Not long ago, Pakistan was touted as the next big emerging market, whispered in the same breath as Brazil and Indonesia. Today, Pakistan's economy is on its knees.

Back when there was cause for optimism, Pakistani Prime Minister Shaukat Aziz, a former Citibank executive, was feted at Davos and other major conferences. Private equity funds rolled in and bankers came sniffing. The Karachi stock exchange boomed, ending the year 2007 as the sixth best emerging markets performer. Investment, particularly from the oil-rich Persian Gulf states and China, poured in. By October of 2007, Pakistan had more than US$16 billion in cash reserves, a 7 percent annual growth rate three years running, a manageable inflation rate, and a growing reputation as the next big market in South Asia.

In recent months, a sense of gloom has squashed hope. The country recently was forced to reach for the much-reviled "begging bowl" once again, negotiating a US$7.6 billion bail-out with the International Monetary Fund as it faced a mounting debt crisis. The inflation rate climbed to 25 percent, and stocks crashed, falling on average 35 percent for the year with trading volume stuck at historically low levels. All major rating agencies have downgraded Pakistan. Meanwhile, new investment has largely dried up.

Mohsin Khan, the distinguished Pakistani economist and former senior IMF official who brokered the IMF-Pakistan deal as a last hurrah before his retirement in early December, said recently that "full recovery is a long way off."

Speaking at an Asia Society event, Khan said that Pakistan will likely grow at 2-3 percent for the fiscal year 2008-2009. "Given population growth, that is effectively a recession," he said.

Economists in Pakistan are predicting significant job losses over the next two years, anywhere from 3 to 4 million, further exacerbating the crisis faced by Pakistan's poor and struggling middle class. The economic crisis comes amid heightened tensions with India after Pakistani militants went on a killing rampage in Mumbai.

What happened to Pakistan's economy? How did it go from emerging market star to the precipice of economic disaster? A range of reasons have been proffered from high oil and food prices to political and security volatility, but the one that seems to arise most often among analysts is the simplest one of them all: bad governance.

At key points in Pakistan's economic descent, political leaders failed to make policy decisions that would have forestalled the decline. The dramatic spike in oil and food prices in the 2007/2008 fiscal period was met with "policy inaction," according to Khan. "They didn't do what they needed to do when they faced these shocks, mostly because they were running for office."

As high oil and food prices tore through reserves, political turmoil gripped the country as former president Pervez Musharraf faced down judges, dissolved the judiciary, and eventually succumbed to elections, while street protests grew violent, former prime minister and Pakistan People's Party star Benazir Bhutto was assassinated, a caretaker government tread cautiously, and political hopefuls vied for votes. [For background see the Eurasia Insight archive].

Today, Pakistan's President Asif Ali Zardari faces a dizzying array of challenges from security concerns in ungovernable tribal areas and the al-Qaida presence in Waziristan to the heightened tensions with India, but he also faces a larger challenge: restoring faith in democracy among Pakistanis mired in economic pain.

The influential Pakistani columnist Shaheen Sebhai recently wrote of an "over-riding sense of failure" that free and fair elections failed to restore trust between the government and the people, while the new leaders have simply "descended into the years-old hit and run, grab and go, mad race for petty political gains, major financial benefits, local and international lucrative jobs."

Dr Farrukh Saleem, the executive director of the Islamabad-based Center For Research and Security Studies said recently that Pakistan is not only haunted by a budget deficit and trade deficit, but also a "trust deficit" with the outside world: "they [the people] do not trust that the government will do the right thing," he said in a recent seminar in Islamabad.

Here is where the economy comes in. For the ordinary citizen, nothing is more important than a sense of economic security. Though Pakistan still had a long way to go, the government of Musharraf was making dents in the decades-old fight with poverty and economic underperformance. Failure by Zardari and his economic team to simultaneously provide social safety nets for the poor and navigate Pakistan's economic recovery with skill might lead many to long for the days of the "enlightened" autocrat.

Furthermore, rising unemployment and economic insecurity combined with one of the youngest populations in the world is a hazardous social cocktail that could lead to widespread unrest - and military intervention. This will lead to a further erosion of trust with the international community (It should be noted that IMF and World Bank officials largely avoid Pakistan; they conduct their meetings with Pakistani officials in Dubai).

The silver lining in this cloud is that the IMF bail-out has prompted others to step in. The Asian Development bank, the World Bank, the Islamic Development Bank, the United Arab Emirates, Saudi Arabia, and China, are all expected to announce large loans to Pakistan's government.

What's more, several analysts indicate that the IMF restrictions are not nearly as onerous as they have been in past bailouts. Sakeeb Sherani, chief economist at the Royal Bank of Scotland, said in a recent seminar: "Compared to the 46 conditions accompanying the 2000 [plan] the latest US$7.6 billion IMF package carried only up to 10 performance criteria. If it can ensure good economic management there is no question why Pakistan shouldn't fulfill those criteria."

In other words, there will be no excuse for "policy inaction" this time. Not only do Pakistan's people deserve it, but the near-term future of Pakistan's democracy may depend on it.