By Nicholas Li

On February 28th Simon Johnson was named the new chief economist at the IMF. Professor Johnson is an economist at the MIT business school with previous work experience at the IMF. He takes over from Raghuram Rajan, an economist at the University of Chicago. As chief economists, their responsibilities include setting the IMF’s research agenda and also providing major input into policy.

The interesting thing about Johnson and his predecessor Rajan is that their research is concentrated in financial institutions and institutional economics more broadly. Johnson is perhaps best known for being the J in AJR (Acemoglu, Johnson, and Robinson), the famous trio of economists who wrote "The Colonial Origins of Comparative Development" the most cited article on growth and development economics in the last decade. That paper examines how malaria and other ecological conditions that influenced early settlement patterns (in particular the decision by white Europeans to settle or to set up "extractive" colonial regimes) influenced the quality of institutions (in particular the strength of property rights, the judiciary, and democracy) and subsequent growth patterns in the 20th century.

Why is this noteworthy? Rajan’s predecessor, Kenneth Rogoff, is a straight up international macroeconomist who specializes in exchange rates, current account balances, currency crises, and the like. This fits perfectly with the IMF’s original role as an international lender of last resort that would come to the aid of countries facing temporary balance of payments or liquidity crises that would have upset the system of fixed exchange rates initiated with the Bretton Woods system in 1944. The role of the IMF, as originally devised by John Maynard Keynes and others, was to intervene in moments of crisis to maintain stability – moments like the Mexican Peso crisis of 1994 or the Asian Financial crisis of 1997-1998. The World Bank was charged with long term development, especially construction of dams, bridges, and infrastructure. If any of the Bretton Woods institutions was to have a role in governance, it would undoubtedly be the UN, as the most democratic (in global terms) of the institutions.

There has been a sea-change in the role and scope of these institutions since their original founding. Both the World Bank and the IMF have become involved in the governance of countries, as advisers (and often debt collectors) telling (or forcing) countries to its policy prescriptions. This has now extended beyond the "good policies" of the Washington Consensus Approach to encompass "good institutions" – legal codes, judiciaries, transparency in government, and open financial markets. This was particularly evident following the Asian financial crisis, as the IMF stepped in and told countries like South Korea and Malaysia to change the way their banking system operated ("crony capitalism"), remove capital controls, and reform the institutions that they had adopted during their years of explosive growth. This approach was heavily criticized by some economists like Joseph Stiglitz, then Chief Economist at the World Bank. Many countries considered this to be over-stepping and a virtual return to colonialism with wealthy countries (through the IMF) dictating policies to developing country governments. See in particular the comments of Mahatir Mohamad, the Prime Minister of Malaysia.

The appointment of Rajan and then Johnson confirms that the IMF increasingly sees its role as that of the surgeon doing preemptive surgery, and not as the surgeon in the ER. It will be interesting to see in what directions Johnson takes the IMF and its research department, and whether the IMF can really be effective in this role as a transformer of fundamental institutions.

Above: Simon Johnson.