HOW should Pakistan address some of the economic problems Islamabad’s policymakers had not foreseen? Some of these were caused by the assassination of Benazir Bhutto on Dec 27.

However, not all that has gone wrong with the Pakistani economy in recent weeks can be attributed to the killing in Rawalpindi of the PPP chairperson. Some of these are the consequence of the failure of the previous government to put Pakistan on the path of sustainable development.

There was a strongly held belief in Islamabad that having achieved a high rate of growth in the 2002-07 period when the economy expanded at the impressive rate of seven per cent a year, the country was on track to maintain that kind of expansion for years to come. That that was not the case was argued by some of us. I wrote a number of articles for this newspaper to suggest that the impressive performance in the 2002-07 period was the result of both good public policy and happy circumstances.

We suggested that the latter may not always be there. The only way out would be to design public policy in a way that the country was not totally dependent on a conducive external environment for achieving economic prosperity. That said this is not the occasion to repeat some of that old debate. What is of real importance at this time is to rescue the economy from its current difficulties.

The government has already begun to take some actions to address the setback that was caused by the mayhem that followed the death of Benazir Bhutto. If appropriate actions are not taken, the damage done to the asset base of the economy and the loss to the incomes of workers and small traders will take a heavy toll. The country has also suffered a reputational hit which will raise the cost of external borrowing and reduce the interest of potential investors in the country.

My estimate is that the rate of economic growth could decline by as much as two per cent in the current year for these reasons and the year that follows while the medium-term growth rate could decrease by one to 1.25 percentage points. Some of these losses could be averted by public policy. The repair to the assets destroyed will take time but the losses suffered by the people who are vulnerable in these kinds of circumstances can be dealt with by a combination of cash payments and a public works programme aimed at providing employment. The government is doing the former; the latter needs some thought.

The use of public works programmes to provide relief to the poor and vulnerable has been successfully tried in a number of countries, most notably Chile which once had to deal with the kind political upheaval that Pakistan is experiencing these days. One way of launching these programmes across the country would be to provide funds to local governments to implement simple projects — repair of roads and government buildings, planting of trees in public places, removal of trash and its disposal etc.

Such a programme could provide immediate employment to hundreds of thousands of people and provide them with the incomes they need to deal with the rising cost of living. How to pay for such a programme without stretching the already stressed government financing? The best way of doing this would be to cut down non-development expenditure which has increased enormously over the years.

Another step taken recently by the government to deal with the difficulties faced by the poor is the launch of a ration card programme. This will provide a number of essential commodities at highly subsidised prices. While this may help a small number people in the urban areas, it is not a viable, long-term strategy to deal with sharp fluctuations in agriculture prices and ups and downs in agriculture output. What is needed is the formulation of a food security programme built on improving storage, creating buffer stocks and establishing a fund the government can tap for providing relief to the poor during periods of extreme stress.

Having dealt with the immediate problem the government needs to strategise about bringing economic growth to the country in a sustainable way. This is an area in which the government headed by President Pervez Musharraf has failed. It should have done this by incorporating four elements in a strategy aimed at producing long-term sustainable growth. I will mention these briefly in the hope that the government that takes office following the elections scheduled for mid-February will work on developing such a strategy.

First, there must be good understanding of the shape of the global economy. The world production and trading systems have gone through some profound changes which means that Pakistan no longer has the opportunities available to it that propelled forward a number of developing countries in the last quarter century and placed their economies on high-growth trajectories. It must seek new avenues for growth that have become available in the new global production and trading system.

Second, having identified the opportunities available to Pakistan, the new administration should determine what kind of public policy initiatives are needed to realise them. These initiatives will need to cover a wide front including the strengthening of the institutional base, building the required physical and human infrastructure and the provision of financial support to the enterprises operating in a few selected areas.

I am among those economists who, while believing in giving fairly free rein to market forces, would also argue for state intervention to guide the private sector in the developing areas that hold promise.

Third, the new strategy must focus on the diversification of trade both in terms of content of exports as well as the direction in which they are sent. Pakistan is one of the few large developing countries which have deviated from what is suggested by the gravity model of trade. According to this, large trading partners are those that are close to the country’s border and also have a large economic mass. According to this, India should be Pakistan’s largest trading partner rather than the United States.

Fourth, the strategy should aim at developing a robust relationship between the public and the private sector. The previous administration did well to give a lot of space in which the private sector could operate. It did not, however, build a strong institutional infrastructure for regulating private enterprise, so that it did not work against the welfare of the citizenry.

It is, therefore, incumbent upon those who are likely to take office within a few weeks to restore the confidence of the people both inside and outside the country for the latter’s economic future. As I have indicated, there is an urgent need to formulate a strategy built upon a few elements which could set Pakistan on a new course. This would ensure a healthy and long-term sustainable rate of economic growth. Only then would the county be able to deal with some of the problems it faces, not only in economics but also in politics.