Final answer:
The incorrect statement regarding the reasons for the failure of former colonies to establish stable states is Option C, as both the Soviet Union and United States did not actively discourage decolonization; rather, local resistance and administrative costs influenced the decline of colonialism.
Step-by-step explanation:
The failure of former colonies to create stable, free, and prosperous states can be attributed to several factors. Notably, these are: the imposition of Western institutions with little regard for local traditions (Option A), the arbitrary merging of diverse ethnic and religious groups into single states (Option B), the prioritization of local interests over a stable central government (Option D), and the unwillingness of those in power to allow criticism or share power (Option E).
One statement that does not represent a reason for this failure is Option C, which falsely claims that the Soviet Union and the United States discouraged decolonization due to concerns that new states would disrupt the global balance of power. In reality, the decolonization process was, in part, a result of the lack of desire from European powers to maintain expensive colonial administrations amid determined resistance from local populations.