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

Sir Arthur Lewis, who knew the policies were not good. What drove the form the economic policies took was the fact that Nkrumah needed to use them to buy political support and sustain his undemocratic regime.
    Neither Ghana’s disappointing performance after independence nor the countless other cases of apparent economic mismanagement can simply be blamed on ignorance. After all, if ignorance were the problem, well-meaning leaders would quickly learn what types of policies increased their citizens’ incomes and welfare, and would gravitate toward those policies.
    Consider the divergent paths of the United States and Mexico. Blaming this disparity on the ignorance of the leaders of the two nations is, at best, highly implausible. It wasn’t differences in knowledge or intentions between John Smith and Cortés that laid the seeds of divergence during the colonial period, and it wasn’t differences inknowledge between later U.S. presidents, such as Teddy Roosevelt or Woodrow Wilson, and Porfirio Díaz that made Mexico choose economic institutions that enriched elites at the expense of the rest of society at the end of the nineteenth and beginning of the twentieth centuries while Roosevelt and Wilson did the opposite. Rather, it was the differences in the institutional constraints the countries’ presidents and elites were facing. Similarly, leaders of African nations that have languished over the last half century under insecure property rights and economic institutions, impoverishing much of their populations, did not allow this to happen because they thought it was good economics; they did so because they could get away with it and enrich themselves at the expense of the rest, or because they thought it was good politics, a way of keeping themselves in power by buying the support of crucial groups or elites.
    The experience of Ghana’s prime minister in 1971, Kofi Busia, illustrates how misleading the ignorance hypothesis can be. Busia faced a dangerous economic crisis. After coming to power in 1969, he, like Nkrumah before him, pursued unsustainable expansionary economic policies and maintained various price controls through marketing boards and an overvalued exchange rate. Though Busia had been an opponent of Nkrumah, and led a democratic government, he faced many of the same political constraints. As with Nkrumah, his economic policies were adopted not because he was “ignorant” and believed that these policies were good economics or an ideal way to develop the country. The policies were chosen because they were good politics, enabling Busia to transfer resources to politically powerful groups, for example in urban areas, who needed to be kept contented. Price controls squeezed agriculture, delivering cheap food to the urban constituencies and generating revenues to finance government spending. But these controls were unsustainable. Ghana was soon suffering from a series of balance-of-payment crises and foreign exchange shortages. Faced with these dilemmas, on December 27, 1971, Busia signed an agreement with the International Monetary Fund that included a massive devaluation of the currency.
    The IMF, the World Bank, and the entire international community put pressure on Busia to implement the reforms contained in theagreement. Though the international institutions were blissfully unaware, Busia knew he was taking a huge political gamble. The immediate consequence of the currency’s devaluation was rioting and discontent in Accra, Ghana’s capital, that mounted uncontrollably until Busia was overthrown by the military, led by Lieutenant Colonel Acheampong, who immediately reversed the devaluation.
    The ignorance hypothesis differs from the geography and culture hypotheses in that it comes readily with a suggestion about how to “solve” the problem of poverty: if ignorance got us here, enlightened and informed 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. Yet Busia’s experience underscores 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.
    Although the ignorance hypothesis still rules supreme among most economists and in Western