What Makes Life In America, Mexico, India, And China So Different — The Institutions


Over the course of its history, America has developed and maintained a good (if not ideal) cocktail of free markets and government, with each institution deployed in areas of society in which it excels.  It deploys free markets in allocating economic resources toward the production of private goods and services, and government in creating a “general equality of condition among the people,” as graphically described in Alexis De Tocqueville Democracy in America.

The government protects civil liberties and economic freedoms, and takes care of the “commons,” sectors of the economy where free markets are inadequate or fail altogether: the provision of public and semi-public goods, and the protection of the public from health, traffic, occupational, and environmental hazards.

No matter how they came to America, people have enjoyed the economic opportunities created by free markets, and the quality of life assured by a fair, transparent, and effective government.

That’s something missing is missing from other countries like Mexico, China, India.

Just take a look at the town of Nogales, which is divided by a fence: on the north side is the United States, and on the south side, Mexico.

“The inhabitants of Nogales, Arizona, and Nogales, Sonora, share ancestors, enjoy the same food and the same music, and, we would hazard to say, have the same “culture,” write Daron Acemoglou and James A. Robinson in Why Nations Fail: The Origins Of Power, Prosperity And Poverty.

“Of course,” they continue, “there is a very simple and obvious explanation for the difference between the two halves of N ogales that you’ve probably long since guessed: the very border that defines the two halves: Nogales, Arizona is in the United States.”

That means “Its inhabitants have access to economic institutions of the United States, which enables them to choose occupations freely, acquire schooling and skills, and encourage their employers to invest in the best technology, which leads to higher wages for them. They also have access to political institutions that allow them to take part in the democratic process, to elect their representatives, and replace them if they misbehave.”

As a result, elected politicians create a government that provides “basic services (ranging from public health to roads to law and order) that the citizens demand.”

But the residents of Nogales, Sonora, are not so fortunate. “They live in a different world shaped by different institutions. These different institutions create very disparate incentives for the inhabitants of the two Nogaleses and for entrepreneurs and businesses willing to invest there.

These incentives created by the different institutions of the two Nogaleses and the countries in which they are situatrd are the main reason for the differences in economic prosperity on the two sides of the border.”

The bottom line: as Acemoglou and Robinson conclude, “to prosper citizens need “inclusive institutions, which create a virtuous circle of innovation, economic expansion and more widely-held wealth.”