The Importance of Institutions

The power of institutions illustrated. But what causes institutions? Can we change institutions?

Corresponding lesson: http://mruniversity.com/importance-institutions-brief

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 institutions are important and
we're not going to try and explain

the mechanisms by which institutions
work

instead what we want to do is is off of
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
eight perfect natural experiment

demonstrating the power of institutions

in nineteen forty four north korea and
south korea were very similar they had

the same people the same culture at the
same language the same history

very similar connie's if anything more
career was a little bit more

industrialized south korea a little bit
more agrarian

then in nineteen forty-five 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 or private initiative

a free press not always honored of
course

but probably speaking

south korea chose capitalism north korea
chose communism

now what were the results of these
choices

will fifty years later the results are
so clear and alien could see them from

outerspace fact this is a picture of
north and south korea

taken from outer space

and what you see this out korea as
lights bribed lights

people going out the party is lighting
up their home what you see in south

korea is a developed modern economy

appear in north korea what you see is
darkness

but the one exceptional pyongyang

the central city where the ruling elite
lives

massive differences created in just
fifty years

today south korea has a gdp per
capita

atleast ten times probably

fifteen times

higher than that in north korea

south korea is a modern developed
economy the most wired economy in the

world standard of living

equal to that of most western countries
north korea isn't periodic starvation

and militarized state

for the people are regularly starving

that is the difference which
institutions can make

in just a matter a few generations

here's another picture which could
suggest the power of institutions

this is my dollins

on the right isn't always mexico on the
left is ten dollars arizona

now there's a lot here which is the same

clearly for example the geography is the
same

you might think the people of different
but actually the people in the culture

also very similar

so until the eighteen fifties both parts
of the dollars were parts of mexico

so many of the people share on both
sides of the spence share the same

ancestors

may have a very similar culture

so what differs

well in the dollar is

uh... arizona income is about three
times higher

then in the dollar's mexico which is
actually one of the richer parts of

mexico

life expectancy is higher on the left

the infrastructure the roads

and other public infrastructure
hospitals and so forth

is better in the united states

it's easier to open a business in the
dollar's arizona than in the dollar's

mexico

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

crime is lower

last than it is on the right

well why well the difference here again
is institutions

institutions make the difference

these two examples i think the good
illustrations

of the fact that institutions matter but
we haven't said which institutions

matter and why did the matter

in future elections will be talking more

amounts on the possibilities

about institutions like property rights
the rule of law free press

on its government open markets will also
be talking about factors which made

underlie

something such as on its government like

trust

and then we'll be asking not only what
are the effects of institutions what are

the causes of institutions

why is it that some countries have
different institutions than others

is this do to accident of history

is is due to differences in geography or
in culture

all of these questions are really
important and will be dealing with them

more as we go on facts