INTERNATIONAL POLITICAL ECONOMICS

Prepared for: International Political Economics

Prepared by: Syed Ali Osija

Submission Date: 11-December-2012

Table of Contents
1. 2. INTRODUCTION ................................................................................................................................ 3 GLOBAL ECONOMY ......................................................................................................................... 3 2.1 2.2 3. 4. 5. 6. 7. 8. EXPORTS OF PAKISTAN .......................................................................................................... 4 IMPORTS OF PAKISTAN .......................................................................................................... 4

NATIONAL ECONOMY ..................................................................................................................... 4 ECONOMIC OVERVIEW ................................................................................................................... 5 ECONOMIC POLICIES ....................................................................................................................... 8 MACROECONOMIC POLICIES ...................................................................................................... 10 MICROECONOMIC POLICIES ........................................................................................................ 12 CONCLUSION ................................................................................................................................... 13

REFERENCES ........................................................................................................................................... 14

1. INTRODUCTION
The economic management of a country is strongly associated with its own internal economic policies but also with its economic relations with the rest of the world. This paper focuses its attention to the economy of Pakistan to assess the kind of national and international economic policies that have affected the countrys economic growth and prosperity. The paper first provides an overview of the global and national economy, and then provides an economic overview of Pakistan. The paper then examines economic policies that pertain to Pakistan, as well as macroeconomic and microeconomic policies that influence the country.

2. GLOBAL ECONOMY
The global economy refers to an economys relations with the rest of the world. Pakistan is strategically located in the South Asian region, bordering China, India, Afghanistan, and Iran. The country maintains strong trade relations with China, a strong economy, but recent political economic and political turmoil in Afghanistan and Iran has put pressures on the Pakistani economy in terms of influx of refugees, adding to economic instability in the country with more mouths to feed that the country can bear. Pakistan also has a strong alliance with the United States of America (CIA 2012).

2.1 EXPORTS OF PAKISTAN

Pakistans has strong economic relations with the Middle East and China, as well as the US. The countrys main exports are textiles which account for most of the countrys earnings. However, Pakistan has cheap labor which is also in high demand especially in the Middle East, which makes labor another source of remittance for the country. Pakistans main exports, besides textiles, are rice, leather goods, sports foods, chemicals, manufactures, carpets, and rugs, and the countrys main exporting partners are the United States, accounting for 14.3% of the countrys exports, the UAE at 7.6% of Pakistans exports, Afghanistan at 7.5%, China at 7.5%, Germany at 5%, and the UK at 4.1% of Pakistans exports (CIA 2012).

2.2 IMPORTS OF PAKISTAN

The countrys imports are mainly in the form of petroleum and petroleum products, machinery, plastics, transportation equipment, edible oils, paper and paperboard, iron and steel, and tea. The countrys main importing partner is China that provides the country with 18.2% of its total imports. Other importing partners are Saudi Arabia that accounts for 11.4% of Pakistans imports, UAE that provides 11.3%, Kuwait that accounts for 5.9% of the countrys imports, Malaysia that provides 5.5%, US that provides 4.3%, and Singapore that provides 4% of the countrys imports (CIA 2012).

3. NATIONAL ECONOMY
Pakistans national economy is large with a lot of potential, especially in terms of resource endowment. The country has a large land area and a large water irrigation system, because of which agriculture is a strong source of the countrys GDP. The Pakistani economy is the 32nd
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largest in the world in nominal terms and 27th largest economy in the world in terms of purchasing power parity (Henneberry, Khan & Piewthongngam 2000). This makes Pakistan an important economy in the world. Agriculture is the main source of output and income in the country, while other important sectors include textiles, mining, and cement. Pakistan also has a burgeoning SME sector, with small and medium industries playing an extremely important role in the countrys growth and development (Berry 2011). In recent years, the Pakistani economy has suffered from internal political disputes and low levels of foreign investment, which have led to slow growth and persisting underdevelopment in the country. Even though textiles still play the major role in the countrys GDP and economic role, there is a substantial lack of investment to expand the manufacturing base, which has led the country vulnerable to shifts in local and foreign demand. There is high unemployment and inflation in the country in recent times, especially owing to increasing food and fuel prices that have not only curbed local demand but has also led to decline in labor demand. Poverty is high in the country, and the Pakistani currency is constantly depreciating. The current account deficit of the country is constantly increasing because of increased reliance on imports because of lack of a manufacturing base in the country (CIA 2012). All of these combined pose serious problems for the country, and make the country prone to macroeconomic instability.

4. ECONOMIC OVERVIEW
Slow growth and underdevelopment have plagued the Pakistani economy in recent years. Agriculture still accounts for more than one-fifths of output and two-fifths of employment, and textiles provide the majority of the countrys earning potential. However, since the manufacturing base of the Pakistani economy is limited to manufacturing alone, the country
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remains vulnerable to economic instability locally and globally. Formal and informal unemployment in the country is high, and high inflation has worsened the living standards. In 2011, inflation rate was high at 13%. The currency of Pakistan is depreciating; since 2007, it has depreciated more than 40%. The balance of payment crisis in 2008 resulted in the International Monetary Fund Standby Agreement, and even though the country has stabilized since then, it has not been able to recover. Foreign investment is at bay, fearing Pakistans growing political and economic instability. The country is home to problems in governance, energy, and security, which has kept foreign investment limited. International economics play an important role in limiting Pakistans economic progress; rising oil prices increased the cost of Pakistans import and lower the cost of Pakistans exports, further worsening the countrys balance of payments deficit (CIA 2012). In 2011, Pakistans GDP at purchasing power parity equaled $488.4 billion, 28th compared to the rest of the world. It has been increasing consistently, albeit at a low rate. In 2010, the GDP at purchasing power parity was $474 billion, compared to $459.9 billion in 2009. The 2011 GDP in official exchange rate equaled $206.9 billion. The real GDP growth rate was 3% in 2011, which is considered considerably low compared to the rest of the world, and Pakistan ranks 123rd compared to the rest of the world on this front. This shows that the growth rate for Pakistan is considerably low compared to other countries, where at least 123 countries are growing at a faster rate than Pakistan. If this situation does not improve, Pakistan would be stuck in a greater underdevelopment trap. The countrys GDP per capita was $2,800 in 2011, and compared to the rest of the world, this is a considerably low rate, where Pakistan ranks 175 in the world. The situation has not been improving in the country over the years, since Pakistans GDP per capita was $2,800 in 2010 as well and $2,700 in 2009. This shows that the Pakistani population has not

experienced an improvement in living standards at least over the past 3 years. The countrys GDP composition by sector is as follows: agriculture 21.6%; industry 24.9%; services 53.4% (CIA 2012). The large services sector is not formal it is the informal SME sector that drives the countrys economic growth. Pakistans formal unemployment rate is high at 5.6% in 2011, and this shows that substantial underemployment exists in the country (CIA 2012). An estimates 22.3% of the population lives below the international poverty line, and there is high income inequality in the country, with the Gini index at a high 30.6 (CIA 2012). Public debt is high, mainly because estimated public revenue is $26.18 billion in 2011, while public expenditure is high at $40.03 billion. Tax revenues are 12.7% of GDP, and public debt is high at 60.1% of GDP in 2011 (CIA 2012). The exchange rate is also worsening. In 2007, the Pakistani rupee was worth 60 against the US dollar; in 2011, the Pakistani rupee was worth 86 US dollars (CIA 2012). A summary of Pakistans economic indicators is presented in the table below. All data is based on the latest 2011 economic indicators published by the CIA (2012).

Economic Indicators
GDP (purchasing power parity) GDP (official exchange rate) GDP real growth rate GDP per capita (PPP) Labor force Unemployment rate Population below poverty line

2011
$488.4 billion $206.9 billion 3% $2,800 58.64 million 5.6% 22.3%

Gini index Investment (% of GDP) Public revenue Public expenditure Taxes and other revenues (% of GDP) Budget surplus (% of GDP) Public debt (% of GDP) Inflation rate (consumer prices) Industrial production growth rate Current account balance Exports Imports Foreign exchange reserves External debt Stock of direct foreign investment

30.6 11.5% $28.18 $40.02 billion 12.7% -6.7% 60.1% 11.9% 3% $268 million $26.3 billion $38.93 billion $18.09 billion $58.27 billion $1.432 billion

5. ECONOMIC POLICIES
In recent times, the emphasis around the globe has been on liberal policies, aimed at increasing trade and integration with the rest of the world. The structural reform programs were initiated in the 1990s, aimed at enhancing exports. During the last decade, these policies were continued in order to boost economic growth within Pakistan. In order to bring more fiscal stability within the country, policies like the imposition of sales tax, withdrawal of subsidies, and increased prices of

petroleum were introduced. The IMF Standby Agreement, discussed in previous sections, was actually responsible for the introduction of these policies. Additional structural economic reforms were undertaken in order to gear the Pakistani economy towards the path of economic stability and growth. These were in the form of financial sector restructuring, privatization, liberalization and deregulation of the economy and banking reforms that were aimed to lead the economy towards a free economy (Afzal 2008). The main focus of the privatization process was on the banking, telecommunication, oil and gas, and energy sectors. Liberalization of the foreign exchange regime led to macroeconomic stability and that led to a boost in the confidence of local and foreign investors. During this period, there was also a boost in investment in stock markets, especially in the form of foreign investment. There was also a boost in public sector investment especially in the water and power sector, as well as housing and physical infrastructure (Afzal 2008). Pakistans alliance with the Western countries in the fight against terrorism also helped the economy in a number of ways. The rescheduling of external debt resulted in approximately $1.5 billion annual relief in the form of decreased debt servicing charges. Sanctions were also lifted that resulted in large foreign grants worth between $1 billion and $1.5 billion per annum in the last five years. Some parts of external debt were also written off. In the past few years, remittances have also come into the Pakistani economy worth approximately $18.5 billion which have helped to build the countrys foreign exchange reserves and ease balance of payments for the country. There is also a growth in Pakistani exports to European markets that has played a positive role in Pakistans economic situation (Afzal 2008).

6. MACROECONOMIC POLICIES
Pakistan still has a long way to go in terms of integrating with the rest of the world, especially in terms of economics. Pakistan has highly concentrated exports, with the majority of exports coming from the textiles and apparels sectors. So far, Pakistan has only been able to expand its export base after the abolition of quotas on textiles and apparel by OECD countries. Imports, however, are more dispersed. Although Pakistan has a sizeable textiles and apparels industry, it needs to import inputs for these sectors since their inputs are not produced at home. Therefore, machinery, fibers, dyes, chemicals make up most of the countrys imports, along with petroleum products (The World Bank 2011). Most of Pakistans trading partners are outside the South Asian region. This shows that the products exported by Pakistan are also exported by its neighboring countries, making demand for Pakistans products low within the South Asian region. Historical tension between India and Pakistan prevents any meaningful trade from occurring between the two countries. However, a recent survey by the Sustainable Development Policy Institute estimated that there is an estimated informal trade between Pakistan and India amounting to approximately $500 million every year, primarily in the form of imports from India via Dubai (The World Bank 2011). Pakistan has adopted a more liberal trade policy over the past decade and has thus made substantial progress in integrating with the rest of the world. Tariff rates have been substantially reduced, which stand at 15 percent in the current trade policy compared to over 50 percent in 1995. Additionally, quantitative restrictions, exchange rates, and other direct state interventions have been extensively removed. The trade regime is controlled only through ordinary customs duties in the current trade regime (The World Bank 2011).

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Recent macroeconomic policies have also resulted in the elimination of special regulatory orders that provided discretionary exemptions and benefits to certain firms or industries, which has led to a more leveled playing field for local industries. On the downside, however, countries around the world have reduced their trade barriers even further. Pakistan still needs to work on this front to remove the export bias that exists in the country that is more evident in the countrys tariff structure (The World Bank 2011). Although Pakistan has embarked upon a liberal trade regime and has thus attempted to integrate more with the global economy, recent years have posed grave problems for the countrys macroeconomic stability and therefore its integration with the rest of the world. Political instability and economic downturn have not favored Pakistan in terms of foreign investment, thus prospects for foreign investment in the country are still uncertain. Since 1991, the Pakistani economy has been deregulated increasingly, moving away from import substitutions strategy to a pro FDI export strategy, which has been highly successful. However, since the 2008 financial crisis, FDI inflows to Pakistan have started decreasing. Pakistans alliance in the war on terror had favorable outcomes for the country in terms of increased market access and financial aid; however, being a front line state did have its costs, and it is estimated that this is the main reason for Pakistans dismal FDI performance, since direct and indirect costs borne by the economy jumped from $2.669 billion in 2001-2002 to $17.8 billion by 2010-11. These figures are more likely to worsen over the next few years (Shah, Hasnat & Jiang 2011). In terms of Pakistans global integration with the rest of the world, it is obvious that the country has taken considerable measures to improve on this front. However, compared to the rest of the world and their progress in terms of trade liberalization, Pakistan is still a slow runner. Recent times have also posed external pressures on the country in terms of its alliance in the war against
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terror, which have also burdened the country with increased costs. Although this has highlighted the country as an ally in global politics, it has also posed domestic instability and economy downturn for the country, which has led to slow foreign investment and the prospects of slower foreign direct investment in upcoming years until the situation improves (Shah, Hasnat & Jiang 2011).

7. MICROECONOMIC POLICIES
Pakistan has a strong agricultural sector; however, for a country to develop, the manufacturing and services sectors need to be expanded since agriculture is highly competitive in the international market, following a perfectly competitive market structure. The manufacturing industry in Pakistan has been retarded historically through the provision of subsidies to the textile industry, and even though subsidies are now being decreased, growth in the manufacturing sector still remains slow, averaging approximately 3% (CIA 2012). This merely shows the fact that excessive government intervention in the market has led to the formulation of large industries that are not growing ideally. Pakistan is distraught with many problems at the moment, from high rates of unemployment and inflation to low levels of investment, mainly because people do not want to invest in times of uncertainty. It is argued that in order for the country to grow, more attention should be given to Pakistans small and medium enterprises (SMEs). While the contribution of large firms cannot be neglected, it is important to note here that Pakistan has a high population of young people, who are unemployed because of limited national output. This means that Pakistan is at least rich in one resource that can be fully utilized labor. While the economy should focus on creating a more hospitable environment for investment by large corporations, it should also simultaneously
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create a structure that nourishes the growth of SMEs. Countries like Taiwan, Japan and Korea have all benefited from the development of small businesses, bringing development from the ground up, and Pakistan should do the same in order to embark upon an era of growth and prosperity (Shah, Mehmood, Hashmi, Shah & Shaikh 2011). At present, SMEs constitute a major share of 30 percent in Pakistans GDP and form a majority of the countrys exports. The main industries that thrive as SMEs in the country include footwear, automotive parts, dairy and meat, leather, sports goods, fabrics and garments, bed wear, towels, tents and canvas, horticulture, cutlery, gems and jewelry, blankets and traveling rugs, furniture, and pharmaceuticals (Shah, Mehmood, Hashmi, Shah & Shaikh 2011). It is evident from their contribution that SMEs have a lot to offer to Pakistan in terms of economic growth and favorable balance of payments.

8. CONCLUSION
This paper has provided a holistic account of Pakistans economic situation, providing details of its macro and microeconomic policies. After providing an extensive overview of the Pakistani economy, this paper has elaborated upon the countrys macro policies focusing on its relation with the rest of the world in terms of trade and investment, and the paper has shown that although Pakistan has embarked upon an era of trade liberalization, there are still many milestones that the country needs to cover. As far as micro policies are concerned, this paper argues that the country needs to give more focus to the small and medium enterprises because they form the majority of the countrys GDP as well as exports.

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REFERENCES
Afzal, M 2008, Macroeconomic adjustment in Pakistan [1981-2004]: an evaluation, Applied Econometrics and International Development, vol. 7, no. 1,

<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1249762>. Berry, A 2011, The potential role of the SME sector in Pakistan in a world of increasing international trade, The Pakistan Development Review, vol. 37, no. 4, pp. 25-49. Central Intelligence Agency 2012, The World Factbook: Pakistan,

<https://www.cia.gov/library/publications/the-world-factbook/geos/pk.html>. Henneberry, SR, Khan, ME, & Piewthongngam, K 2000, An analysis of industrial-agricultural interactions: a case study in Pakistan, Agricultural Economics, vol. 22, no. 1, pp. 17-27. Shah, AA, Mehmood, T, Hashmi, MA, Shah, SM & Shaikh, FM 2011, Performance of SMEs in export growth and its impact on economy of Pakistan, International Journal of Business and Management, vol. 6, no. 7, <www.ccsenet.org/ijbm>. Shah, SH, Hasnat, H & Jiang 2011, Foreign direct investment, cost of war and trade in Pakistan, MPRA Paper 35598, Munich, Germany, University Library of Munich. The World Bank 2011, Pakistan policy and performance, Pakistan Growth and Export Competitiveness in International Economics & Trade in South Asia,

<http://go.worldbank.org/E4GRINENA0>.
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