Daron Acemoglu, Is ignorance the cause of ineffective economic 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 in knowledge 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 the agreement. 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…

Although the ignorance hypothesis still rules supreme among most economists and in Western policymaking circles—which, almost to the exclusion of anything else, focus on how to engineer prosperity—it is just another hypothesis that doesn’t work. It explains neither the origins of prosperity around the world nor the lay of the land around us—for example, why some nations, such as Mexico and Peru, but not the United States or England, adopted institutions and policies that would impoverish the majority of their citizens, or why almost all sub-Saharan Africa and most of Central America are so much poorer than Western Europe or East Asia.

When nations break out of institutional patterns condemning them to poverty and manage to embark on a path to economic growth, this is not because their ignorant leaders suddenly have become better informed or less self-interested or because they’ve received advice from better economists.

China, for example, is one of the countries that made the switch from economic policies that caused poverty and the starvation of millions to those encouraging economic growth. But, as we will discuss in greater detail later, this did not happen because the Chinese Communist Party finally understood that the collective ownership of agricultural land and industry created terrible economic incentives. Instead, Deng Xiaoping and his allies, who were no less self-interested than their rivals but who had different interests and political objectives, defeated their powerful opponents in the Communist Party and masterminded a political revolution of sorts, radically changing the leadership and direction of the party. Their economic reforms, which created market incentives in agriculture and then subsequently in industry, followed from this political revolution. It was politics that determined the switch from communism and toward market incentives in China, not better advice or a better understanding of how the economy worked.

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