This year’s Nobel awards in economics raise critical issues about the future of the world.

I was not alone with high hopes when the Soviet Union collapsed. It has been good to see various nations leave the yoke of the Soviet Empire and move towards liberal democracies with thriving economies although sometimes it has been two steps forward and one back. But that has not happened to Russia itself, despite it having a comparatively well-educated population and a large economy. It remains nowhere near a liberal democracy and any economic success has been correlated with high oil and gas prices.

Among others who were disappointed was a British economist and political scientist, James Robinson, currently at the University of Chicago. He has just been awarded a Nobel laureateship in economics jointly with Turkish economist Daron Acemoglu and British economist Simon Johnson of MIT. With Ronald Coase, Douglass North, Elinor Ostrom, and Oliver Williamson – also Nobel Laureates – they have been key contributors to the ‘new institutionalism’, which focuses on the contribution of institutions (the social and legal norms and rules) that underlie economic activity.

The approach is well illustrated by the 2018 Why Nations Fail by Acemoglu and Robinson. Like all their books, it is rich in ideas. I focus here on the light it sheds on the Russian experience.

What I underestimated at the time of the Soviet collapse was the importance of institutions such as the rule of law, restraint on arbitrary government, lack of corruption, secure human rights, sound property rights and sustainable fiscal practices (including a robust tax system). They are so integral to many of the economies I have studied closely that I overlooked their importance.

The Soviet empire generally lacked them. Even today, the ‘liberated’ nations to its west struggle, some lapsing into authoritarianism (currently Hungary) and finding it difficult to eliminate corruption (Ukraine is not alone in this respect).

Perhaps it is not so surprising. It took the prosperous Western economies centuries to evolve their current institutional arrangements and they are still not always perfect. What is sad though, is that Russia has made so little progress compared to the years when it dominated the Soviet Union.

The Russian economy is distinguished from the ex-Soviet economies to its west by being based upon enormous mineral reserves – especially oil and gas. The success of these quarry industries crowds out more conventional exportable industries, such as farming and manufacturing (as explained by the ‘Gregory effect/Dutch disease’). Resource-based industries produce substantial rents and there is more private profit to be made from wrestling over the allocation of those rents than by producing things, especially when the members of an authoritarian government are syphoning off some for their private enrichment. The book describes the resulting political economy as ‘extractive’.

Contrast with New Zealand. Admittedly we inherited our institutions from the long-evolving British ones. (Acemoglu and Robinson see their foundation in the 1688 Bill of Rights.) But we are a resource-based economy too. Our resources – sun and water (New Zealand soils are not particularly fertile) – are not as easily monopolised as those found down a well with their associated pipelines. Instead, the rise of the mixed family farm, following the introduction of refrigeration in 1882, dispersed the resource rents across much of the population, shaping the political economy of New Zealand into a popular liberal state with a market economy, which the book describes as ‘inclusive’.

There was almost an important exception. Initially, prosperous sheep farms were not viable north of Taupo because of bush sickness and footrot. Instead, late nineteenth-century Auckland developed around the extractive industries of gold, kauri gum and kauri timber. Fortunately for Auckland, as they became depleted, the railway network facilitated dairy farming in the Waikato region while, as its port became increasingly dominant, local manufacturing prospered. Even so, today a residual of those ‘wild west’ times is still evident in the more commercially vigorous Auckland. (This story is elaborated in Chapters 13, 16 and 18 of Not in Narrow Seas.)

Acemoglu and Robinson argue that inclusive political and economic institutions lead to a prosperous economy, while where the institutions are ‘extractive’ there is poverty and economic failure. A key difference is that the former allows initiative and innovation, whereas the latter stifles it.

But is an inclusive political economy necessary for economic prosperity? Acemoglu admits that China appears to be an exception suggesting its economic success may be but transitory. In my view China’s success has been the result of technology transfer from the West and the economy may not be sufficiently innovative to sustain its growth.

We must be careful though with this explanation. Concentrated effort enabled the Soviet Union to develop nuclear weapons and the sputnik. But it was not generally pervasive. Clearly China’s development of electrical vehicles is impressive, but widespread innovation has been less evident. I await to learn more of the new institutionalists’ explanation for the China anomaly. A major component of its current economic struggle has been a bursting of a Ponzi-type property boom (although one might argue that the finance boom in the West is similarly artificially stimulative). Certainly, China’s government has not shown the degree of arbitrariness and corruption evident in Russia – not as yet.

Both China and Russia show considerable outmigration. The success of those migrants rules out that their countries face some cultural or racial handicap. The outflow of so many able, energetic well-educated Russians to the West adds to my pessimism about its future. Instead of the prosperous inclusive society which one hoped for after the collapse of the Soviet Union, it is likely to remain exclusive and extractive, even after Putin, with its elite fighting over the resource rents. That is disturbing because of the destabilising impact on the world order. That is sad because I so much admire Russian contributions in art, literature, mathematics, music, science and – yes – even economics. Too often though, recently these have been by its refugees in the West.

Why Nations Fail and the other works the three have published are worthy of Nobel recognition. The New Institutionalism reminds us that economics is not just about narrow technical markets but about the wider social context in which an economy operates. Adam Smith, David Ricardo, Karl Marx, Maynard Keynes and Joseph Schumpeter – among so many of our great economists – would applaud.