Financial Market Development, Economic Development and Growth Diagnostics: An Application to Peru

Abstract

The purpose of this paper is two fold. First, we hope that the analysis contained here will provide policymakers in Peru with a guidepost to framing appropriate financial and economic policy.  Second, we hope to offer policymakers everywhere a template to implement a similar type of “growth diagnostic” for their respective countries.  In this paper we find that the macro and micro-economic milieu in Peru constitutes a binding constraint and relieving this constraint would lead to significant economic growth. A recent World Bank study and a World Economic Forum survey confirm our general findings. In addition, our analysis indicates the following: Peru is not savings or investment constrained in either domestic or international markets; Peru is clearly constrained by a lack of “High Quality” human capital; poor infrastructure in Peru results in high transportation costs causing an adverse impact on competitiveness. Surprisingly, the sophistication of Peru’s exports was not a constraint, and in fact, Peru appeared to do quite well in terms of self discovery.