MPIA-12237 Global Financial Crisis, MDGs and Choices for Pakistan’s Inclusive Development

Abstract

The global financial crisis which followed oil and food price crises threatens to wipe out the gains made towards the achievement of Millennium Development Goals (MDGs) in the past years. The first goal which emphasises on the eradication of poverty and hunger now seems to be low on priority as most developing countries are focused more on macroeconomic stabilization and recovery. The pass-through channels by which the external shocks impact poverty, malnutrition and hunger include remittances, official development assistance (ODA), private capital flows, and exports. The import prices also influence domestic prices, input costs, and household consumption. Similarly the export prices also influence factor returns. At the end of 2008, World Bank and independent forecasts showed that remittance flows to developing countries will decrease by over 7 percent in 2009. The low case scenario indicated that in South Asia (home to half the world’s poor) the remittances will decline by 6.4 percent. These flows may be more uncertain if the developed economies see volatility in the value of their currencies. This gloomy milieu was not helped by the fact that the global private capital flows to developing countries were also projected to decline by more than 50 percent in 2009. The weak employment projections in the developed countries implied anti immigration sentiments which could further reduce the flow of workers from poor countries. According to the Global Development Finance 2009 net private capital inflows to developing economies were $1.2 trillion in 2007. However this figure was projected to fall in 2009 to around $363 billion. In South Asia’s case this implied reduced foreign investment particularly FDI. The global exports were projected to decline in 2009 for the first time since 1982. The WTO estimated the exports to decline by 10 percent for industrial countries and 3 percent for developing economies. On the aid front IMF expected ODA to decline for the poorest 71 countries by 25 percent. We present here a case study of Pakistan – an economy which due to the global financial crisis witnessed a decline in the real GDP from 6.8 percent in 2007 to 2 percent in 2009. The foreign direct investment decreased by 28 percent and foreign portfolio investment declined by 128 percent. Both exports and imports decreased by 13 and 5.3 percent respectively. The foreign loans (that include bilateral and multilateral arrangements) declined by 61.3 percent. The combined effect of reduced inflows resulted in a decline in foreign exchange reserves of around 41.6 percent. This in turn reduced the available import cover and the country had to resort of IMF’s stand-by arrangement for securing a balance of payments support. This programme in turn embodies conditionalities which may keep the growth rate subdued in the short to medium term. Using a macro – micro framework we present here the changes in the socio-economic variables due to a fall in textile exports and official inflows. Our results reveal that the decline in exports was particularly harsh for the high income earners many of whom were associated with the large scale manufacturing sector. On the contrary, the decline in official assistance from abroad was harsh on the poor as it led to rising commodity prices. However the increase in remittances during the times of high food inflation provided some relief in poverty but did not prevent overall inequality to increase. The share of textiles in the overall exports of Pakistan before the crisis was over 60 percent. The major importers of Pakistani textile were US and EU – the regions most hit by the financial crunch. This sector was already facing issues of sustainability and competitiveness due to infrastructure shortages (reduced energy generation), rising oil prices, withdrawal of preferential access in EU market, and lack of diversification. Pakistan’s external financing for budgetary requirements also faced pressures due to a reduction in disbursements of programme loans under multilateral arrangement and project aid under bilateral arrangement. We link the changes in our model with the pro-poor budgetary expenditures committed for the achievement of MDGs. The results indicate a sharp decline in the development spending in sectors such as health, education, population planning and social security. This may in turn pose serious challenges for Pakistan fulfilling its commitment towards MDGs. Currently the country faces an uphill task with Human Development Index currently at 134 out of 177, life expectancy at birth at 63.6 years, under 5 mortality rate at 97 per 1000 births, maternal mortality ratio at 3.2 per 1000 women, net enrolment ratio in primary education at 65.6 percent (both sexes) and unemployment at 6.2 percent of total labour force. The feedback effects of health and education also need to be understood in the macroeconomic context. The long run sustainable growth can only be ensured with a sufficiently nourished and educated labour force which is also equipped with a skill – base in sectors with high global projected demand. It will be important in the post – crisis period to facilitate labour mobility through active labour market programmes in order to avoid a sharp increase in unemployment in the medium term. There have been diverse set of responses to the crisis. The countries across the world have tried to come up with multi-pronged rescue packages for the poor. In order to protect a minimum level of jobs, export-oriented industries have been allowed tax breaks. In order to share the consumption burden, subsidies have been allowed on food items and in some cases food rationing programmes have been initiated. The governments have also expanded public sector investments in education and health so that the gains made towards the MDGs are not reversed. For infrastructure sector, public investment is being geared towards labour intensive projects. All these programmes will require increased monetary financing of fiscal deficits leading to some increase in inflation. In order to stimulate the supply-side the central banks are easing monetary policy and cutting interest rates for commodity producing sectors. The coverage of social protection programmes is being expanded along with a more efficient targeting of vulnerable groups that are usually most affected. These groups include female headed households, agriculture and non-agriculture wage earners and casual labour. In the medium term it will be essential that developing countries focus on increasing agricultural productivity in order to ensure food security at the national level.


Members

Project leader: Vaqar Ahmed

Project researchers: Saira Ahmed | Ahsan Abbas


Journal publication

No journal publications.


Working Papers

No working papers.


Policy Briefs

No policy briefs.


Final report

Title Modified Size Comments Recommendations
2012-04-12 217.89KB 0 0

Proposal

Title Modified Size Comments Recommendations
2010-05-24 263KB 0 0

Copyright © 2008-2022 PEP. All rights reserved.
If you have any question or if you need assistance, please contact: info@pep-net.org.