Simon Johnson

• Rey Juan Carlos University

Rising inequality and widespread poverty, social unrest and polarization, gender and ethnic disparities, declining social mobility, economic fragility, unbalanced growth due to technology and globalization, and existential danger from climate change are urgent global concerns of our day. These issues are intertwined. They therefore require a holist...

Children in many extremely poor, remote regions are growing up illiterate and innumerate despite high reported school enrollment ratios. Possible explanations for such poor outcomes include demand – for example, low perceived returns to education compared to opportunity cost; and supply – poor state provision and inability of parents to coordinate...

In this paper, we review the role of political economy in inclusive growth. We find that political economy forces on the demand and supply side have weakened redistribution over time and contributed to a new wave of populism. We document growing support for a rethink of the social contract to make growth more inclusive and discuss some of its broad...

In the face of elevated pandemic risk, canonical epidemiological models imply the need for extreme social distancing over a prolonged period. Alternatively, people could be organized into zones, with more interactions inside their zone than across zones. Zones can deliver significantly lower infection rates, with less social distancing, particularl...

In the face of elevated pandemic risk, is it necessary to completely lock down the population, imposing extreme social distancing? Canonical epidemiological models suggest this may be unavoidable for months at a time, despite the heavy social and human cost of physically isolating people. Alternatively, people could retreat into socially or economi...

The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a prior connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected fir...

A country's rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly. For a sample comprising emerging market economies, we show that in the last two years, the renminbi (RMB) has increasingly become a reference currency which we define as one which exh...

Financial crises frequently increase public sector borrowing and threaten some form of sovereign debt crisis. Until recently, high income countries were thought to have become less vulnerable to severe banking crises that have lasting negative effects on growth. Since 2007, crises and attempted reforms in the United States and Europe indicate that...

The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms whe...

This paper sheds light on two problems in the Penn World Table (PWT) GDP estimates. First, we show that these estimates vary substantially across different versions of the PWT despite being derived from very similar underlying data and using almost identical methodologies; that the methodology deployed to estimate growth rates leads to systematic v...

Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997–98 crisis suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups—facing severe financial and governance problems—could still borrow heavily f...

Successive plans to restore confidence in the euro area have failed. A combination of misdiagnosis, lack of political will, and dysfunctional politics across 17 nations have all contributed to the failure so far to stem Europe's growing crisis. Proposals currently on the table also seem likely to fail. Boone and Johnson say the euro area faces two...

There has been a great deal of financial innovation in recent decades but its social value is unclear. In the run-up to 2008, banks took large amounts of risk relative to the size of the economy. This approach was made possible by and sometimes justified in terms of “innovation.” But it also created a great deal of downside risk for the economy—inc...

Simon Johnson (MIT) will moderate a panel consisting of Martin Feldstein (Harvard University and NBER), Carmen M. Reinhart (Peterson Institute of International Economics) and Kenneth Singleton (Stanford University) who will discuss the causes, consequences and methods of dealing with sovereign default.

Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997-99 crisis, suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups (chaebol) – facing severe financial and governance problems – could still b...

We construct a simple firm-based automata model for global economic inter-dependence of countries using modern notions of self-organized criticality and recently developed dynamical-renormalization-group methods (e.g., L. Pietronero et al., Phys. Rev. Lett., 72(11):1690 (1994); J. Hasty and K. Wiesenfeld, Phys. Rev. Lett., 81(8):1722, (1998)). We d...

No abstract available.

David Albouy expresses three main concerns about the results in Acemoglu, Johnson and Robinson (2001) on the relationship between potential settler mortality and institutions. First, there is a general concern that there are high mortality outliers, potentially affecting this relationship, with which we agree. However, limiting the effect of outlie...

Europe’s efforts to stabilize its finances are failing, and the region needs to prepare for widespread restructuring of sovereign and bank debt. Peter Boone and Simon Johnson argue that Europe’s financial system has relied on a policy of protecting creditors from default and has thus spread pervasive moral hazard—a presumption by creditors that the...

Many books have been published that discuss the recent extraordinary financial crisis involving U.S. banks and, more broadly, the U.S. economy. For people interested in antitrust and competition policy, Simon Johnson and James Kwak's book 13 Bankers is particularly interesting. The book offers an excellent discussion of the run-up to the recent fin...

Are structural reforms growth enhancing? Is the effectiveness of reforms constrained by a country's institutional environment or by its distance from the technological frontier? This paper takes a new and comprehensive look at these questions by employing a novel dataset that includes several kinds of real (trade, agriculture and networks) and fina...

The discussion in this panel will be on the financial crisis. Participants include: John Cochrane (University of Chicago) Simon Johnson (M.I.T.) Raghuram Rajan (University of Chicago) Myron Scholes (Platinum Grove Asset Management, Stanford University)

The French Revolution had a momentous impact on neighboring countries. It removed the legal and economic barriers protecting oligarchies, established the principle of equality before the law, and prepared economies for the new industrial opportunities of the second half of the 19th century. We present within-Germany evidence on the long-run implica...

Can a “no bailout” government policy eliminate investors’ perception that some firms are “too big to fail”? We analyze this question using evidence from the Korean crisis of 1997-98. Despite a “no bailout” policy of Korean government following the crisis, we find that the largest Korean corporate groups (chaebol) were able to retain access to exter...

This paper sheds light on two problems in the Penn World Table (PWT) GDP estimates. First, we show that these estimates vary substantially across different versions of the PWT despite being derived from very similar underlying data and using almost identical methodologies; that this variability is systematic; and that it is intrinsic to the methodo...

This paper sheds light on two problems— variability and valuation— in the Penn World Table (PWT) GDP estimates. We show that these estimates vary substantially across di¤erent versions of the PWT; that this variability is systematic; and that it is intrinsic to the methodology deployed by the PWT to estimate growth rates. Moreover, this variability...

To many observers, the Federal Reserve has never looked more heroic than it does right now. This past winter, America's financial system faced the prospect of utter ruin. And, while the economy has suffered plenty in 2009, the worst did not come to pass. The banking system that lends to our employers, thereby allowing our economy to function, never...

We study the determinants of vertical integration in a new data set of over 750,000 firms from 93 countries. We present a number of theoretical predictions on the interactions between financial development, contracting costs, and the extent of vertical integration. Consistent with these predictions, contracting costs and financial development by th...

The French Revolution of 1789 had a momentous impact on neighboring countries. The French Revolutionary armies during the 1790s and later under Napoleon invaded and controlled large parts of Europe. Together with invasion came various radical institutional changes. French invasion removed the legal and economic barriers that had protected the nobil...

The American dollar is in the midst of a large fall in its value, or depreciation, as measured against other major currencies. The decline has been steady since 2002 and our currency is down about 35 percent from that peak. After strengthening slightly more than 10 percent during the global financial crisis of the past 18 months, the dollar is agai...

How does the structure of the families behind business groups affect the group's organization, governance, and performance? We construct a unique dataset of family trees and business groups for 93 of the largest business families in Thailand. We find a strong positive association between family size and family involvement in the ownership and contr...

We argue that the question of whether and when policy reform works should be investigated together with the political economy factors responsible for distortionary policies in the first place. These not only determine the initial distortions, but also often shape policy in the post-reform environment. Distortionary policies are more likely to be ad...

Existing studies establish a strong cross-country correlation between income and democracy but do not control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We present...

We propose an economic theory of infectious disease transmission and rational behavior. Diseases are costly due to mortality (infected individuals can die prematurely) and morbidity (lower productivity and quality of life). Our model offers three main insights. First, a greater prevalence of diseases implies a lower savings-investment propensity be...

The World Bank Research Observer publishes balanced surveys of the literature. When the authors of a survey are also the proponents of one of the major indicators being surveyed, it invites comments to ensure that balance is maintained. Kaufmann and Kraay provide a useful taxonomy of governance indicators, distinguishing between those measuring “ru...

3 The relationship between health and development at the aggregate level is a subject of ongoing 4 debate. This paper contributes to the debate by proposing a general equilibrium theory of infectious 5 disease transmission and rational behavior. Diseases cause premature death, labor productivity loss 6 and lower quality of life. Higher disease prev...

We exploit the major international health improvements from the 1940s to estimate the effect of life expectancy on economic performance. We construct predicted mortality using preintervention mortality rates from various diseases and dates of global interventions. Predicted mortality has a large impact on changes in life expectancy starting in 1940...

We revisit and critically reevaluate the widely accepted modernization hypothesis which claims that per capita income causes the creation and the consolidation of democracy. Existing studies find support for this hypothesis because they fail to control for the presence of omitted variables. Controlling for these factors either by including country...

A dozen countries had weak institutions in 1960 and yet sustained high rates of growth subsequently. We use data on their characteristics early in the growth process to create benchmarks with which to evaluate potential constraints on sustained growth for sub-Saharan Africa. This analysis suggests that what are usually regarded as first-order probl...

In this paper we exploit the invasion of Europe, particularly Germany, by French Revo-lutionary armies as a 'natural experiment' to investigate the causal e¤ect of the institutions of the ancien régime on economic development. A central hypothesis which can account for comparative development within Europe is that economic growth emerged …rst in pl...

We exploit the major international health improvements from the 1940s to estimate the effect of life expectancy on economic performance. We construct predicted mortality using preintervention mortality rates from various diseases and dates of global interventions. Predicted mortality has a large impact on changes in life expectancy starting in 1940...

Geography and institutions are the two main contenders to explain the fundamental causes of cross-country differences in prosperity. The geography hypothesis — which has a large following both in the popular imagination and in academia — maintains that the geography, climate, and ecology of a society’s location shape both its technology and the inc...

We analyze the capital controls imposed in Malaysia in September 1998. In macroeconomic terms, these controls neither yielded major benefits nor were costly. At the same time, the stock market interpreted the capital controls (and associated events) as favoring firms with stronger political connections, and some connected firms reportedly received...

This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development. We first document the empirical importance of institutions by focusing on two “quasi-natural experiments” in history, the division of Korea into two parts with very different economic ins...

We study the determinants of vertical integration in a new dataset of over 750,000 firms from 93 countries. Existing evidence suggests the presence of large cross-country differences in the organization of firms, which may be related to differences in financial development, contracting costs or regulation. We find cross-country correlations between...

We revisit one of the central empirical findings of the political economy literature that higher income per capita causes democracy. Existing studies establish a strong cross-country correlation between income and democracy, but do not typically control for factors that simultaneously affect both variables. We show that controlling for such factors...

This article uses the different mortality rates of European colonialists to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies. In places where mortality rates were high they did not settle, but set up extractive institutions that exist to the present day. By exp...

This paper evaluates the importance of property rights institutions', which protect citizens against expropriation by the government and powerful elites, and contracting institutions', which enable private contracts between citizens. We exploit exogenous variation in both types of institutions driven by colonial history, and document strong first-s...

The conventional wisdom views high levels of education as a prerequisite for democracy. This paper shows that existing evidence for this view is based on cross-sectional correlations, which disappear once we look at within-country variation. In other words, there is no evidence that countries that increase their education are more likely to become...

Good Governance" is central to the agenda for growth and for aid in low income countries. The broad contours of what this implies are clear, and there is strong evidence that deep- rooted economic institutions are of first order importance for sustained economic growth. But we know much less about the specific policies or political institutions tha...

In a recent comment, David Albouy claims that the data series we constructed for European settler mortality in Acemoglu, Johnson and Robinson (2001) suffers from "in-consistencies, questionable judgements, and errors. " He proposes two series, for "barracks" and "campaigns," that he claims are better measures of settler mortality, and shows his rec...

Families run a large fraction of business groups around the world. In this paper, we analyze how the structure of the families behind these business groups affects the groups' organization, governance and performance. To address this question, we constructed a unique data set of family trees and business groups for nearly 100 of the largest busines...

Using a comprehensive database of European firms, we study how the business environment in a country drives the creation of new firms. Our focus is on regulations governing firm creation ("entry regulations") and on financial development. We find entry regulations hamper the creation of new firms, especially in industries that naturally should have...

There is a growing consensus among economists that differences in institutions, in particular the enforcement of property rights, rule of law, and constraints placed on politicians and elites, have a first-order effect on long-run economic development. This chapter argues that institutions also have a first-order effect on short- and medium-run eco...

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...

In this paper we revisit the central finding in Comparative politics that the greater the per-capita income of a country, the more likely it is to be democratic. We argue that the existing empirical literature fails to treat seriously the fact that income and democracy are jointly determined in a political-economic equilibrium. Based on our previou...

Although strong empirical evidence suggests that the entrepreneurs in countries with weak legal systems often engage in "tunneling" (expropriating funds that rightfully belong to minority shareholders), the same entrepreneurs may prop up firms using their private resources. Anecdotal evidence suggests that "propping" may actually be an important pa...

We develop a simple firm-based automaton model for global economic interdependence of countries using modern notions of self-organized criticality and recently developed dynamical renormalization-group methods. We demonstrate how extremely strong statistical correlations can naturally develop between two countries even if the financial interconnect...

The emerging markets crisis of 1997-1998 offers many instances of looting of firms by their controlling shareholders. Assets were transferred out of companies, profits syphoned off to escape creditors, and troubled firms in a group propped up using loan guarantees by other listed group members.

Health conditions and disease environments are important for economic outcomes. This paper argues that the main impact of disease environments on the economic development of nations is not due to the direct effect of health conditions on income, but rather because of their indirect effect via institutions. Health does affect income directly, but th...

Did living standards stagnate before the Industrial Revolution? Traditional real-wage indices typically show broadly constant living standards before 1800. In this paper, we show that living standards rose substantially, but surreptitiously because of the growing availability of new goods. Colonial luxuries such as tea, coffee, and sugar transforme...

There is little evidence on unemployment duration and its determinants in developing countries. This study is on the duration aspect of unemployment in a developing country, Turkey. We analyze the determinants of the probability of leaving unemployment for employment or the hazard rate. The effects of the personal and household characteristics and...

Which is the tighter constraint on private sector investment: weak property rights or limited access to external finance? From a survey of new firms in post-communist countries, we find that weak property rights discourage firms from reinvesting their profits, even when bank loans are available. Where property rights are relatively strong, firms re...

Among countries colonized by European powers during the past 500 years, those that were relatively rich in 1500 are now relatively poor. We document this reversal using data on urbanization patterns and population density, which, we argue, proxy for economic prosperity. This reversal weighs against a view that links economic development to geograph...

Countries that have pursued distortionary macroeconomic policies, including high inflation, large budget deficits and misaligned exchange rates, appear to have suffered more macroeconomic volatility and also grown more slowly during the postwar period. Does this reflect the causal effect of these macroeconomic policies on economic outcomes? One rea...

Botswana has had the highest rate of per capita growth of any country in the world in the last 35 years. This occurred despite adverse initial conditions, including minimal investment during the colonial period and high inequality. Botswana achieved this rapid development by following orthodox economic policies. How Botswana sustained these policie...

This paper asks whether 'contingency fees' offered by some insurance companies influence where insurance agents choose to place business. I use data from 1994—2000 from a privately-held insurance broker at which many individual agents place business. There are two types of agents working at the broker: agents with equity in the broker (equity agent...

Among countries colonized by European powers during the past 500 years, those that were relatively rich in 1500 are now relatively poor. We document this reversal using data on urbanization patterns and population density, which, we argue, proxy for economic prosperity. This reversal weighs against a view that links economic development to geograph...

Which is the tighter constraint on private sector investment: weak property rights or limited access to external finance? From a survey of new firms in post-communist countries, we find that weak property rights discourage firms from reinvesting their profits, even when bank loans are available. Where property rights are relatively strong, firms re...

Post-communist countries offer new evidence on the relative importance of courts and relationships in enforcing contracts. Belief in the effectiveness of courts has a significant positive effect on the level of trust shown in new relationships between firms and their customers. Well-functioning courts also encourage entrepreneurs to try out new sup...

We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive...

We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive...

The onset of the Asian financial crisis in Malaysia reduced the expected value of government subsidies to politically connected firms, accounting for roughly 9% of the estimated $60 billion loss in their market value from July 1997 to August 1998. Firing the Deputy Prime Minister and imposing capital controls in September 1998 primarily benefited f...

We construct a simple firm-based model of global interdependence. We show how extremely strong statistical correlations can naturally develop between countries even if the interconnections between those countries remain very weak. Potential policy implications of this result are also discussed.

We exploit di®erences in early colonial experience to estimate the e®ect of institutions on economic performance. Our argument is that Europeans adopted very di®erent colonization policies in di®erent colonies, with di®erent associated institutions. The choice of colonization strategy was, at least in part, determined by the feasibility of whether...

Most former Soviet republics have fallen into an economic and political under-reform trap. An intrusive state imposes high tax rates and drives entrepreneurs into the unofficial economy, which further aggravates the pressure on official businessmen. Tax revenues and public goods dwindle, further reducing incentives to register business activity. Th...

The stock prices of politically connected Malaysian firms fell disproportionately in the early stages of the Asian financial crisis but rose more than the market once capital controls were imposed in September 1998. Capital controls primarily benefited wellconnected firms without access to international capital markets. These results hold for both...

Differences in institutions are thought to be a key part of the explanation for large cross-country differences in per capita income. Unfortunately, recent empirical research suffers from severe endogeneity problems. In this paper we provide both a theory of why different countries have different institutions and a way of measuring this, which does...

In China, local governments have actively contributed to the growth of new firms. In Russia, local governments have typically stood in the way, be it through taxation, regula or corruption. We argue that the difference can be traced to lies in the degree of political centralization present in China, but not in Russia. In China the central governmen...

Who should enforce laws or contracts: judges or regulators? Many Coasians, though not Coase himself, advocate judicial enforcement. We show that the incentives facing judges and regulators crucially shape this choice. We then compare the regulation of financial markets in Poland and the Czech Republic in the 1990s. In Poland, strict enforcement of...

Tunneling represents the most fundamental process in physics. According to our present understanding tunneling started the universe about 13 billions years ago. Nowadays we know that tunneling is involved in radioactivity and in nuclear fusion — the latter effect is heating the sun. Tunneling is the process of molecular inversion motion in chemistr...

We use survey data to examine new firms in Poland, Slovakia, Romania, Russia and Ukraine. By measures of job growth, security of property, and market development, our countries fall into two groups: an advanced group including Poland, Romania and Slovakia, with Slovakia falling somewhat behind the other two; and a backward group of Russia and Ukrai...