Minsky meeting Prebisch: Some questions on Peru’s successful macroeconomic model

Abstract After decades of macroeconomic instability, in the last twenty years the Peruvian economy seems to have finally stabilised around relatively high growth rates with price stability. This good performance was achieved within a policy framework aligned with the New Macroeconomic Consensus. However, the downside of this process was a sustained current account deficit and a continuous increase in external indebtedness (both in terms of foreign direct investment and portfolio investments). Even when the terms of trade were favourable, Peru did not manage to balance its external accounts. The chronic current account deficit and the sustained growth above the balance-of-payment equilibrium growth rate suggest, first, that Peru’s good economic performance is not sustainable and, second, that there are deep structural elements underlying this lack of sustainability. We build upon Kregel’s (2004) extension to the open economy of Minsky’s financial instability hypothesis to define a set of indicators aimed at gauging Peru’s external financial fragility. We find that in the period 2000–9 there is a strong structural tendency for the Peruvian non-financial private sector to oscillate between a speculative and a Ponzi situation, where net exports and remittances are not enough to face the debt services, thereby leading to a continuous increase of external indebtedness. We conclude the paper by linking Peru’s external financial fragility to the structure of its economy, which is a result of historical processes that can only be modified over a long time period if a set of active policies are deployed and sustained.