I admit it: I tend to make things complicated. That’s not always popular, especially not with my son, who asked this very basic question while we were already halfway out the door to soccer practice.

Perhaps my aversion to simple answers is due to my own inability to formulate complex thoughts succinctly.

Or maybe it’s my mistrust of explanations that claim there is one clear truth. As if one singular truth needs to be found, known and boldly stated.

“That’s an important question,” I replied. “It’s not easy to answer quickly. There’s the Industrial Revolution, the legacy of colonialism, the global economic order, wars… It’s complicated. Education plays a role. Innovation. Distribution.”

My son nodded politely and left.

Children sense when adults improvise. My uncertainty, however, became an opportunity to fill my knowledge gap with some research.

Wealth has a History

We know that the question of the causes of wealth and poverty in nations cannot be answered monocausally. It always depends.

Accordingly, different complementary or competing perspectives have become established in research. However, there is one general point of agreement: Wealth has history.

This history rarely begins with an investing mindset, nor is it friendly.

Colonial expropriation, slavery, violence, unbalanced trade, and financial treaties created a world in which some countries built up some industries early on, while others supplied raw materials and accumulated debt. A division of labor that remains to this day.

Prosperity is path-dependent. It is not only created — it is also extracted. This can be seen in the example of Great Britain, which industrialized in the late 18th and 19th centuries, while India was deliberately deindustrialized and relegated to the role of a supplier of raw materials.

Today, research on global value chains describes a similar pattern: production is spread across borders, but profits are concentrated. Countries on the periphery often remain in low-margin activities such as extraction or assembly, while technology, finance, design, and brand ownership remain in the center.

This is where institutions come into play.

Institutions are not a Detail

One of the most influential schools of thought on prosperity comes from neo-institutional economics, shaped by the work of Daron Acemoglu and James A. Robinson, who received the Nobel Prize in Economic Sciences in 2024 together with Simon Johnson. Their argument is straightforward: Institutions matter.

An example that is often cited is a comparison between South Korea and Ghana: Both countries had a similar income level in the 1950s. However, today South Korea's per capita income is many times higher.

Balanced tax systems and guaranteed property rights which ensure clear rules, security and participation are parts of well-functioning institutions that in turn enable innovation and growth.

Where such institutions are weak, development and social mobility are hindered. Power and wealth are then concentrated in the hands of the few.

But even if inclusive institutions are a key factor for prosperity, they do not emerge in a vacuum, but from historically evolved power relations. Only when state and society are balanced in a dynamic equilibrium can inclusive institutions emerge and assert themselves. Sustainable governance structures cannot simply be imported or installed.

The Ladder has Been Pulled Away

Even where states try to follow this institutional path, they are now coming up against new limits: so-called "premature deindustrialization". Economists such as Dani Rodrik show that many countries no longer have the opportunity to follow the classic industrialization path. They are losing industrial jobs before they have even reached a medium income level - thwarted by global competition, cheap imports and volatile capital markets. In many sub-Saharan African countries, the share of the industrial sector never reached more than 10-15 percent and is already falling again in some cases - much earlier than in Europe or East Asia historically.

However, not all obstacles to development are political or economic.

Geographical Indicators

An older perspective is the geographical-ecological school of Jared Diamond or Jeffrey Sachs. This school of thought argues that geographical factors such as climate, disease burden, such as malaria in tropical regions, and the availability of natural resources or access to trade routes are decisive factors for a nation's development opportunities.

In recent years, countries which have already faced disadvantageous geographical conditions are now also those most severely affected by the effects of climate change. Droughts, floods, and extreme weather events destroy livelihoods and infrastructure, reinforcing cycles of poverty.

Ideas are Powerful

Sociological approaches also emphasize the role of ideas, values, and cultural attitudes in economic development.  

American and Israeli economic historian Joel Mokyr argues that the rapid economic growth in the western world beginning in Great Britain in the 18th century was made possible through cultural appreciation of innovation, scientific research, and technological progress. In pre-modern Europe, technical knowledge was not only developed, it was socially legitimized. Inventors were seen as useful. American economist Deirdre McCloskey emphases the role of civic virtues and a changed rhetoric about trade and entrepreneurship.

There are also critical voices that fundamentally question the overarching understanding of economic development. They see it as a westernized model of progress and prosperity that suppresses other ways of life. Geographer natural resources specialist Kamanamaikalani Beamer shows that pre-colonial societies had regenerative economic systems that were based on principles of communal prosperity. These societies represent an alternative to the material, growth-centered concept of prosperity.

Overall, current research shows a complex interplay (what a joy!) of institutions, historical structures of power and violence, geographical conditions, and cultural values.

And now? How should I have answered my son's question about rich and poor countries? That is another difficult question that I have to think about first.