In this case study we adopt a macro-micro framework in order to evaluate the impact of the current global crisis on the Pakistan economy. We use a ‘top-down’ approach to combine a static computable general equilibrium model with a microsimulation model. Our results suggest that between 2007 and 2009 the poverty headcount ratio is likely to have increased by almost 80 percent, from 22 to 40 percentage points. However, our results also show that this increase is attributable in part to the fuel and food crisis that preceded the financial crisis. Our results also indicate a differential impact, with wage increases for farm workers and a decrease in wages for skilled labour.CGE; micro-macro; global economic crisis; Pakistan

Cathal O’Donoghue

Vaqar Ahmed

English

Research Papers in Economics

INTERNATIONAL JOURNAL OF MICROSIMULATION (2010) 3(1) 127-129 
Global Economic Crisis and Poverty in Pakistan 
 
Vaqar Ahmed
1 and Cathal O’ Donoghue
2 
1 Planning Commission of Pakistan; email: vahmed@gmail.com 
2 Rural Economy Research Centre (RERC), Teagasc, Ireland; email: Cathal.ODonoghue@teagasc.ie 
 
ABSTRACT: In this case study we adopt a macro-micro framework in order to evaluate the impact of the 
current  global  crisis  on  the  Pakistan  economy.  We  use  a  ‘top-down’  approach  to  combine  a  static 
computable general equilibrium model with a microsimulation model. Our results suggest that between 
2007 and 2009 the poverty headcount ratio is likely to have increased by almost 80 percent, from 22 to 
40 percentage points. However, our results also show that this increase is attributable in part to the fuel 
and food crisis that preceded the financial crisis.  Our results also indicate a differential impact, with wage 
increases for farm workers and a decrease in wages for skilled labour. 
 
Keywords: CGE; micro-macro; global economic crisis; Pakistan 
 
 
I. INTRODUCTION 
 
The  global  economic  crisis  impacts  developing 
economies  through  trade,  aid,  remittances  and 
investment  channels.  The  precise  magnitude  of 
effect across countries differs, depending on their 
level of  integration  into  the  world  economy.  The 
economy  of  Pakistan,  which  during  this  decade 
witnessed steady growth along with rising foreign 
direct  investment,  remittances  and  exports,  has 
found  itself  recently  with  declining  foreign 
exchange  reserves
1,  rising  twin  deficits
2,  and 
falling overall economic growth
3.  
 
Table  1  provides  a  snapshot  of  recent  economic 
performance.  The  real  GDP  growth  rate  declined 
from 9 percent in 2005 to as low as 2 percent in 
2009.  Before  the  crisis,  poverty  had  fallen 
substantially  with  the  headcount  ratio  declining 
from almost 35 percent in 2001 to 22 percent in 
2006.  However  for  2009,  it  is  provisionally 
estimated  to  have  climbed  to  as  much  as  40 
percent, an increase of almost 80 percent.  
 
The reduction in poverty and progress toward the 
achievement of the Millennium Development Goals 
were  to  some  extent  attributable  to  the 
unprecedented  increase  in  poverty-related  public 
spending  that  was  possible  due to  the  increased 
fiscal  space  available  to  the  federal  government 
during this period. However, soon after the global 
economic crisis, a sharp reduction was observed in 
this  spending.  The  shares  of  public  sector 
development  expenditure  on  for  example  health 
and  education  were  cut  by  34  and  26  percent, 
respectively.  The  overall  poverty  related  public 
spending declined by 45 percent.  
 
There  have  been  several  attempts  to  trace  the 
impacts  of  external  shocks  such  as  the  global 
financial  crisis  on  national  poverty  profiles  in 
developing countries. For the impact on monetary 
poverty,  see  Friedman  and  Levinsohn  (2001), 
Robilliard et al. (2001), Bourguignon et al. (2003), 
and  Weeks  (2009).  For  the  impact  of  economic 
crises on nutritional status and welfare in general, 
see  Block  et  al.  (2004),  Chapman-Novakofski 
(2009),  and  Chen  and  Ravallion  (2009).  In  this 
paper we have adopted a macro-micro framework 
in  order  to  evaluate  the  impact  of  the  current 
global crisis on the Pakistan economy. 
 
 
II. DATA AND METHODOLOGY 
 
We  use  a  static  computable  general  equilibrium 
(CGE) model following Decaluwé et al. (2009). We 
link  this  model  in  a  top-down  manner  with  an 
income generation framework shown in Alatas and 
Bourguignon (2005). The Social Accounting Matrix 
(SAM)  for  our  Computable  General  Equilibrium 
(CGE) model is derived from Dorosh et al. (2006). 
The  main  data  source  for  the  microsimulation 
model is the 2002 Household Integrated Economic 
Survey (HIES). 
 
In  the  agricultural  sector,  capital  and  land  are 
assumed to be fixed and in non-agriculture sector 
only capital is fixed. Unskilled non-farm labour is 
fully  mobile  between  sectors,  whereas unskilled
 
 
Table 1 Pakistan - Macroeconomic Situation 2001 - 2009 
Indicators  2001  2005  2006  2007  2009* 
GDP growth (%)  2.0  9.0  5.8  6.8  2.0 
Exports (US $ billion)  9.2  14.4  16.4  16.9  17.8 
Imports (US $ billion)  10.7  20.6  28.6  30.5  34.8 
FDI (US $ billion)    1.5  3.5  5.1  3.7 
Remittances (US $ billion)    4.2  4.6  5.5  7.8 
External debt and liabilities (US $ billion)    35.4  37.2  40.3  52.8 
Poverty headcount ratio  34.5  23.9  22.3    35 – 40 
Poverty related expenditure (US $ billion)    5.3  6.3  7.0  3.8 
Exchange Rate  58.4  59.4  59.9  60.6  78.0 
Source: Economic Survey of Pakistan, State Bank of Pakistan - Annual Reports 2001-2009. 
Notes: *provisional estimates 
 AHMED AND O’DONOGHUE      Global Economic Crisis and Poverty in Pakistan                         128 
 
farm labour is only used in agriculture and skilled  
labour  is  only  used  in  non-agricultural  sectors, 
where they are also fully mobile. Supply of land is 
fixed and sector-specific. Total investment is fixed 
and equal to total savings, which is comprised of 
household, firm, foreign and government savings. 
Real government expenditure is held fixed and the 
public  deficit  is  flexible.  The  nominal  exchange 
rate  is  kept  flexible,  which  implies  that  foreign 
savings,  which  are  fixed  in  nominal  terms,  are 
flexible  in  domestic  currency  terms.  Thus  the 
external  account  is  cleared  by  the  nominal 
exchange rate. 
 
 
III. RESULTS 
 
In what follows we analyse the impact of the crisis 
in a two-pronged manner. First, we simulate the 
poverty effect of observed changes in wage rates, 
self-employment  and  consumer  prices  between 
2007 and 2009. However, these changes are not 
necessarily only attributable to financial crisis, as 
other factors may have come into play such as the 
rise  in  fuel  and  food  prices  preceding  the  crisis. 
Second,  we  use  our  combined  CGE  and 
microsimulation  models  to  simulate  the  macro-
micro impact of a 25 percent decline in  external 
resource  inflows  (foreign  savings).  This  reflects 
what has been observed during the financial crisis, 
leading to a depreciation of the Pakistani Rupee by 
almost 28 percent.  
 
In the first analysis, we note that, between 2007 
and 2009, wages for skilled and unskilled labour 
fell by almost 9.5 and 3.6 percent. Returns to self 
employment declined by 11 percent.  Food prices 
increased by almost 28 percent and the price for 
fuel went up by almost 70 percent.
4 Using only the 
micro model we estimated that this will have led 
to an increase in poverty by almost 39.6 percent.
5 
The  poverty  gap  and  severity  will  also  have 
increased by 26.8 and 19.4 percent, respectively. 
The overall decline in per capita caloric intake is 
estimated  at  around  8.5  percent,  with  urban 
households facing a higher magnitude of decline. 
Average per capita daily caloric intake was 2349 
calories in 2007. With an 8.5 percent decline, this 
will now be around 2149 calories.   
 
In  the  second  analysis,  using  the  macro-micro 
framework,  we  see  that  the  decline  in  external 
resources  will  have  reduced  real  investment  by 
1.2  percent  (Table  2).  Imports  decrease  on 
account of the currency depreciation and there is 
some  increase  seen  in  exports,  which  become 
relatively  more  competitive.  Textile  exports 
increase  by  5  percent.  This  is  of  particular 
importance  as  textiles  constitute  around  60 
percent  of  Pakistani  exports  and  an  important 
source  of  employment.  Wages  increase  for  farm 
workers
6,  remain  unchanged  for  unskilled  non-
farm  workers,  rise  marginally  in  the  case  of  the 
self  employed  and  decline  for  skilled  labour.
7  A 
general increase in consumer prices is observed as 
a result of the depreciation of rupee and the rising 
food  and  fuel  import  bill.
8  As  a  result,  food 
consumption  falls  by  1.3  percent.  The  poverty 
headcount  ratio  increases  by  almost  4  percent, 
with  the  poverty  gap  and  severity  increasing  by 
1.5 and 1 percent, respectively. 
 
 
Table 2 Decline in External Resource 
  Inflow (foreign savings) 
Variables  Percentage  
Change 
Real Investment  -1.2 
Government Revenue  0.9 
Wages   
   Unskilled_farm  3.6 
   Unskilled_non farm  0.0 
   Skilled  -2.8 
Self employment  0.2 
Returns to Land  3.9 
Exports   
   Cotton yarn  0.8 
   Textile  5.0 
Consumer Prices   
   Food  3.4 
   Fuel  1.9 
Poverty   
   FGT 1  3.6 
   FGT 2  1.5 
   FGT 3  0.9 
Consumption (food)  -1.3 
 
 
The  impact  of  fall  in  foreign  inflows  on 
disaggregated food consumption is shown in Table 
3  and  reveals  adjustments  in  consumption 
patterns in response to changes in relative prices 
and  falling  incomes.  The  consumption  of  cereals 
and pulses increases, which are staples, while that 
of  meat,  fish,  sugar  products,  vegetables  and 
processed  food,  (which  are  also  imported) 
decreases.  This  substitution  away  from  non-
essential food items toward staples is a common 
coping strategy to preserve caloric intake. 
 
 
Table 3 Change in food consumption (quantity) 
 
Product 
Percentage  
change 
Milk products  0.2 
Meat & fish  -0.5 
Fruits  -1.6 
Vegetables  -1.7 
Sugar products  -0.4 
Beverages  -1.5 
Cereals  1.3 
Pulses  1.2 
Oil & fats  -1.4 
Tea  -1.5 
 
 
IV. CONCLUSION 
 
In this short case study we have tried to show the 
impact  of  the  global  economic  crisis  on  Pakistan 
economy. Our results estimate that between 2007 
and  2009,  poverty  increased  by  almost  40 
percent.  However  this  is  also  attributable  to  the 
fuel  and  food  crisis  that  preceded  the  financial 
crisis.  More  recently  Pakistan  witnessed  a  sharp 
reduction in foreign capital inflows on account of AHMED AND O’DONOGHUE      Global Economic Crisis and Poverty in Pakistan                         129 
the  global  recession,  among  other  reasons.  This 
led  to  a  sharp  depreciation,  a  decline  in 
investment, falling wages for skilled workers, and 
a  general  rise  in  consumer  prices.  At  the  micro 
level, we estimate that this resulted in a 4 percent 
increase  in  poverty  with  food  consumption 
declining by 1.3 percent. 
 
Dealing with the crisis is difficult for Pakistan due 
to  fiscal  constraints.  Balance  of  payments 
weaknesses forced the country to resort to an IMF 
stand-by  arrangement,  which  imposed  further 
conditionalities  on  the  budget.  Subsidies  on 
wheat,  electricity,  fertilizer  and  oil  had  to  be 
phased  out,  which  in  turn  increased  the 
inflationary burden on the consumer. While there 
are  some  social  safety  nets  at  the  federal  and 
provincial  level,  access  to  these  has  generally 
become  more  difficult.  Reforms  to  better  target 
social safety nets are still underway. 
 
Acknowledgements 
 
The  authors  would  like  to  acknowledge  funding 
from  the  Poverty  and  Economic  Policy  (PEP) 
research  network  which  is  financed  by  the 
Australian  Agency  for  International  Development 
(AusAid) and the government of Canada through 
the  International  Development  Research  Centre 
(IDRC)  and  Canadian  International  Development 
Agency  (CIDA).  Acknowledgements  are  also  due 
to  John  Cockburn,  Paul  Dorosh,  Stefan  Boeters, 
and Saira Ahmed for their comments and technical 
help. 
 
Notes 
  
1   The accumulated forex reserves declined to 
record low levels in the wake of rising cost of 
importing fuel and food.  
2   The import bill reached to unprecedented 
levels. The fiscal deficit worsened as the 
government continued subsidies on wheat, 
electricity, fertilizer and oil, in order not to pass 
on the full effect of rising prices abroad.  
3   The domestic manufacturing sector found it 
difficult to maintain the growth momentum due 
to infrastructure shortages particularly poor 
provision of energy. Consequently in 2008-09 
the growth rate of large scale manufacturing 
turned negative and remained so consecutively 
for the next 17 months. The textile sector was 
also hit to some extent by declining external 
demand. 
4   Also attributable to the removal of a subsidy as 
a result of IMF conditionality.  
5   Our findings are in line with the Panel of 
Economists Report submitted to Pakistan’s 
Planning Commission, which found an increase 
in poverty from 22 to almost 40 percent.  
6   Shown separately from other unskilled 
workers. 
7   The increase in textile and particularly cotton 
based textile exports are also partly 
responsible for increased returns to farm 
workers and also helped the change in returns 
to unskilled workers from turning negative.  
8   In the overall imports, food and fuel imports 
have 7 and 23 percent share respectively. 
 
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Case Study: Global economic crisis and poverty in Pakistan

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Case Study: Global economic crisis and poverty in Pakistan

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