Development, Uzbekistan is currently a bright spot for opportunity. “Investment in infrastructure is still there. There is [also a] readiness to accept the private sector,” she said at the Superbridge Business Summit in Dubai this week.

Ms Hargitai added other factors such as access to critical raw materials and resources, which Central Asia is rich in, a strong market and investment in education. She also advised that, in addition to the importance of institutions, using human capital effectively and improving public health are critical to prospects of prosperity.

Equally, India is showing its own path to greater prosperity. At the summit, Bharat Shah of ASK Investment Managers said the country had “the best regulator of banking in the world” and praised its leadership for the promise that it still holds.

Several other G20 countries are showing positive signs, too. Takashi Maruyama of Asset Management One said that even though Japan is comparatively weak on innovation, its advantage is its stability – particularly at a time of great uncertainty around the world. China, by contrast, has few issues around innovation, despite the prognosis of a slowing rate of growth.

A certified remote pilot trained under the government-backed 'Drone Sister' programme operates a drone to spray liquid fertiliser over a farm in Pataudi, northern India. AFP

Qing Liu of the National Innovation Centre Par Excellence talked about the scale of the so-called innovation institutions in the Yangtze Delta, a region that includes Shanghai. The region boasts $4.1 trillion in gross domestic product – which is almost a quarter of the national output – and has an integrated innovation ecosystem that bridges academia with industry. The ideas generated in this part of the world are, for good reason, generating tens of millions of dollars in revenue annually.

On the flipside, there are confusing messages coming out of the world’s largest economy. Is achieving prosperity actually a priority for America’s leaders? Donald Trump and Kamala Harris, who are locked in battle for the White House, have on paper listed their ambitions for a more prosperous future. Yet both candidates have spent a large part of their campaigns focusing on the negatives of each other’s merits as a future leader of the US.

Similarly, in the UK, Prime Minister Keir Starmer’s Labour government has spent weeks hammering the previous administration for destroying economic value and limiting opportunity, warning Britons that they would need to face higher taxes amid weaker institutions and public services. It is to this maelstrom that they hope to attract international investment.

Europe is also struggling with its own definition of prosperity. French President Emanuel Macron, for example, rails about the dangers to prosperity while many in his country might be asking exactly where this prosperity he fears losing is.

It might be worth considering that prosperity is about more than just landing on the best-sounding policies and rhetoric. It is as much an ideology as populism or nationalism might be. And if a country doesn’t build up its institutions and peoples based on a vision for prosperity, then it will probably never come close to achieving it.