Today, we're going to take a brief look at the importance of institutions.
This will be brief in that we're not going to look today --
at which institution are important,
and we're not going to try and explain the mechanisms by which institutions work.
Instead, what we want to do is offer the big picture:
Why do people study institutions?
Why do people think that institutions are important for economic growth?
Let's take a look.
North and South Korea provide almost a perfect natural experiment
demonstrating the power of institutions.
In 1944, North Korea and South Korea were very similar.
They had the same people, the same culture,
the same language, the same history, --
very similar economies.
If anything, North Korea was a little bit more industrialized,
South Korea, a little bit more agrarian.
Then, in 1945, the country was split --
and North Korea chose communism, --
a totalitarian state,
centrally planned, centrally directed;
no private property rights,
very little room for private initiative,
no free press.
South Korea, broadly speaking, chose capitalism.
Private property rights, a free economy,
much bigger scope of private initiative,
a free press;
not always honored, of course.
But, broadly speaking, South Korea chose capitalism,
North Korea chose communism.
Now, what were the results of these choices?
50 years later, the results are so clear, an alien could see them from outer space.
That this is a picture of North and South Korea, taken from outer space.
And what you see is South Korea has lights,
broad lights,
people going out to parties, lighting up their home.
What you see in South Korea is a developed modern economy.
Up here, in North Korea, what you see is darkness,
with the one exception of Pyongyang, --
the central city where the ruling elite lives.
Massive differences created in just 50 years.
Today, South Korea has a GDP per capita at least 10 times,
probably 15 times higher than that in North Korea.
South Korea is a modern developed economy, the most wired economy in the world,
the standard of living, equal to that of most western countries.
North Korea is in periodic starvation,
a militarized state where the people are regularly starving.
That is the difference which institutions can make
in just a matter of a few generations.
Here's another picture which could suggest the power of institutions.
This is Nogales.
On the right is Nogales, Mexico.
On the left is Nogales, Arizona
Now, there's a lot here which is the same.
Clearly, for example, the geography is the same.
You might think the people are different,
but, actually, the people and the culture are also very similar.
So, until the 1850s, both parts of Nogales were parts of Mexico.
So, many of the people share, on both sides of this fence,
the same ancestors.
They have a very similar culture.
So, what differs?
In Nogales, Arizona, --
income is about three times higher than in Nogales, Mexico,
which is actually one of the richer parts of Mexico.
Life expectancy is higher on the left.
The infrastructure, the roads, the other public infrastructure,
the hospitals and so forth, is better in the United States.
It's easier to open a business in Nogales, Arizona than in Nogales, Mexico.
Democracy is more reliable on the left of this picture than it is on the right.
Crime is lower on the left than it is on the right.
Well, why?
The difference here, again, is institutions.
Institutions make the difference.
These two examples, I think, are good illustrations
of the fact that institutions matter.
But we haven't said which institutions matter
and why do they matter.
In future lectures, we'll be talking more about
some of the possibilities, about institutions like property rights,
the rule of laws, free press,
honest government, open markets.
We'll also be talking about facts which may underlie
something such as honest government, like trust.
And then we'll be asking not only what are the effects of institutions,
but what are the causes of institutions?
Why is it that some countries have different institutions than others?
Is this due to accidents of history?
Is this due to differences in geography or in culture?
All of these questions are really important,
and we'll be dealing with them more as we go on.
Thanks.