Why are people on one side of a border rich and on the other poor?

Because of the rules each side lives under, say the economists Daron Acemoglu and James Robinson, not because of the land or the people.

Their book Why Nations Fail opens on a fence. Nogales, Arizona, and Nogales, Sonora, are twin border towns, and yet living standards differ dramatically on either side of the Mexican-American border. The authors use such cases because they compare people from the same geographical area and the same culture, which leaves the institutions, the rules of the game, as the difference. Their other showpiece is Korea. Divided in 1953, its two halves diverged completely: South Korea became one of the richest countries in Asia while North Korea remains among the poorest. By some accounts North Korea was even ahead in the 1970s; by 2006 its per capita income was estimated at one-seventeenth of the South's, though North Korean figures are rough because economic data are scarce.

What differs is how inclusive the institutions are. Inclusive economic institutions protect the property rights of wide sections of society, not just the elite, and let everyone take part in the economy and profit. They go with inclusive political institutions, where many people have a say in decisions. Extractive institutions do the opposite: they let an elite rule over others and extract wealth from them, as under slavery or serfdom. Where this is the history, the authors argue, entrepreneurs and citizens have less incentive to invest and innovate.

The idea has well-known critics. Jared Diamond asks a pointed question: if good institutions explain growth, what explains good institutions in the first place? The economist Arvind Subramanian notes that China grew fast under an authoritarian regime while democratic India lagged behind. The authors reply that what drives growth directly is economic institutions, which political ones shape.