for the differences between the two halves of Nogales that
you’ve probably long since guessed: the very border that
defines the two halves. Nogales, Arizona, is in the United
States. Its inhabitants have access to the economic
institutions of the United States, which enable them to
choose their 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. In
consequence, politicians provide the basic services
(ranging from public health to roads to law and order) that
the citizens demand. Those of Nogales, Sonora, are not so
lucky. 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 the entrepreneurs and businesses
willing to invest there. These incentives created by the
different institutions of the Nogaleses and the countries in
which they are situated are the main reason for the
differences in economic prosperity on the two sides of the
border.
Why are the institutions of the United States so much
more conducive to economic success than those of Mexico
or, for that matter, the rest of Latin America? The answer to
this question lies in the way the different societies formed
during the early colonial period. An institutional divergence
took place then, with implications lasting into the present
day. To understand this divergence we must begin right at
the foundation of the colonies in North and Latin America.
T HE F OUNDING OF B UENOS A IRES
Early in 1516 the Spanish navigator Juan Díaz de Solís
sailed into a wide estuary on the Eastern Seaboard of
South America. Wading ashore, de Solís claimed the land
for Spain, naming the river the Río de la Plata, “River of
Silver,” since the local people possessed silver. The
indigenous peoples on either side of the estuary—the
Charrúas in what is now Uruguay, and the Querandí on the
plains that were to be known as the Pampas in modern