Benazir Bhutto’s death leaves Pakistan in desperate crisis. The killing has caused widespread rioting and will further destabilise this strategically vital part of the globe. It will probably lead to the cancellation of national and provincial elections on January 8. It might even push Pakistan into civil war.

Among Pakistani MPs, journalists and lawyers after news of the assassination there was not only real sorrow but also real fear. Pakistanis are used to crises buffeting their country but many of them at the end of last week seemed on the verge of despair.

Never has the contrast between India and Pakistan appeared so stark. One is widely perceived as the next great superpower, famous for its software geniuses, its Bollywood stars, its strongly growing economy, its super-rich steel magnates and legions of brilliant writers. The other is written off as a failed state, a world centre of Islamic radicalism, the hiding place of Osama Bin Laden and the only US ally that Washington appears ready to bomb.

Even a few months ago it was possible to argue that the differences between these neighbours were less clear on the ground and largely superficial. First-time visitors to Pakistan are almost always surprised by the country’s visible prosperity. There is far less poverty on show than in India and the infrastructure is more advanced: there are better motorways and airports, and more reliable electricity.

Moreover, the Pakistani economy is undergoing a similar construction and consumer boom to India’s, with growth rates of 7% and what was until recently the fastest-rising stock market in Asia. You can see the effects everywhere: in new shopping centres and restaurant complexes, in the hoardings for the latest laptops and iPods, in the cranes and buildings sites, in the endless stores selling mobile phones. In 2003 the country had fewer than 3m mobile phone users; today it is said there are almost 50m. Car ownership has been increasing at roughly 40% a year since 2001; foreign direct investment has risen from $322m in 2002 to $3.5 billion in 2006.

Nevertheless, despite the economic boom, Pakistan now finds itself in a major existential crisis, at the heart of which lies the central question: what sort of country do Pakistanis want? A western-style liberal democracy, as envisaged by Pakistan’s founder, Muhammad Ali Jinnah? An Islamic republic like Mullah Omar’s Afghanistan? A military-ruled junta of the sort created by Generals Ayyub Khan, Zia and Musharraf?

The most pressing crisis now facing Pakistan comes in the shape of the country’s many armed and dangerous jihadi groups. For 25 years the military and Pakistan’s powerful intelligence agency, the Inter-Services Intelligence (ISI) have been the paymasters of myriad mujaheddin groups intended for deployment first in Afghanistan and then Kashmir. While the military may have once believed that it could use jihadis for its own ends, the Islamists have followed their own agendas and have now brought their struggle onto Pakistani streets and into the heart of the country’s politics.

The assassination of Bhutto and the three recent attacks on Musharraf are just the tip of the iceberg. Every bit as alarming is the degree to which the jihadis now control much of the NorthWest Frontier Province. The Swat Valley – once one of the most popular destinations in South Asia for tourists – is now smouldering as government troops and jihadis battle for control. The government claims to have won back the area, but no foreign correspondents are being allowed into the valley so the claims are impossible to check.

The second big issue facing the country is its desperate educational crisis. No problem in Pakistan casts a longer shadow over its future than the abject failure of the government to educate more than a fraction of its own people: a mere 1.8% of Pakistan’s GDP is spent on government schools. This education gap is the most striking way in which Pakistan is lagging behind India, where more than 65% of the population is literate with the number rising every year. Only last year the Indian education system received a substantial boost from state funds; and there is a long tradition among Hindus of making sacrifices to educate children.

In Pakistan the literacy figure is 49% and falling. The virtual collapse of government schooling means many of the poorest people have no option but to place the children in madrasahs. Though the link between these establishments and Al-Qaeda is exaggerated, it is true that madrasah students have been closely involved both in the rise of the Taliban and the growth of sectarian violence.

The third big crisis facing Pakistan is political. Democracy has never thrived, in part because landowning remains the main social base from which politicians emerge. Pakistani parties, including Bhutto’s PPP, are not internally democratic: she operated her party as a personal fiefdom, awarding seats to friends and allies – most from a similar background to hers.

The educated middle class – which in India gained control in 1947 – is still largely excluded from the political process in Pakistan, while the peasantry are pressurised, sometimes violently, into voting for their feudal lords.

Amid the mourning and shock, there is some hope that Bhutto’s death could yet act as a wake-up call for the secular and moderate majority in the country. The PPP still contains many of Pakistan’s most talented politicians, such as the leader of the lawyers’ movement, the articulate Cambridge-educated Aitzaz Ahsan, currently under house arrest in Lahore, or the stylish Sherry Rehman, former editor of Pakistan’s best news magazine, The Herald.

If such people were to take over the party, rather than more Sindhi feudals such as Bhutto’s husband, Asif Ali Zardari, they could open it up to the urban middle class, and steer the party into power as a genuinely democratic force for good. If this were to happen there is still a glimmer of hope that Bhutto’s death might yet strengthen democracy in Pakistan, and end the long and disastrous period of power-sharing by the country’s landowners and their military cousins.

But with Asif Zardari strengthening his grip on the PPP, rapid advances now being made by the jihadis throughout the country, and the loss of confidence among the liberal elite, nobody in Pakistan appears optimistic.

William Dalrymple’s new book, The Last Mughal: The Fall of a Dynasty, Delhi 1857, published by Bloomsbury, was awarded the Duff Cooper Prize for History. www.williamdalrymple.com

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