Do you think microcredit - brought to the fore by the 2006 Nobel Peace Prize awarded to Mr Muhammad Yunus - is a shortcut to economic development? (Miguel López, Buenos Aires, Argentina)

I don't think so. In general, I am skeptical of "shortcuts" to economic development. Economic development is a set of interrelated social and economic changes, and it is supported by a set of complementary institutional structures and policies. Thus "magic bullets" are unlikely to exist.

Having said that, certain micro institutional innovations, such as microcredit, can certainly have a major impact on the economic opportunities and welfare of many citizens. The question therefore is whether microcredit has played this beneficial role. Here the early evidence suggests that microcredit has had a small-scale beneficial impact.

However, I am not aware of any evidence that suggests that microcredit has induced a set of changes that are capable of lifting the living standards of a large fraction of the population. Such changes require the entry and financing of relatively large-scale firms that can employ a significant number of workers, contributing to labor demand and wage earnings. By its very nature, microcredit does relatively little of this.

Africa is richer in natural resources than East Asia, but the economic performance of the former is much worse than that of the latter. Is Africa’s situation a legacy of long and harsh colonial exploitation?

Yes and no. The research that I have done with Simon Johnson and James Robinson and research by others suggest that the African economic tragedy is closely related to the weak African institutions and governance problems. These problems, in turn, are at least in part a legacy of the colonial heritage of African nations, not only starting with their "official" colonization in the 19th century, but going back to the slave trade and the relationships between Europeans and Africans as far back as late 15th century. Work by Nathan Nunn of the University of British Columbia, for example, shows that African nations that have supplied more slaves during the colonial times have significantly worse economic performance today.

This evidence, however, does not imply that Africa is poor today because of colonialism. Almost all of the evidence is comparative in nature and shows that African nations are poor relative to other former European colonies that inherited different types of institutions (for example the United States or Australia). This evidence therefore does not show that Africa is poorer today than it would have been without contact with the Europeans. We simply do not know what the "counterfactual" history of Africa would have been had they remained militarily, technologically and culturally isolated from the West.

Democratic India is growing at a slower pace than dictatorial China. Examples of fast-growing undemocratic regimes abound, from South Korea and Chile in the 1970s and 1980s, to Russia and Singapore today. Does it mean that totalitarian regimes are good for the economy? (Burt Lynch, San Francisco, CA, USA)

This is a central question for current political economy. There are many examples of growth under undemocratic regimes ranging from early South Korea to Chile, from Singapore to current-day China. There are also many undemocratic regimes that have been unmitigated economic disasters, including the Philippines under Marcos, Iraq under Hussein, the Congo under Mobutu, Zimbabwe under Mugabe. On average, it seems that there are no striking differences in the economic growth performance of democratic and non-democratic regimes in the postwar era. This is in itself surprising, since we would have expected the democratic regimes to grow faster.

I believe that the reason why the so-called democratic regimes of today do not grow as fast as we would have expected them to has two reasons: first, all political regimes create various sorts of distortions; democracies often pursue populist policies that are not conducive to rapid capital accumulation and may even discourage technological development. In fact the examples of Singapore, China and Chile under Pinochet are all examples of regimes that have clearly aligned themselves with parts of the business elite, thus providing them relatively secure property rights, low taxes and insurance against populist policies. To the extent that this reason is important, it suggests that there may sometimes be a trade-off between political rights and economic performance.

The second reason why many democratic nations are not economically more successful than they are, on the other hand, denies the presence of such a trade-off. According to this view, which I have worked on myself and find quite plausible, the source of disappointing performance in democratic countries may be because these are typically "captured" democracies. Societies that are captured democracies possess certain functioning democratic institutions, but the traditional elites continue to have disproportionate power and are able to distort democratic policies, sometimes at significant economic costs. Postwar Mexico and Brazil (during its democratic periods) would be examples of such captured democracies.

In your research you seem to argue that the nature of colonial regimes is the driving force of economic development. But aren’t you underestimating the role of active policies? For example, I am thinking of the Russian privatization, which opened the country to entrepreneurial spirit... (Susannah Prize)

My research does indeed emphasize the colonial origins of the current institutions. But it does not do so at the exclusion of other factors. To make progress in social sciences, we often need to focus on a specific mechanism abstracting from the rest. My emphasis on the role of institutions and their colonial origins is in this spirit. This research suggests that colonial origins are indeed very important, but still account for no more than 25-30% of the variation in current-day institutions we observe. Many other factors, ranging from factor endowments, international relations, the role of leaders and luck play an important role.

For example, recent research by Benjamin Jones of Northwestern University and Benjamin Olken of the Harvard Society of Fellows documents how national leaders play an important role in the economic growth experiences of countries. However their most interesting result is that the effect of leaders is much stronger in nations where underlying institutions are weak. It seems like strong, functioning institutions are able to withstand the challenge of weak and bad leaders, but this is not so in institutionally-weak, and especially undemocratic societies.

A final comment is that while I believe policies matter a lot and are shaped by many factors, one of the channels through which institutions and historical determinants of institutions have an effect even today is by influencing the set of policies pursued by various nations.

Max Weber put the Protestant ethic at the core of capitalism. In your view, does his approach help explain Europe’s economic rise? (Peter Huber, Germany)

I don't think so. There is some evidence that religious beliefs shape individuals' attitudes in the marketplace. Thus we should not discount religious and cultural factors altogether. Nevertheless, my own research and research by others suggest that religious differences have not been important in the early stage of European modernization, have played a minimal role during the Industrial Revolution, and have played little role in the development experience of former European colonies.

Lobbying by vested interests has become a major obstacle to economic growth in many developed economies. What policies could help get rid of this obstacle?

I believe that this has been the case for a long time. Barriers by vested interests and established groups that prevent introduction of new technologies or the startup of new firms are among the most important obstacles to economic growth. Economic growth takes place through Schumpeterian creative destruction, and this process creates winners and losers. When losers are politically powerful, they will attempt to prevent this process of creative destruction. Recognizing the importance of this obstacle to economic growth is by itself an important step.

How can it be prevented? Not easily. What enables such obstacles is that the traditional elites, who stand to lose from modernization and economic progress, are politically strong to start with. It is not easy to remove their political strength. Nevertheless, a more open and democratic political system, that makes the relationship between the economic elite and the political elite more transparent and gives a voice to newly emerging groups, would make it harder for traditional elites to block technological and economic progress.

To prevent such gridlocks might also be one of the roles of international organizations such as the World Bank. Currently, international organizations view themselves more as "technocratic advice givers". But I believe that most dysfunctional policies in less-developed countries are not adopted because their politicians and bureaucrats don't realize that these policies will have disastrous economic consequences (after all, who believes that 500% inflation is good for economic growth?). Instead these policies are implemented because of political pressures. When international organizations recognize the political dimension and change their relationships with their client countries accordingly, we will have further tools against the grip of traditional elites in these countries. Unfortunately, international organizations such as the World Bank and the IMF have not taken up this challenge yet.

Could you please highlight the economic factors that determined the fall of empires such as the Spanish, Portuguese and British ones? (Fernando Silva, Madrid, Spain)

I believe it is difficult to give a single reason that could explain the decline of all of these empires. The story is simpler for Spain and Portugal. Their absolutist state structure starting in the 16th century was initially beneficial, both because it enabled them to organize a vast overseas empire and because the crown and groups aligned with the state benefited most from the rents created by this overseas empire. But this same factor was also the cause of their demise. Contrary to Britain or the Dutch Republic, where colonization enriched new groups of merchants, who could play a more important economic role and demand and obtain political change, the Spanish and Portuguese regimes remained stagnant and then faced crises. At a simple level, we can therefore say that they were victims of their own early success under absolutist regimes.

The decline of the British Empire is more limited. Britain lost its colonies, but so did all other European countries. Britain lost its international technological leadership, but still remains a relatively rich country. It would be interesting to study the causes of the relative decline of the British economy more systematically (and there is a literature on this), but my guess is that the causes of this process are different from the causes of the decline of the Spanish and Portuguese empires.

Do you think that, after the failure of the WTO Doha Round, the “politics of trade” will be supplanted by more sensible approaches to world development?

I hope so, but I am not sure. Politics of trade, today, favors the more developed nations. Greater international trade should help all countries in the world, but would probably be most beneficial to the relatively poor nations. But the trade restrictions in the European Union and the United States still prevent international trade between poor and rich countries. It is difficult to forecast what the exact effects of lifting these various trade restrictions would be, but like most economists, I believe that they would be beneficial to world growth and fuel economic growth in many currently less-developed nations.

Does your research provide any insight into the relationship between religious radicalism and poverty in Arab countries?

This is not a topic I have studied academically. The existing evidence I have seen points out that various factors ranging from poverty, repression and previous religious indoctrination have all played a role in the unparalleled increase in religious fundamentalism and radicalism we observe today.