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

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

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at which institution are important, and
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 
the big picture:

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Why do people study institutions?

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

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Let's take a look

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North and South Korea provide almost a 
perfect natural experiment

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demonstrating the power of institutions

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In 1944, North Korea and South Korea were 
very similar

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they had the same people

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the same culture, the same language,
the same history

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very similar economies

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If anything, North Korea was a little bit 
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
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,
no free press

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South Korea, broadly speaking, chose
capitalism

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private property rights, a free economy,


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much bigger scope of private initiative,
a free press

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not always honored, of course

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but broadly speaking, South Korea chose
capitalism, North Korea chose communism

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Now, 
what were the results of these choices?

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

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

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and what you see is South Korea has lights,
broad lights

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people going out to parties, lighting 
up their home

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what you see in South Korea is a developed
modern economy

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Up here, in North Korea,
what you see is darkness

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

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Massive differences created in just
50 years

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Today South Korea has a GDP per capita at 
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,
the most wired economy in the world

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the standard of living, equal to that of
most western countries

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North Korea is in periodic starvation,
a militarized state

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where the people are regularly starving

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That is the difference which institutions 
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
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 
the same

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you might think the people are different,
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
were parts of Mexico

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so many of the people share, on both sides
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
times higher than in Nogales, Mexico

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which is actually one of the richer parts 
of Mexico

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Life expectancy is higher on the left

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the infrastructure, the roads, the other
public infrastructure, the hospitals

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and so forth, is better in 
the United States

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

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

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crime is lower on the left than it is
on the right

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Well, why?
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
illustrations of the fact that

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institutions matter

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

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

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

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

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may underlie something such as 
honest government, like trust

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and then we'll be asking not only what 
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
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 
in culture?

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All of these questions are really 
important,

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

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Thanks