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External Shocks in a Small Open Economy: A CGE - Microsimulation Analysis

Author

Listed:
  • Vaqar Ahmed

    () (Macroeconomics Section, Planning Commission, Islamabad, Pakistan.)

  • Cathal O'Donoghue

    () (Rural Economy Research Centre, Teagasc, Athenry, Ireland.)

Abstract

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.

Suggested Citation

  • Vaqar Ahmed & Cathal O'Donoghue, 2010. "External Shocks in a Small Open Economy: A CGE - Microsimulation Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(1), pages 45-90, Jan-Jun.
  • Handle: RePEc:lje:journl:v:15:y:2010:i:1:p:45-90
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    References listed on IDEAS

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    Cited by:

    1. mahmood, Hamid mahmood & gul, Sidra gul, 2014. "Assessing the impact of fta: a case study of pakistan- malaysia fta," MPRA Paper 55802, University Library of Munich, Germany, revised 12 Jun 2014.
    2. Hassan, Syeda Anam & Zaman, Khalid, 2012. "Effect of oil prices on trade balance: New insights into the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2125-2143.

    More about this item

    Keywords

    Microsimulation; computable general equilibrium; poverty; inequality; balance of payments; Pakistan.;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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