In the following interview, Professor Winkelried reflects on his time in Cambridge, his research interests and the highly complex reality of his country.
Diego Winkelried [Class of 2005] is a Peruvian economist who currently works as Associate Professor at the Department of Finance at Universidad del Pacífico (Lima, Peru). He has conducted research on a wide array of topics, such as monetary policy, impact evaluation, development economics and quantitative methods. His work has been the recipient of numerous distinctions, including many past editions of the Rodrigo Gómez Award from Centre for Latin American Monetary Studies. His academic articles have appeared in the Journal of Development Economics, Economic Development and Cultural Change, the Journal of International Money and Finance, the International Journal of Central Banking, among other publications. Outside academia, he has served as Head of the Department of Macroeconomic Models at the Central Reserve Bank of Peru (BCRP). After completing a degree in Economics at the Universidad del Pacífico, he pursued an MPhil and a PhD in the same subject at the University of Cambridge.
Take us back to 2005. What did it mean for you to be selected as the first Gates Cambridge scholar from Peru?
I remember vividly when the chair of the Gates Cambridge scholarship committee, who interviewed me, asked me to name the accomplishment I was proudest of.
“I answered nervously but spontaneously: ‘I am proud of this very moment, being here talking to you and having a serious chance to be selected as a Gates scholar; this is the accumulation of many smaller achievements (savings, traveling abroad, polishing my English, etc.), none of them spectacular but all of them important.’ Then he nodded and smiled in return, and I knew I got it!”
Since then, being a Gates scholar remains a continuous source of pride because it rewarded the effort and dedication I put into my “Cambridge project”. Being the first Peruvian Gates scholar makes it even more special.
You spent almost five years at Cambridge. In what ways did your experiences at the university shape you to become the economist you are today?
Cambridge is a magical place to study. I learned a lot about economics, especially econometrics, which was the main topic of my PhD thesis. However, it was the exposure to and interactions with many areas of knowledge that truly made the experience unique for me. I joined the Cambridge Statistics Initiative, which brought together faculty and students from different backgrounds and disciplines who shared a common interest in the usage of statistics in their research. Numerous fields were involved, including theoretical statistics, biology, astronomy, material sciences, economics, and other social sciences. As a scholar from St John’s College, I immensely enjoyed the formal halls where seats were often randomly allocated, providing the opportunity for engaging in long conversations over fine wine with experts from a vast array of fields, very different from mine.
My time in Cambridge not only helped me develop a fascination for knowledge itself but also instilled a sense of humility regarding what we can personally achieve. Economists often tend to be somewhat arrogant about the relevance of our work and our contribution to society. Thus, I feel that this modesty has served as a wise advisor, making me a better person, and possibly a better economist.
Something you emphasise in your Gates bio is that you have “a deep interest in social behaviour”. In the context of a democracy, how can the state influence the way people behave on a daily basis to foster macroeconomic stability?
I wrote this bio several years ago, and most of it still applies. I continue to find it fascinating how individuals coordinate and cooperate on a large scale, most often anonymously, in a grandiose process that is well beyond our candid comprehension.
“Economics attempts to provide some answers through a better understanding of the workings of markets and the price system. My experience studying some of these processes in developing countries, especially in Latin America, and working in a first-class institution isolated from the influence of politics, has led me to the conclusion that the state should focus on guaranteeing the basics for these institutions to function smoothly.”
This includes providing an efficient framework to protect property rights and to promote the rule of law. To our disappointment, most of the time governments and politicians waste their time, and ours, pursuing anything but these essentials.
According to the Inter-American Development Bank, Latin America is among the most unequal regions in the world. How can developing countries generate economic growth with equity under such diverse and uneven conditions?
Inequality and its relationship with economic growth are complex phenomena, partly because they are dynamic. Hence, it is useful to think of them in dynamic terms. Whereas it is true that Latin America remains a region with large inequality, it has decreased significantly during the last two decades, a period where economic growth was strong and persistent. I have documented such a decline, with a special emphasis on the Peruvian experience, in a recent paper.
The evidence points out that Latin America is at a stage of economic development such that economic growth, especially when it is sustained, tends to reduce inequality. See the chapter by Norman Loayza in this collection (an English version is in chapter 2 here). In such a context, the investments underlying economic growth expand activity by capitalising previously undercapitalised sectors, thereby increasing productivity and the amount and quality of employment. Growth becomes more inclusive and appears to have a stronger impact on low-income groups. My work on this topic has documented considerable upper income mobility in Peru, especially for vulnerable groups such as the uneducated and unskilled workers.
Furthermore, Loayza’s chapter in this collection suggests that Latin American governments have limited capacity to implement effective distributional policies. Thus, for now, it seems sensible to conclude that promoting economic growth is the most effective policy to reduce inequality.
Last year, Peru’s economy experienced its second worst contraction in 33 years, with the GDP falling 0.6%. Amid ongoing political turmoil and economic downturn, are there reasons to be optimistic about the future of your country?
Private property rights are among the most important institutions for healthy long-run economic growth. Thus, experts may argue that one of the basic functions of the state must be to secure and protect private property. Unfortunately, I perceive an increasing incapacity (or perhaps unwillingness) of the government and the courts to credibly protect private property. Since 2020, assaults on productive private property have significantly increased—including mines and mining equipment being burned, threats of expropriation from a minister, and incidents of land trafficking and fraud—with no corresponding increase in the prosecution of such crimes. If I can perceive such weakening in the rule of law, so can investors from around the world.
While it is true that investors can tolerate some risk in a politically unstable country such as Peru, I am concerned that the risk has increased without a corresponding rise in expected returns. I don’t expect sustainable growth to resume until these issues are resolved.
Along with your job as a full-time professor, you’ve served as Head of the Department of Macroeconomic Models at the Central Reserve Bank of Peru (BCRP). You have referred to BCRP as “the guardian of the sea”. What are some of the lessons you took away from your time at such an impactful institution like BCRP?
By the end of the 1980s, as a result of numerous populist and interventionist government policies and a central bank completely dominated by politics, Peru experienced hyperinflation. For instance, in 1990 alone, inflation was 7,650%. Then, the country embarked on a series of reforms to try to address this mess. Some of these reforms are reviewed in this project, and I have argued that one of the most important was the monetary reform.
In 1993, the Peruvian Constitution granted the BCRP independence; the government does not influence its goals, instruments, or decisions of monetary policy. Additionally, it forbids the BCRP from lending money to the government, which was arguably the main driver of the hyperinflation. The board of the BCRP is appointed by the President and the Congress, but since then there has been an unusual understanding among politicians that the board members should be (mostly, not always) competent and committed professionals. It can be argued that such a reform was instrumental in achieving the sustained economic growth later on, as per capita GDP increased by a factor of 2.5 between 1993 and 2019.
“Think of the Peruvian monetary reform as Ulysses resisting the bewitching song of the sirens by having his ship’s crew tie him up and block their own ears to prevent themselves from hearing the song. That is to say, the reforms created an institutional arrangement that kept the workings of an important actor like the BCRP relatively isolated from the political intrigue and appetites that are so volatile and harmful in countries like mine.”
I worked at the BCRP, which was truly an isle of efficiency in the public sector and a challenging, inspiring place to work. I called it “guardian of the sea” as an analogy to a solitary lighthouse that provides guidance and much needed clarity in a sea of darkness. The most important lesson from the BCRP experience is that a public institution can function effectively if it is kept far enough from politicians in a credible way.
The Central Reserve Bank of Peru (BCRP). Photo credit: Paulo Guereta, licensed under CC BY 2.0, via Wikimedia Commons.
In an article you published last year, you expressed your concern about a significant increase in the number of Peruvians leaving their country. Is there anything that can be done within Peru to alleviate the brain drain associated with this mass emigration?
In that article, I argue that significant economic and institutional reforms in the 1990s, such as the monetary reform I mentioned, leveled the playing field for two decades of strong economic growth. This growth led to a significant reduction in both poverty and inequality, as previously noted.
Warren Buffett used to say: “Only when the tide goes out do you discover who has been swimming naked”. Now that economic growth has weakened, it seems obvious that further urgent reforms are required. In addition to my previous concerns about the defense of private property in the country, I believe the economy is over regulated. Red tape makes doing business very difficult. Labour legislation is abundant, unclear and contradictory. The Peruvian labour market is very rigid, which explains why about 80% of the workforce is employed in the informal sector. This, of course, hinders the translation of economic growth into further improvements in living conditions.”
Many of these obstacles to growth can be dealt with relative ease, but the political will seems lacking. I believe this uncertainty is the main reason why the number of Peruvians emigrating tripled in 2022, following a decade of sustained decline.
Over the years, you’ve engaged with large audiences through a variety of platforms and events. How have you managed to bridge the gap between the academy and the general public?
I think that if I managed to convey clear messages colloquially, it is because I enjoy teaching. Thus, I naturally feel the urge to make potentially complicated messages as simple and intuitive as possible. Not necessarily to a very broad audience, but at least to educated yet uninformed students.
In 2021, the Research Center at Universidad del Pacífico, where I am affiliated, asked me to write the macroeconomic chapter of a volume to commemorate the Bicentennial of the Independence of Peru. In that chapter I made the simple computation that during my lifetime the yearly average Peruvian inflation amounted to 300%—I witnessed the conquest of Peruvian inflation as a teenager —while the yearly average inflation experienced by my students was less than 4%. I immediately felt the urge to convince them that they belong to a generation for which macroeconomic stability is taken for granted, and it is crucial for them not to become complacent. These kinds of messages are the most difficult to transmit persuasively but, at the same time, are the most important.
What can you tell us about the projects (in research or otherwise) you’re currently working on?
In 2014, the Universidad del Pacífico launched its undergraduate degree in Finance, and I am now the chair of that program. Much of my time is devoted to consolidating the program and making it world-class. Thus, I have devoted some of my research to applying financial econometric techniques that are particularly relevant and beneficial to our graduating students.
The topics of how institutions can help markets work smoothly to the benefit of all their participants remain the line of inquiry in which I am most interested.
The views expressed in this piece are solely those of the author(s) and do not reflect those of the Editorial Board, the Scholars’ Council, the Gates Cambridge Trust or the University of Cambridge.