The Nobel Committee validates that institutions matter
Economist Intelligence: EIU
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Here at EIU, we know firsthand that institutions matter. But nothing is quite as validating as having the Royal Swedish Academy of Sciences awarding the Nobel Prize in Economic Sciences to Daron Acemoglu, Simon Johnson and James Robinson “for studies of how institutions are formed and affect prosperity”. Similar evidence can be drawn from our Democracy Index, our Operational Risk Index and our Business Environment Ranking tool.
Last week we published two research reports on this subject which demonstrated the predictive power of our Business Environment Ranking tool. The first demonstrated the relationship between our business environment scores and economic growth finding that improvements in our index are a statistically significant leading indicator for stronger growth in real GDP per head—in the two decades since it began, our index has successfully predicted where growth can be expected. Our second paper explores which geographies improved their business environments the most between 2003 and 2023, and which are best placed to improve further in 2024-29.
Messieurs Acemoglu, Johnson and Robinson argue that countries with better institutions, more secure property rights and less distortionary policies will invest more in physical and human capital, and will use these factors more efficiently to achieve a greater level of income. EIU’s index is a broad measure of the attractiveness of the business environment, examining 91 indicators across 11 categories: the political environment; the macroeconomic environment; market opportunities; policy towards free enterprise and competition; policy towards foreign investment; foreign trade and exchange controls; taxes; financing; the labour market; infrastructure; and technological readiness. Our work and that of Messieurs Acemoglu, Johnson and Robinson validate that the quality of institutions that support property rights of both domestic and foreign investors are a central component of future prosperity.
The EIU's political effectiveness sub-category that includes scores on policy implementation, the quality of the bureaucracy and the extent of corruption, as well as assessments of the rule of law and property rights is also predictive. Not only does our index show which countries and regions have benefited the most by improving their business environment, but our forward-looking forecasts are a good indicator of which geographies are poised to have the best and most treacherous business climates and growth prospects in the future.
Hearty congratulations to Messieurs Acemoglu, Johnson and Robinson, from all of us here at EIU.
Explore EIU's business environment rankings from March and October 2024 to learn more.
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UK economic policies have come home to roost, being on par with Venezuela, Wake up before you self destruct. You are not producing enough North Sea oil to survive Venezuelan style squandering of assets.