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

Author

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  • Vaqar Ahmed
  • Cathal O'Donoghue

    (Department of Economics, National University of Ireland, Galway)

Abstract

This paper studies the impact of changes in the external balance of a developing economy (Pakistan). We explain that the economic growth achieved during the past decade is highly dependent on the improvements in external balance. Between 2001 and 2007 Pakistan has benefited from, an increase in the inflow of remittances, foreign assistance from bilateral and multilateral sources, and a relatively stable exchange rate. This was also complimented by growth in the real sector. The GDP grew at an average of 6 percent from 2001 to 2007. During the same time period the investment to GDP ratio increased from 17 to 23 percent. After 2007 this performance came under pressure due to external price shocks. The increase in import price of petroleum, raw materials and other manufactured goods has the potential of reducing the growth performance, impacting the competitiveness of the economy and thereby threatening the gains achieved during the past years. We integrate a 33 sector CGE model with a detailed microsimulation model to study the effects of changes in foreign savings and import prices faced by Pakistan. A 50 percent increase in foreign savings leads to an increase in imports and a decrease in exports. Main sectors facing a decline in exports are textile, leather, cement and livestock. Changes in prices seem pro-poor as food and oil prices decline. Those factors of production that gain under this change are agricultural wage labor and non-agricultural unskilled wage labor. The later indicating a change in favor of urban poor. The increase in import prices of petroleum or industrial raw material leads to a reduction in exports. The prices impact the crop sector adversely. Return to land and profits to farm owners increase showing a change in favor of agricultural asset owners. Poverty and inequality increase.

Suggested Citation

  • Vaqar Ahmed & Cathal O'Donoghue, 2009. "External Shocks in a Small Open Economy: A CGE-Microsimulation Analysis," Working Papers 0142, National University of Ireland Galway, Department of Economics, revised 2009.
  • Handle: RePEc:nig:wpaper:0142
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.

    More about this item

    Keywords

    Microsimulation; Computable General Equilibrium; Poverty; Inequality; Balance of Payments Algorithmic Trading; MACD;

    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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