States. There is a small but growing group of rich countries
—mostly in Europe and North America, joined by Australia,
Japan, New Zealand, Singapore, South Korea, and Taiwan
—whose citizens enjoy very different lives from those of the
inhabitants of the rest of the globe.
The reason that Nogales, Arizona, is much richer than
Nogales, Sonora, is simple; it is because of the very
different institutions on the two sides of the border, which
create very different incentives for the inhabitants of
Nogales, Arizona, versus Nogales, Sonora. The United
States is also far richer today than either Mexico or Peru
because of the way its institutions, both economic and
political, shape the incentives of businesses, individuals,
and politicians. Each society functions with a set of
economic and political rules created and enforced by the
state and the citizens collectively. Economic institutions
shape economic incentives: the incentives to become
educated, to save and invest, to innovate and adopt new
technologies, and so on. It is the political process that
determines what economic institutions people live under,
and it is the political institutions that determine how this
process works. For example, it is the political institutions of
a nation that determine the ability of citizens to control
politicians and influence how they behave. This in turn
determines whether politicians are agents of the citizens,
albeit imperfect, or are able to abuse the power entrusted
to them, or that they have usurped, to amass their own
fortunes and to pursue their own agendas, ones detrimental
to those of the citizens. Political institutions include but are
not limited to written constitutions and to whether the
society is a democracy. They include the power and
capacity of the state to regulate and govern society. It is
also necessary to consider more broadly the factors that
determine how political power is distributed in society,
particularly the ability of different groups to act collectively
to pursue their objectives or to stop other people from
pursuing theirs.
As institutions influence behavior and incentives in real
life, they forge the success or failure of nations. Individual
talent matters at every level of society, but even that needs
an institutional framework to transform it into a positive
force. Bill Gates, like other legendary figures in the