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What makes rich countries rich?

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Today, we’re going to talk
about why most people

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have the wrong answer
to that question.

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[music playing]

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Most people would say
that a country becomes rich

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if it has natural resources,
like oil or minerals or farmland.

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But if that were true, Japan would
actually be a very poor country,

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and many African countries
would be incredibly rich.

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So, if resources don’t make
a country rich, what does?

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I’ll tell you two stories.

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This is a bridge and aqueduct
in southern France.

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It was built by the Romans
about 2000 years ago.

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To build it, they had only
the most basic techniques,

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lots of stone and mortar,
some basic levers and pulleys,

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and lots of workers.

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And, it’s still standing
after 2000 years.

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This is the Tacoma Narrows Bridge.

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It was built in 1940
in Washington state,

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using all the most sophisticated
tools and techniques possible.

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They had high-grade steel, they had
reinforced concrete and cranes

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and it still fell down less than
a year after it was built.

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So clearly, resources don’t explain

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the success or failure of
these two different bridges.

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What does? Incentives.

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The Romans would always test
their bridges before they used them.

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They would load up this huge
ox cart full of heavy stones

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and drive it across the bridge.

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And if the bridge didn’t fall down
under that heavy load,

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then it was safe to use.

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And here’s the thing.

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The Romans made the guy
who designed the bridge

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drive that first cart across it.

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So he had a very personal incentive

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in building the strongest
bridge possible.

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And that’s why some Roman bridges

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are still standing after 2000 years,

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and some of our modern
bridges fall down.

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Our second story takes place
on the Korean peninsula,

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which is split between
North Korea and South Korea.

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Here’s a satellite picture
taken at night.

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You can see South Korea all lit up
like neighboring China,

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because it’s a thriving,
developed economy.

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And you can also see North Korea,
which has a similar population,

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but is catastrophically
underdeveloped.

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What explains the difference?

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Well, these two countries
have the same geography,

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the same climate and the same
resources. So that can’t be it.

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Up until 1945, North and South Korea
were the same country.

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So, they share the same history,
the same language,

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the same religion, the same culture.
So that can’t be it.

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The difference is that South Korea
has a market-based economy,

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and it’s been a democracy
since the 1970s.

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North Korea, on the other hand,

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is one of the world’s last remaining
Communist dictatorships.

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Again, the difference is incentives.

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A market democracy sets up incentives
for innovation and investment

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that aren’t there in
a Communist dictatorship,

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and incentives explain
why resource-poor Japan

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is actually very wealthy while
many African countries are very poor.

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Japan is democratic,
has the rule of law,

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and protects property rights,

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and all those institutions create
incentives for economic growth.

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Whereas, for a variety
of historical reasons,

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many developing countries
don’t have those institutions

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which means their citizens
have less incentive

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to invest and innovate.

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The effect of incentives is so strong

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that it can be seen from space.

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Who is that Econ Guy?

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I am Patrick Walsh. I’m an associate
professor of economics

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at Saint Michael’s College
near Burlington, Vermont.