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

within Latin America—for example, why Argentina and Chile are more prosperous than Peru and Bolivia. Other types of cultural arguments—for instance, those that stress contemporary indigenous culture—fare equally badly. Argentina and Chile have few indigenous people compared with Peru and Bolivia. Though this is true, indigenous culture as an explanation does not work, either. Colombia, Ecuador, and Peru have similar income levels, but Colombia has very few indigenous people today, while Ecuador and Peru have many. Finally, cultural attitudes, which are in general slow to change, are unlikely to account by themselves for the growth miracles in East Asia and China. Though institutions are persistent, too, in certain circumstances they do change rapidly, as we’ll see.
T HE I GNORANCE H YPOTHESIS
    The final popular theory for why some nations are poor and some are rich is the ignorance hypothesis, which asserts that world inequality exists because we or our rulers do not know how to make poor countries rich. This idea is the one held by most economists, who take their cue from the famous definition proposed by the English economistLionel Robbins in 1935 that “economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
    It is then a small step to conclude that the science of economics should focus on the best use of scarce means to satisfy social ends. Indeed, the most famous theoretical result in economics, the so-called First Welfare Theorem, identifies the circumstances under which the allocation of resources in a “market economy” is socially desirable from an economic point of view. A market economy is an abstraction that is meant to capture a situation in which all individuals and firms can freely produce, buy, and sell any products or services that they wish. When these circumstances are not present there is a “market failure.” Such failures provide the basis for a theory of world inequality, since the more that market failures go unaddressed, the poorer a country is likely to be. The ignorance hypothesis maintains that poor countries are poor because they have a lot of market failures and because economists and policymakers do not know how to get rid of them and have heeded the wrong advice in the past. Rich countries are rich because they have figured out better policies and have successfully eliminated these failures.
    Could the ignorance hypothesis explain world inequality? Could it be that African countries are poorer than the rest of the world because their leaders tend to have the same mistaken views of how to run their countries, leading to the poverty there, while Western European leaders are better informed or better advised, which explains their relative success? While there are famous examples of leaders adopting disastrous policies because they were mistaken about those policies’ consequences, ignorance can explain at best a small part of world inequality.
    On the face of it, the sustained economic decline that soon set in in Ghana after independence from Britain was caused by ignorance. The British economist Tony Killick, then working as an adviser for the government of Kwame Nkrumah, recorded many of the problems in great detail. Nkrumah’s policies focused on developing state industry, which turned out to be very inefficient. Killick recalled:
    The footwear factory … that would have linked the meat factory in the North through transportation of the hides to the South (for a distance of over 500 miles) to a tannery (now abandoned); the leather was to have been backhauled to the footwear factory in Kumasi, in the center of the country and about 200 miles north of the tannery. Since the major footwear market is in the Accra metropolitan area, the shoes would then have to be transported an additional 200 miles back to the South.
    Killick somewhat understatedly remarks that this was an enterprise “whose viability was undermined by poor siting.” The footwear factory was one of many such projects, joined by the mango canning plant situated in a part of Ghana which did not grow mangos and whose output was to be more than the entire world demand for the product. This endless stream of economically irrational developments was not caused by the fact that Nkrumah or his advisers were badly informed or ignorant of the right economic policies. They had people like Killick and had even been advised by Nobel laureate