By Matija Šerić
Many economic experts trace the beginning of modern economic thought to Adam Smith’s seminal book, The Wealth of Nations, published in 1776. In this epochal work, Smith attempted to explain why some countries succeed in building wealth and prosperity, while others remain trapped in poverty and stagnation. Nearly two and a half centuries later, economists around the world are still searching for answers to the same fundamental questions. Nearly all nations and states strive for prosperity and well-being, yet only a few truly manage to achieve this ideal. Although economic theory offers numerous explanations and recipes for success, the reality is that the path to wealth is far from simple.
GDP – A Key Indicator
When evaluating the wealth of nations, experts most often rely on indicators such as nominal Gross Domestic Product (GDP) and GDP per capita. Total GDP measures how much a country produces in goods and services over a given period, while GDP per capita shows how that wealth is distributed among citizens — providing insight into living standards and the economic strength of a society.
The Richest and Poorest Countries in the World
In 2025, according to Statista, the top ten countries by GDP per capita are: Luxembourg ($140,940), Ireland ($108,919), Switzerland ($104,895), Singapore ($92,932), Iceland ($90,283), Norway ($89,693), the United States ($89,105), Macau ($76,314), Denmark ($74,969), and Qatar ($71,652). At the bottom are countries such as Malawi ($448), South Sudan ($334), and Burundi ($157). These figures clearly reveal the enormous gap between the rich and the poor regions of the world — a gap that, despite globalization, is not shrinking and often continues to widen.
Why are some nations poor
The Great Divide Between Rich and Poor
Even without consulting statistics, it is obvious that we live in a world of enormous social and income disparities. While some countries enjoy prosperity, others remain on its margins. Prosperity seems to favor only a few. On average, an American is ten times wealthier than someone from Central America and forty times wealthier than someone living in the poorest African nations. How has this gap between the rich and poor grown so dramatically?
Why Are the Rich Rich and the Poor Poor?
During the 1960s and 1970s, economists sought to identify the key reasons why some nations prosper while others remain impoverished. Explanations varied widely — from geography, climate, soil fertility, and natural resources to cultural and religious factors, work ethic, and adherence to basic economic principles. One of the earliest and most important explanations emphasized knowledge. Access to knowledge has often been viewed as the primary dividing line between prosperous and impoverished societies.
A Shift in Paradigm
Over time, however, perspectives evolved. A new wave of economic thinking, most notably advanced by Daron Acemoglu and James A. Robinson in their influential book Why Nations Fail, offered a deeper understanding of the causes of economic success. Their thesis emphasizes that political and economic institutions are the foundation of a nation’s destiny. Extractive institutions — built on exploitation, corruption, dictatorship, and lack of transparency — inevitably lead a society toward poverty. Inclusive institutions, on the other hand — promoting democracy, fairness, accountability, and citizen participation — create fertile ground for development, innovation, and long-term prosperity.
Inclusive Institutions
Political and economic institutions are the architects of social incentives. They shape the behavior of citizens, entrepreneurs, and political leaders. While economic institutions determine how wealth is created and distributed, political institutions set the framework in which these processes occur — the rules of the game, labor conditions, and the level of economic freedom. In other words, the political system directly shapes a nation’s economic landscape.
Inclusive institutions encourage curiosity, innovation, and freedom of expression — values that benefit both individuals and society as a whole. They allow citizens to actively participate in economic life, promote entrepreneurship, and provide equal access to market opportunities. Inclusive institutions uphold private property, the rule of law, openness to new ideas and investment, and create a fair environment in which anyone can succeed based on talent and effort.
The best countries to live in 2025
The Importance of Property Rights
Property rights enable individuals and businesses to own land and capital. Ownership allows people to produce, buy, and sell goods and services and profit from their ventures. The right to private property also includes the ability to sell that property. Without secure property rights, few people would be willing to start a business, buy a home or land, or invest in the future.
Free Markets
Free and open markets refer to the ability of legal entities and individuals to buy and sell goods and services with minimal government interference. It is a state of balance: while the government provides protection through laws and regulations, excessive regulation can make economic activity unprofitable and unattractive. Governments establish basic rules, but businesses must have the freedom to operate within them. Participation in international trade is also essential, as it requires producing goods and services that are desirable abroad. Competitiveness and quality are imperative for nations that aim to prosper.
Rule of Law
The rule of law means that the country is governed by laws rather than the whims of individual leaders, and that both government officials and citizens must follow them. It provides stability and security for economic activity. Citizens and business owners are more likely to invest for the future when “the rules of the game” are stable rather than subject to constant change or arbitrary decisions.
Limiting the Power of Elites
Inclusive political institutions distribute power and influence across society, giving citizens mechanisms to limit the authority of political elites. They do not tolerate extractive measures that favor a small privileged minority at the expense of the majority. Acemoglu and Robinson note that under certain conditions, economic growth can occur under repressive regimes — examples include China, Stalin’s USSR, and countries under military rule in Latin America during the 20th century. However, such growth is unsustainable in the long run unless the state reforms toward inclusive institutions.
Institutions Come First
Today, rich nations are wealthy because they developed inclusive institutions at some point in the last 300 years. This contradicts theories that attribute wealth primarily to geography, climate, or other external factors. Clear examples that challenge these theories include North and South Korea, Botswana and much of sub-Saharan Africa, Costa Rica and Honduras, the U.S. and Mexico, and Poland and Ukraine — countries that share similar geography, resources, and climate yet display vast differences in prosperity.
Moreover, the assumption sometimes promoted in U.S. foreign policy — that economic growth under authoritarian regimes naturally leads to democracy and freedom — does not hold, as the case of China demonstrates. Modern economists argue that economic growth without political and civil freedoms, as expressed through strong pluralistic institutions, benefits only a narrow ruling elite. For example, while living standards in China have improved over the past thirty years, inequality has grown substantially. Similar patterns occurred under military rule in Brazil and Argentina during the latter half of the 20th century.
Stable Institutions Produce Wealthy Nations
Countries such as Luxembourg, Switzerland, Norway, the U.S., and Denmark enjoy prosperity because they have maintained a stable political and economic order for centuries. Their inclusive political systems allow citizens to participate in decision-making through elections, free media, civil society organizations, and other mechanisms of an open society.
For a nation to be wealthy and enjoy prosperity, it must first establish a foundation — a robust institutional framework capable of resisting attempts by individual politicians or elites to exploit the system for the benefit of a privileged few.
References:
Acemoglu, D., James A. Robinson (2012) Why Nations Fail: The Origins of Power, Prosperity, and Poverty
https://worldpopulationreview.com/country-rankings/gdp-per-capita-by-country
https://www.weforum.org/stories/2022/07/wealth-nations-some-richer-than-others/
