The US mortgage crisis has seriously challenged the idea of laissez faire (free market) economies. What was once regarded as the soundest and progressive economic model is now suffering a crisis of confidence. No one seems to have the answers.
The free market economic model in a nutshell dictates that a government must not interfere or be involved in any economic activity. On the other extreme end you have communist economies where government owns, controls and directs all economic activity. What is important to note is that no country is fully capitalist or communist. Most countries are mixed economies defined as capitalist or communist depending on how far they lean either way.
In the early 1990's the World Bank and International Monetary Fund (IMF) came up with a series of programs known as Structural Adjustment Programs (SAP's) designed to help third world economies spur economic growth and get out of poverty.
The main thrust of these programs was:
o Third world economies were to liberalize their economies, that is, sell state assets and corporations to the private sector. In other words, governments were asked to reduce their involvement in economic activity and become free market economies.
o Reduce public spending mainly by reducing the workforce on government payroll. Third world governments were forced to downsize their work force significantly. They were also required to reduce spending in healthcare and education by removing subsidies in these sectors. In a nutshell they were to require their populations to pay for these services.
To ensure that third world governments committed to these programs; aid, grants and loans were to tied to how successful a government was in implementing these programs. The US and Europe followed suit and tied their financial support to commitment to SAP's.
The argument then was that the free market economic model was the only route to economic prosperity. We now know better given that since 1978 China's GDP has grown an average 9.9 percent a year. China's per capita income has grown at an average annual rate of more than 8% over the last three decades, drastically reducing poverty. It is now almost unanimous amongst economists that the SAP's nearly destroyed third world economies. In fact, most countries have since abandoned them completely.
What is going on in the US and now Europe is an example of what runaway, unbridled, unregulated capitalism can do. The US $ 700 billion bailout plan recently passed by congress is a slap in the face of what used to be sound economic policy. The events in the US and Europe should serve as wake up call to all; that the best economic model is not necessarily the laissez faire 'hands off' model but rather that countries should strike a balance between the capitalist and communist models. China appears to be doing rather well. Being too far on one end clearly has its hazards.