This paper studies the impact of changes in the external balance of
Pakistan. We explain why the economic growth achieved during the past
decade was highly dependent on improvements in the external balance.
Between 2001 and 2007, Pakistan benefited from an increase in
remittances, foreign assistance from bilateral and multilateral sources, and
a relatively stable exchange rate. After 2007, this performance came under
pressure from external price shocks. The rise in the import prices of
petroleum, raw materials and other manufactured goods has the potential
to reduce the country’s growth performance, impacting the competitiveness
of the economy and threatening the gains achieved during past years. We
integrate a computable general equilibrium (CGE) model with a
microsimulation model to study the effects of changes in foreign savings
and import prices faced by Pakistan. An increase in foreign savings leads
to an increase in imports and a decrease in exports. The main sectors
facing a decline in exports are textiles, leather, cement, and livestock. In
this simulation food and oil prices decline and the factors of production
that gain are agricultural wage labor and nonagricultural unskilled wage
labor. The increase in import prices of petroleum or industrial raw
material leads to a reduction in exports. In this simulation the crop sector
is negatively impacted and returns to land and profits to farm owners
increase, showing a change in favor of agricultural asset owners, while
poverty and inequality increase.
External Shocks in a Small Open Economy: A CGE -
Microsimulation Analysis