Exploring the roots of prosperity: Nobel laureate Simon Johnson on economic institutions
Nobel Prize-winning economist Simon Johnson sheds light on the power of institutions in determining a nation’s economic destiny. From lessons for developing nations to the potential for international organizations to drive reform, in an exclusive interview with Kazinform News Agency Johnson explains how historical legacies continue to shape today’s global economy.
What motivated you to explore the role of historical institutions in economic development, particularly in the context of colonization?
I spent most of the 1990s working in the former communist controlled parts of Eastern Europe (particularly Poland), as well as Ukraine and Russia. I became frustrated with the fact that standard economic policy tools were not working as expected, and I started to dig into informal entrepreneurship, the rule of law, and corruption for an explanation. Looking back (and emphasizing that I did not use these words at the time!), I was hot on the trail of inclusive institutions.
How did the collaborative nature of your work with Daron Acemoglu and James A. Robinson shape your approach to the complex questions explored in the research?
Daron and Jim are deep thinkers, with a broad view of history and politics. In my first conversation with Daron in the late 1990s, I realized that they were very close to cracking the code of what makes for robustly inclusive institutions. They were just missing one piece - and I helped them discover that piece. Once we had that, a lot of other things began to fall into place.
Looking back, what do you consider to be the most influential moment of your career?
It was a conversation with Daron after a particular seminar. We agreed instantly and entirely that geography by itself could not explain much of why some countries are so much richer than others. Daron asked me if I wanted to help them find the missing piece – a causal answer to the question of why Europeans did such dramatically different things in different parts of their empire. It sounded like an incredibly difficult and open-ended task - and I jumped hard at the opportunity. Working with Daron and Jim was a fantastic experience.
What has been the most surprising discovery or insight for you while studying the persistence of institutional differences?
The form of European colonization imprinted institutions on countries so deeply that the consequences have lasted for centuries – up to 500 years in some cases. History is not destiny, but it has proved remarkably difficult to escape the legacy of extractive institutions.
What key lessons can developing nations learn from your research when addressing their political and economic systems?
There are no easy or “one size fits all” lessons. Building a middle class is important. Allowing more political voice can be helpful. And sharing prosperity with people of all education levels should be the priority. But even in the United States and Western Europe today we struggle with the same issues – as you can see from reading newspaper headlines on any day of the week.
Your research suggests that under certain circumstances, societies can break free from extractive institutions and establish more inclusive ones. What are some of these circumstances, and how can they lead to long-term prosperity?
This is not easy. The most inspiring examples include engaging with the international economy, but not in a way that consigns you always to produce raw materials or to have low-cost labor. Singapore and South Korea were both quite poor in 1960 and found ways to build real prosperity. Poland and some other parts the former Communist world did something similar by integrating more closely with the European Union. But for countries that had the most extractive institutions under colonialism, these transitions have proved extremely difficult.
Are there contemporary examples of countries that have successfully transitioned from extractive to inclusive institutions? In your opinion, what key lessons can be learned from their experiences?
See my answer above. If we look over a long enough historical period, we could put some European countries in this category also - including parts of Scandinavia. But they started early and managed to combine democratization with industrialization. The world economy today is a hard place - it is too easy for elites to make a lot of money through extraction, and they can use those resources to stay in power.
Could international bodies, like the IMF or World Bank, use your findings to support countries trapped in a cycle of extractive institutions?
The Fund and the Bank know all this already! I worked at the IMF for 3 1/2 years in the early 2000s, including for 18 months as chief economist, and we had many discussions about the way in which institutions encouraged or, more often, impeded sustainable prosperity. I left the IMF more than 16 years ago and I know they still care and think about these issues. But when entrenched elites are primarily focused on their own wealth, it is hard to make progress.
What areas of research do you believe can be explored further when it comes to the link between historical institutions and modern-day prosperity?
Digging more deeply into what happened in particular countries generates a lot of additional insight and, hopefully, perspectives on what may make a difference. The brilliant research of Melissa Dell on Peru and Lakshmi Iyer on India springs to mind, but there are many other smart young people active in this area.
How do you see the field of economics evolving in the next decade, and what role do you see yourself playing in that evolution?
In 2023, Daron Acemoglu and I published Power and Progress: Our Thousand-Year Struggle of Technology and Prosperity, arguing that we need to think more clearly about the choices we make as societies regarding the direction of technological change – and focus on how to generate what we and David Autor (our colleague at MIT) call “Pro-Worker AI”. If AI enhances the marginal productivity and pay of workers who did not go to college, it can potentially reduce inequality not just in the US but also around the world. The path of innovation driven purely by Big Tech is not likely to deliver that – and there are many cautionary tales from history to reinforce this point. But we can also do much better when (and if) we grasp that shaping the vision for technology is fundamental. If you allow a few billionaires to drive the tech agenda, you will get the world that they want – in which they hold all the power. But how to change the path of technology, to root it more deeply in democracy and a wider set of voices? This is not easy, but we (and others) are working hard on this.