SEVENTY-FIVE years ago, delegates from the victorious nations of the Second World War met in Bretton

Woods to design a new economic order. This economic order, or system, was to be governed by two new
institutions: the IMF and the World Bank.

Few people know that the US delegation led by Harry Dexter White muscled out competing ideas for the
new system that sought to assign checks on rich lending countries. Dexter`s team stalled British efforts to
set up an international clearing bank for automatically reducing borrower countries` deficits. The US
secured a third of all votes, guaranteeing itself the power to veto any proposal as well. Some say this new
economic order was designed to ensure America`s geopolitical dominance.

The Bretton Woods` delegates were ardent proponents of free trade. Free trade`s supposed positive
influence was not new thinking. Even in the early 19th century, Adam Smith and David Ricardo extolled
the virtues of free trade and advised nations to improve their `comparative advantage` Thus, free trade
between nations became one of the pillars of the new economic order.

Free trade has been successful in lifting millions out of poverty. The problem is that these gains are
concentrated in only a few nations. For others like Pakistan, free trade has led to persistent current
account deñcits and plummeting exchange rates. The primary reason why such nations have not been
able to benefit from the economic order is the inability to produce high-value exports. Specifically,
Pakistan`s economy has not been able to make the transition from agriculture to even light
manufacturing. Why has Pakistan failed? Standard trade and growth theories that assume that countries
can always improve their comparative advantage are of little help. Had that been the case, Pakistan
would have been able to diversify and increase the total value of its exports; 21 per cent of its export
earnings would not come from agriculture.

`Product-space` scholars like Ricardo Hausmann offer a more plausible explanation by showing there is
nothing automatic about high-value exports. They argue that a country`s export sector is connected in
such a way that a country cannot automatically move from having a comparative advantage in textiles to
having one in machinery, chemicals or artificial intelligence, ie what a nation exports today largely
determines what it will export 10 years later unless policies encourage economies towards high-value
sectors.

Given that the present economic order is based on free trade and the fact that Pakist an has been unable
to develop comparative advantage in high-value exports, whatoptions are available for policymal(ers?
Policymakers can decide to leave the free trade economic order and impose a stringent import control
regime while implementing import-substitution-industrialisation (ISI).

Many Latin American states tried ISI with sub-par results as inward-oriented growth is costly in a
globalised world intermediate goods, foreign technology, foreign savings and ideas are not available
locally.

Policymakers can also decide to go the East Asian `Tigers` route. East Asian countries achieved
exponential economic growth rates by improving their comparative advantage in high-value exports
within the free trade economic order through developing good policies and effective implementation. It
should be mentioned that there was nothing automatic in this process as the government played a key
role picking `winners`, credit allocation, promotion of industrial investment, encouraging firms to
upgrade technology, etc.

However, the best way forward for Pakistan is a combination of both ISI and export-ori-ented
industrialisation policies. It should play within the free trade arena to earn foreign exchange but then
channel heavy investment to import substitution that will actually improve its comparative advan-ented
industrialisation policies. It should play within the free trade arena to earn foreign exchange but then
channel heavy investment to import substitution that will actually improve its comparative advan-tage.
At the same time, policymakers need to pick sectors like IT and AI and make winners out of them by
establishing world-class universities and business incubators, which will train the next generation of
Pakistani technology workers and entrepreneurs. Compared to commodities, technology-based exports
have tremendous potential as they earn more foreign exchange and increase in demand as incomes in
our trading partners rise.

The Bretton Woods system just turned 75.

Thoughfree trade has been a pillar of this system, it has not benefited everyone since nations like
Pakistan have failed to produce high-value exports. In order to gain from free trade, Pakistan`s economy
needs a structural shift to produce high-value exports. To do so, policymakers need to design policies that
will tangibly assist in improving its comparative advantage. With the rise of African economies, the
window to improve Pakistan`s comparative advantage may be closing sooner than we think.