Once Pakistan settles down politically, policymakers in Islamabad will have to turn their attention to putting the economy on a high growth trajectory.

At that time, the nation will have to decide as to which model of development it should follow: the democratic model of socialism in which the state is actively involved in managingthe economy and providing security to the citizens or a guided capitalist model that suits the present times.

If by capitalism we mean an economic system in which the private sector is left mostly to its devices then that is what Pakistan has followed, with one minor aberration, since its birth as a nation-state. The departure was during the days of Zulfikar Ali Bhutto when the state intervened actively in economic management. Then the new PPP administration sought to expand the presence of the state in the economy.

Jawaharlal Nehru, the first Indian prime minster who governed the country for 17 years, had used the resources available to the public sector to invest in government owned enterprises, manufacturing mostly producer goods or distributing essential services to the citizenry.

Bhutto, however, was impatient. He chose the path of expropriation to build the public sector. In Pakistan a series of nationalisations of privately owned assets enlarged the public sector. The state got involved in manufacturing such items of everyday consumption as vegetable oil and wheat flour.

The moment Bhutto left the political stage, the governments that followed began to take the state out of the economy. The process was speeded up during the eight years of President Pervez Musharraf when the private sector was allowed to freely operate without many constraints. This is where the economy is at the beginning of 2012.

There were two reasons why free play was given to private enterprise. The first was that the government apparatus was weak when the first industrial policy was formulated. Then Pakistan had to develop quickly the industrial sector to produce simple manufactures as the country faced serious shortages because of disruption of the trade with India.

The other reason was Pakistan’s inability to develop a class of economic thinkers who could provide the country with an indigenous model of growth and development. Since the policymakers chased foreign flows to fuel the economy, Pakistan had to take advice from foreign development agencies.

The country repeatedly returned to the IMF to obtain emergency capital flows. The Fund support came with a number of attached conditions. Over time the IMF began to advise the governments it worked with to adopt the set of policies that came bundled together in what came to be called The Washington Consensus.

Pakistan and other countries receiving support from the Fund were advised to privatise state-owned enterprises, to open their economies to foreign trade and capital flows, to allow the private sector to take investment and production decisions without constraint, and to lighten the burden of regulation on private enterprise. Pakistan went a long distance in implementing this model particularly during the period of President Pervez Musharraf.

This brings me to the question of the suitability of capitalism for Pakistan’s situation. Should Pakistan, faced as it is with serious economic difficulties, continue with the capitalist approach or should the state get more involved in running the economy? Capitalism of the Reagan and Thatcher variety is being seriously questioned by a number of thinkers in the West.

The main problem the western economies are dealing with is the sharp increases in income inequalities and in the distribution of economic wealth. In the United States, for instance, the ratio between the average compensation for the chief executive officers to the average wage of the common worker has increased from 24 in 1963 to as much as 325 in 2010.

Pakistan too has suffered from a serious widening of the gap in incomes and wealth of the very rich and the very poor. Such widening will not be tolerated for too long by the common man as he suffers not only from a deepening sense of relative deprivation but also from the discomfort occasioned by severe shortages of electricity and natural gas.

If the “animal spirits” for which capitalism has been celebrated are to be restrained and if that function is to be performed by the state, how should that be done in a country such as Pakistan?

What makes it difficult to give a large role to the state in Pakistan is that its institutions have been weakened in the last few years. This has happened because of neglect as well as deliberate moves by the policymakers. Therefore, in assigning a more meaningful role to the state, Pakistan will have to move with extreme caution.

There are three things that could be done as Islamabad, in association with the provincial capitals, begins to develop a new development model that draws upon its own experience, the experiences of other countries as well as the constraints imposed by the lack of resources available to the state to play a more meaningful role.

The first order of business should be to carry out a review of all regulations and economic laws on the books. Many of these have lost their meaning; some of them date back to the colonial times. Weeding them out would create space within which the bureaucracy can operate. The second area for focus should be to work with the provinces so that regulatory role of the state can be performed with the support of the people at the local level. Islamabad is too distant from the citizenry to know what they want by way of protection from a free-wheeling private sector.

The third should reduce the role of the state in domestic commerce. The only reason the government is still involved in procuring some agricultural surpluses and setting the price at which they can be sold is not to protect the poor but to help the rich. These kinds of subsidies never work for the benefit of the poorer segments of the society. They are captured bythe well-to-do. If the poor are to be helped they should be provided direct income support as is being done in the Benazir Income Support Fund.

In determining the role of the state there is no reason to give up on letting private enterprise and markets be the main players. The only thing is to recognise that what Adam Smith, the founder of modern economics, called the “invisible hand” does not always work for the benefit of all citizens. This is especially the case when those in power are able to use the state to enrich themselves rather than serve the people. Capitalism will only work for Pakistan if the state can guide it properly and with honesty for society’s benefit.