Daron Acemoglu, Simon Johnson and James Robinson won this years Nobel Prize in Economic Sciences.
Their research demonstrated the importance of societal institutions for a country’s prosperity. Societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better.
An good demonstration of why nations fail, can be seen by the description of life on the border between Mexico and the United States.
The city of Nogales is divided in half by a wall. North of the wall is the “American” Nogales: Santa Cruz County, Arizona, USA. The median household income in this city is $30,000 a year.
The people of Nogales can go about their business without fear for their lives or limbs.
Equally important, the people of Nogales, Arizona, view their government – albeit inefficient and corrupt as their hired manager.
They can vote to change their mayor, their congressman, and their senator; they vote in presidential elections that determine who leads the country. Democratic habits are second nature to them.
Life just a few feet away, south of the wall, is a far cry from that. Although residents of Nogales, Sonora, live in a relatively prosperous part of Mexico, the average family income there is about a third of the average family income in the U.S. portion of Nogales.
Crime is high, and starting a business is unsafe … And residents of Nogales, Sonora, deal with corrupt and incompetent government officials every day.
Unlike the experience of their northern neighbors, democracy is a relatively new experience for the residents of Nogales, Mexico.
There is a simple and obvious explanation for the differences between the two halves of Nogales.
Nogales, Arizona, is in the United States. Its residents have American economic institutions that allow them to freely choose their profession, get an education and the necessary skills, and their employers are encouraged to invest in the most advanced technologies, which will result in their profits being higher.
Residents of “American” Nogales also have access to political institutions that provide the opportunity to participate in democratic processes, electing their representatives and replacing them if they perform poorly.
As a result, politicians provide the basic services, from health care and roads to law and order that citizens demand.
The people of Nogales, Sonora, are less fortunate. They live in a different world, shaped by different institutions that create very different incentives for the people of “Mexican” Nogales and for the entrepreneurs and companies that want to invest here.
The different incentives created by the different institutions of the two Nogaleses and the two countries in which these cities are located are the main reason for the fundamental differences in the level of well-being on both sides of the border.”
