Why Nations Fail: The Origins of Power, Prosperity, and Poverty

unlikely to lead to a fundamental transformation of these authoritarian regimes toward inclusive institutions.
    The historical record is even less generous to modernization theory. Many relatively prosperous nations have succumbed to and supported repressive dictatorships and extractive institutions. Both Germany and Japan were among the richest and most industrialized nations in the world in the first half of the twentieth century, and had comparatively well-educated citizens. This did not prevent the rise of the National Socialist Party in Germany or a militaristic regime intent on territorial expansion via war in Japan—making both political and economic institutions take a sharp turn toward extractive institutions. Argentina was also one of the richest countries in the world in the nineteenth century, as rich as or even richer than Britain, because it was the beneficiary of the worldwide resource boom; it also had the most educated population in Latin America. But democracy and pluralism were no more successful, and were arguably less successful, in Argentina than in much of the rest of Latin America. One coup followed another, and as we saw in chapter 11 , even democratically elected leaders acted as rapacious dictators. Even more recently there has been little progress toward inclusive economic institutions, and as we saw in chapter 13 , twenty-first-century Argentinian governments can still expropriate their citizens’ wealth with impunity.
    All of this highlights several important ideas. First, growth under authoritarian, extractive political institutions in China, though likely to continue for a while yet, will not translate into sustained growth, supported by truly inclusive economic institutions and creative destruction. Second, contrary to the claims of modernization theory, we should not count on authoritarian growth leading to democracy or inclusive political institutions. China, Russia, and several other authoritarian regimes currently experiencing some growth are likely toreach the limits of extractive growth before they transform their political institutions in a more inclusive direction—and in fact, probably before there is any desire among the elite for such changes or any strong opposition forcing them to do so. Third, authoritarian growth is neither desirable nor viable in the long run, and thus should not receive the endorsement of the international community as a template for nations in Latin America, Asia, and sub-Saharan Africa, even if it is a path that many nations will choose precisely because it is sometimes consistent with the interests of the economic and political elites dominating them.
Y OU C AN’T E NGINEER P ROSPERITY
    Unlike the theory we have developed in this book, the ignorance hypothesis comes readily with a suggestion about how to “solve” the problem of poverty: if ignorance got us here, enlightening and informing rulers and policymakers can get us out, and we should be able to “engineer” prosperity around the world by providing the right advice and by convincing politicians of what is good economics. In chapter 2 , when we discussed this hypothesis, we showed how the experience of Ghana’s prime minister Kofi Busia in the early 1970s underscored the fact that the main obstacle to the adoption of policies that would reduce market failures and encourage economic growth is not the ignorance of politicians, but the incentives and constraints they face from the political and economic institutions in their societies. Nevertheless, the ignorance hypothesis still rules supreme in Western policymaking circles, which, almost to the exclusion of anything else, focus on how to engineer prosperity.
    These engineering attempts come in two flavors. The first, often advocated by international organizations such as the International Monetary Fund, recognizes that poor development is caused by bad economic policies and institutions, and then proposes a list of improvements these international organizations attempt to induce poor countries to adopt. (The Washington consensus makes up one such list.) These improvements focus on sensible things such as macroeconomic stability and seemingly attractive macroeconomic goals such asa reduction in the size of the government sector, flexible exchange rates, and capital account liberalization. They also focus on more microeconomic goals, such as privatization, improvements in the efficiency of public service provision, and perhaps also