Economic Growth and Institutions

Definition of Institutions

• Institutions: Includes laws, regulations, property rights, reliable courts, political stability, and cultural norms (honesty, trust, cooperation).

The Korean Peninsula as a Case Study

• Illustration: Dramatic difference between North and South Korea as seen from space at night.
• Natural Experiment: Shows how different institutions can lead to different economic outcomes.

Historical Background

• Pre-Division: Koreas had similar people, culture, language, and economy; North was wealthier.
• Post-WWII: Split into two distinct institutional tracks:
  • North Korea: Communism imposed, centrally planned economy.
  • South Korea: Capitalism with a free-market economy.

Institutional Incentives

• South Korea:
  • Incentives for Commercial Cooperation:
    • Entrepreneurs could keep profits.
    • Unsuccessful businesses went bankrupt, allowing for capital reallocation.
  • Market Outcomes:
    • Major car producers and exporters (e.g., Hyundai).
    • Strong cultural exports (K-pop, movies, cosmetics).
    • Developed country standard of living.
• North Korea:
  • Totalitarian State:
    • Centrally planned economy, controlled prices, capital allocated by the Communist Party.
    • Lack of freedom to start businesses, keep profits.
    • Focus on political influence rather than economic efficiency.
  • Outcomes:
    • Starvation due to poor incentives for farmers.
    • Militarized state, widespread fear.
    • Economically backward, dark at night.

Conclusion

• Growth Miracle vs. Growth Disaster: The divergence between North and South Korea highlights the critical role of institutions in economic development.

Additional Observations

• Population Clusters: People tend to cluster in certain areas rather than spread randomly across the Earth's surface.

Further Resources

• MRUniversity.com: Access to a library of videos and resources.
• Practice Questions and Next Videos: Options for interactive learning and further exploration.