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Today we're going to take a brief look at [br]the importance of institutions

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this'll be brief and that we're not going [br]to look today

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at which institution are important, and[br]we're not going to try and explain

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the mechanisms by which institutions work

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instead what we want to do is offer [br]the big picture:

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Why do people study institutions?

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Why do people think that institutions are[br]important for economic growth?

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Let's take a look

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North and South Korea provide almost a [br]perfect natural experiment

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demonstrating the power of institutions

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In 1944, North Korea and South Korea were [br]very similar

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they had the same people

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the same culture, the same language,[br]the same history

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very similar economies

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If anything, North Korea was a little bit [br]more industrialized

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South Korea, a little bit more agrarian

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Then in 1945, the country was split

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and North Korea chose communism, a[br]totalitarian state

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centrally planned, centrally directed

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no private property rights

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very little room for private initiative,[br]no free press

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South Korea, broadly speaking, chose[br]capitalism

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private property rights, a free economy,[br]

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much bigger scope of private initiative,[br]a free press

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not always honored, of course

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but broadly speaking, South Korea chose[br]capitalism, North Korea chose communism

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Now, [br]what were the results of these choices?

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50 years later, the results are so clear:[br]an alien could see them from outer space;

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that this is a picture of North and South [br]Korea, taken from outer space

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and what you see is South Korea has lights,[br]broad lights

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people going out to parties, lighting [br]up their home

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what you see in South Korea is a developed[br]modern economy

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Up here, in North Korea,[br]what you see is darkness

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With the one exception of Pyongyang, the [br]central city where the ruling elite lives

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Massive differences created in just[br]50 years

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Today South Korea has a GDP per capita at [br]least 10 times, probably 15 times higher

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than that in North Korea

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South Korea is a modern developed economy,[br]the most wired economy in the world

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the standard of living, equal to that of[br]most western countries

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North Korea is in periodic starvation,[br]a militarized state

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where the people are regularly starving

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That is the difference which institutions [br]can make

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in just a matter of a few generations

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Here's another picture which could suggest[br]the power of institutions

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This is Nogales

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On the right is Nogales, Mexico

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On the left is Nogales, Arizona

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Now there's a lot here which is the same

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clearly, for example, the geography is [br]the same

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you might think the people are different,[br]but actually the people and the culture

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are also very similar

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So until the 1850s, both parts of Nogales[br]were parts of Mexico

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so many of the people share, on both sides[br]of this fence, share the same ancestors

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they have a very similar culture

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So what differs?

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In Nogales, Arizona, income is about three[br]times higher than in Nogales, Mexico

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which is actually one of the richer parts [br]of Mexico

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Life expectancy is higher on the left

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the infrastructure, the roads, the other[br]public infrastructure, the hospitals

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and so forth, is better in [br]the United States

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It's easier to open a business in Nogales,[br]Arizona than in Nogales, Mexico

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democracy is more reliable on the left of [br]this picture than it is on the right

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crime is lower on the left than it is[br]on the right

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Well, why?[br]The difference here again, is institutions

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Institutions make the difference

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These two examples, I think, are good[br]illustrations of the fact that

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institutions matter

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but we haven't said which institutions [br]matter and why do they matter

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in future lectures we'll be talking more[br]about some of the possibilities

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about institutions like property rights,[br]the rule of laws, free press,

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honest government, open markets[br]We'll also be talking about facts which

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may underlie something such as [br]honest government, like trust

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and then we'll be asking not only what [br]are the effects of institutions,

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but what are the causes of institutions?

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Why is it, that some countries have[br]different institutions than others?

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Is this due to accidents of history?

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Is this due to differences in geography or [br]in culture?

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All of these questions are really [br]important,

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and we'll be dealing with them more as [br]we go on

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Thanks