The financial crisis of 2007-2008 shook the very foundations of the globalized financial world. By destabilizing the global economy, the meltdown created a legitimacy crisis for the Bretton Woods system. The International Monetary Fund (IMF) was the brainchild of the 1944 Bretton Woods Conference and put forward an era of intense market liberalization. Under the leadership of the super-powerful United States, the world (or at least those 45 allowed into the original institution) entered a new age of interdependence. However, times have changed. The United States is not the powerhouse it used to be, with economic power spreading as more countries enter the global markets. Legitimacy of the IMF and the effects of domestic economic problems on the rest of the world have created a lack of faith in how the IMF handles crises, leading to issues and impediments for governments to cooperate.
Legitimacy is a major criticism of Helleiner in their piece regarding the effects of the 2007-2008 financial crisis. How the major powers – namely the US and the UK – reacted to both the 97-98 crisis and then subsequently the 07-08 crisis has created this legitimacy issue. During the previous crisis, the Anglo-Americans attributed the economic issues to problems within the developing countries, where the problem originated. In response, the G7 countries enforced their model on these countries. According to Andrew Walter, this response is “a model of ‘regulatory neo-liberalism’ based on an (idealized) Anglo-American experience.” However, the 2007-2008 crisis did not originate in these areas. This most recent crisis originated in the UK and US markets because of their policies and spread from there.
The United States and the United Kingdom are not the financial superpowers that they once were, and the world felt the repercussions of their declining markets during the 2007-2008 crisis. Rising markets, such as China, have been steadily increasing their presence in the global marketplace, offering their advice to these two countries. Without the strong leadership of the United States, doubt has been cast on the effectiveness of their neo-liberal creation, the IMF. According to Helleiner, some historians are claiming we have ‘recently ended [an] era of financial globalisation.’ What does this mean for the global financial institution?
On the international level, there has been a call for a reorganization of the leadership to reflect the changes in their economic power and reliability, with greater incorporation of emerging market countries into the core. In their international regulatory agenda, the G20 have pushed for stricter standards that have encouraged ‘host country’ regulation of international banks to better understand the effects of the international bank on the host country, particularly in terms of national taxes. With this increased knowledge of the domestic costs of international banking, new barriers to international cooperation have arisen.
Fear of another economic crisis from the interlocking global markets as well as the domestic cost on the host countries cast doubt on the future of the IMF. If the previous leaders can be not only negatively affected by the globalization of the market, but the root cause of a crisis, how beneficial can globalization be? For now, the US and the UK still have power. Through reform and reorganization, the IMF can still function. With emerging economies gaining momentum, a greater incorporation into the global market can decrease the pressure felt by the US and UK markets. Markets fail, markets rebound. Depending heavily on any country can lead to a domino effect, as seen in the 2007-2008 crisis. The world is not the same as it was during the Bretton Woods conference. Times change, and organizations, such as the IMF, need to reflect this change to maintain legitimacy.