chapter  5
39 Pages

Austerity, External Debt, and Capital Formation in Peru

WithPaul Beckerman

This chapter outlines the analytical relationship among an economy's capital formation, its real growth rate, and its external-debt accumulation, on the basis of a simple extension of the well-known Harrod-Domar growth analysis. It discusses this issue in analytical terms; the noneconomist may wish to skip it. The basic point is that Peru's heavy interest burden severely limits its capital formation. The chapter deals with the relationship among capital formation, austerity, and external debt#8212;first in theory and then with respect to Peru up to the time that Garcia took office. The constraint on capital formation has been one of the debt crisis's most troubling consequences for developing nations. Physical capital and accumulated-saving stocks are, almost by definition, relatively scarce in poorer nations and abundant in richer nations. The growth rate of the nation's capital stock, while uncertain in magnitude, has undoubtedly been low —and this likely accounts in large measure for the country's declining real per capita growth since 1975.