Today we're going to take a brief look at the importance of institutions
this'll be brief and 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, share 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