The state of the world order has often changed throughout history due to various events that redefined which region or country held immense influence around the globe. Since the end of the great wars, the West – led by the United States – held immense power as to the course of international politics and determined the standards of the rest of the world. In recent years, Western dominance was close to being invincible in every aspect of the world. However, when the Global Financial Crisis struck, the public and experts alike noticed a significant change within the world order. A few even remarked that the crisis had overturned whatever traditional assumptions anyone had with the structure of today’s world order, but some question if this indeed occurred. The Global Financial Crisis had indeed overturned assumptions regarding the world order as America and other Western powers are now being shouldered by emerging economies like China instead of the West determining the structure of the entire system.
The 2008 Global Financial Crisis is said to be caused by earlier events which had destabilized the state of the world economy little by little without alarming the world. The first event was the 1997 Asian Financial Crisis which created heavy surpluses from the Asian region and caused capital to bankrupt Asia and required American support. The bursting of the dotcom bubble followed the Asian Crisis in 2001, which enabled the NASDAQ to boom with regards to the sudden boom of the internet and other connected industries. China and India’s rise to power and increase in demand had also reorganized the state of the world economy and their high demand for critical commodities such as oil and food from 2004 to 2007 had affected price levels that almost caused the same oil shock issue in 1970. It was also clear prior to the global financial crisis that there is a developing inflation problem throughout the globe since 2004, which caused many monetary agencies like the International Monetary Fund (IMF) and the World Bank (WB) to issue stronger financial policies to stop potential impacts to the world economy.
Although these events had already ensured that there will be a global downturn when it comes to the growth of the global economy, three specific events in 2007 had brought the growth of the financial crisis. The first event is the burst of the housing bubble in the United States and several parts of Europe. The bubble developed due to the low interest rates brought on by the US Federal Reserve in order for the country to continue sustaining Japan and Europe which has experienced problems with deflation. Once the housing bubble popped, there was a decrease in housing productivity and triggered the offset of housing investment. With the decrease in housing investments, many mortgage and lending firms such as Lehman Brothers were unable to keep up with the high risk premiums which should have been moderated through the mortgage market. With the mortgage market slowly decreasing and the housing price bubble bursting in 2007, Lehman Brothers – as well as other agencies – declared huge losses and sold most of their assets to stay afloat. However, Lehman Brothers were unable to wrestle back the losses and in September 2008, declared bankruptcy and were followed by other firms which cannot keep up with the rising premiums. With the rising premiums and the bankruptcy of several firms, many families slowly shyed away from spending. Although attempts were done to prevent the financial crisis to take root, there were unable to stabilize the United States and Europe and resulted to the global financial crisis.
The impact of the Global Financial Crisis had been seen differently by various experts especially with regards to the status of the world order. Some argue that the West remains superior and still holds immense influence in the world order, especially the hardest hit nations such as the United States. Since the crisis escalated in 2007, the US has actually taken an active step to reorganize the country’s financial policies and investors remain confident with America and the Western countries. With this confidence still high in the West, it ensures that challenges to the current periphery remain stable and ensure that these Western countries remain firmly at the center to prevent fragmentation. Furthermore, it is also clear that the US, while being in the center of the crisis, contains other crises from spreading globally and ensure that the global economy remains strong. America even absorbs banking losses even if it has domestic economic problems on its own. The resiliency of the United States and other Western nations also ensures that emerging economies are balanced and stable.
However, in contrast to the argument that the world order remains the same, it is clear for other experts that the Global Financial Crisis had reorganized the state of world affairs and indicated a change in leadership in the world order. Some experts estimate that full American recovery may prove to be difficult considering that the crisis has cost the US 40 to 90 percent of its entire goods and services demands, including output. America’s recovery is also hindered by the subsequent recession in the country that prolonged unemployment and increased risk for many Americans. Unless the US government or other Western nations could determine the root causes of the crisis, full recovery may not be possible. Considering this scenario and the signs that full Western recovery is uncertain, the financial crisis had solidified the growing power of previously developing economies like Brazil, Russia, India and China (BRIC) and made them the new world economic powers. In contrast to the open financial policies of the US, which ensured that its allies would feel its impacts, BRIC countries had limited foreign access to their markets and stabilized their economies by regulating business and trading. India, for instance, imposed heavy restrictions to bank lending to the real estate sector and improved country reserves to ensure the country would not be hit by the crisis. BRIC member countries also considered capitalism the key reason as to why America now experiences heavy losses and fails to recover from the global financial crisis.
Furthermore, it is the developing countries themselves now supporting the recovering markets of the West and all those directly affected by the global economic crash. In the statement of Alex Patelis of Merrill Lynch, he expressed that “the typical troublemakers of the global economy, the emerging markets, are actually now the world’s creditors.” China, for instance, is now sustaining the U.S. economy with its foreign direct investments and loaning. The country had released a $585 billion stimulus package for ailing countries and they continue to increase it without influencing their fiscal deficit and public debt rate. Russia had also been aiding previously strong economies such as Iceland since 2008 despite Russia’s former status as an ailing economy ten years previously. China has also ensured that Asian countries would remain stable despite the impact of the financial crisis to their respective economies. With China and India growing steadily alongside the smaller economies, it is expected that it would also improve economic conditions throughout the region and fuel further recovery given the history of the region with regards to earlier financial crisis.
Another clear sign that the world order has shifted significantly after the global financial crisis is the changes in leadership or dominance in key financial institutions such as the IMF and the World Bank – as well as economic groups such as the G7 and the G20-, which has long been dominated by the West since 1945. With America now losing ground over its influence and power in the economic arena, the BRIC countries are now using this as a reason to slowly assert itself in the political and financial arena and take over America’s spot in the world order. Aside from the BRIC countries, members of the G-20 are now taking over the economic influence of the G-7 and most of its members come from the developing nations. Although there were a few who questioned the legitimacy of the group and America’s continous inclusion to the group, the G20 has ensured that they are now equal in power similar to the US, Europe and Japan who are members of the G7. The developing nations have also exercised their power to ensure that the US/EU initatives would not take root in their partnerships considering the impacts it may bring to their own nations and the interests it would curtail.
The IMF and WB, on their end, is now being challenged in terms of dominance by the BRICS – Brazil, Russia, India, China and South Africa - countries in response to their failure to provide working reforms that would restabilize the world economy. In 2014, the BRICS countries announced the creation of the New Development Bank that would ensure that the economic order is reorganized to ensure that the world sees that developing countries are also growing and sustain ailing countries which cannot easily get aid from the IMF and the WB without concessions determined by the US. Even at present time, America remains influential in determining the IMF’s lending authority and lending capacity and if the country sees something in IMF or WB policies that would be detrimental to the country, it disables each agency from acting. Some experts, such as the former economic adviser for President Bill Clinton Joseph Stiglitz, even stress that the actions done by the BRICS countries emphasize that America’s leadership is no longer working and weakened the power of the WB and the IMF. With the BRICS-led bank prospers, it is likely to also ensure that better banking standards would be followed by every member country and ensure that potential crisis would be prevented.
It is undeniable that the West’s influence around the globe is unparalled over the past couple of years as these Western countries defined the standards of political and economic prosperity. With the Global Financial Crisis, it is clear that two opposing arguments are proven correct at some point. The West remains the center of the world economy and determines the stability of the entire system. Many investors still see that the US and its close allies are still strong areas for them to invest on and ensure that possible spillovers are prevented. However, with the impacts of the crisis mostly affecting the West, the world order has indeed shifted to the Eastern or growing economies as they are now sustaining the balance of the world economy. New economies such as China, India and other emerging economies are expected to be better than ever in the following years while the US and other Western countries recuperate. Considering these scenarios, it is clear that the East is now reorganizing the world order as it sees fit and unless America could recuperate the losses they have lost throughout the crisis, the Eastern dominance is likely to stay.
Atkinson, T., Luttrell, D. & Rosenblum, H., 2013. How Bad Was It? The Costs and Consequences of the 2007-09 Financial Crisis. DallasFed, (20), pp.1-22.
Danzman, S.B. & Winecoff, W.K., 2013. Why U.S. Financial Hegemony Will Endure. [Online] Available at: http://www.symposium-magazine.com/why-u-s-financial-hegemony-will-endure/ [Accessed 25 July 2015].
Hill, P., 2014. Emerging economic powers to challenge U.S., IMF with own aid bank. [Online] Available at: http://www.washingtontimes.com/news/2014/aug/5/emerging-economic-powers-to-challenge-us-imf-with-/?page=all [Accessed 25 July 2015].
McKibbin, W. & Stoeckel, A., 2009. The Global Financial Crisis: Causes and Consequences. Lowy Institute For International Policy Working Papers in International Economics, (2), pp.1-39.
Payne, R., 2012. Global Issues. New York: Pearson.
Sally, R., 2011. The Crisis and the Global Economy: A Shifting World Order? ECIPE Occasional Paper, (3), pp.1-32.
Sands, D., 2008. Financial crisis reshapes world order. [Online] Available at: http://www.washingtontimes.com/news/2008/oct/12/financial-crisis-reshapes-world-order/?page=all [Accessed 23 July 2015].
Wade, R., 2011. Emerging World Order? From Multipolarity to Multilateralism in the G20, the World Bank and the IMF. Politics and Society, 39(3), pp.347-78.