Explain this chart.

[Gustaf]

I think plenty of answers have been provided, but I'd like to note that good institutions does not just mean stable or non-corrupt government. It's broader than that.

It is reasonable to expect there to take some time before the effect of superior reforms really kick in.

Also, this graph is a bit misleading since it uses a linear scale. Just eyeballing it and making a rough calculation, what looks like a flat line from 1950 to 1975 is probably something like an average of 5% growth, even though there is a war in between as well. So both countries are doing pretty decently, probably due to post-war build-up etc. Eventually North Korea hit the ceiling for where you get with Communist planned economy, while South Korea continued upwards.

[Gustaf]

To clarify, if South Korea averaged yearly GDP growth of 5.35% after WWII they would hit a GDP per capita of $3 000 in 1975 and one of about $19 000 in 2010, roughly consistent with the graph. The exponential trend is just becase growth is inherently exponential, not necessarily because anything dramatic happened.