AUTHOR: JAMES CHINEMELU NWAZUOKE

B. PHARM, UNIV. OF BENIN, NIGERIA

MBA, RMIT, MELBOURNE

PROJECT RESEARCH OUTLINE

1. EXECUTIVE SUMMARY-----------------------------------------------------------------PAGE 4
2. INTRODUCTION------------------------------------------------------------------------PAGE 5-6
3. LITERATURE REVIEW-------------------------------------------------------------------PAGE 7

3.1. CAUSES AND IMPACTS OF THE FINANCIAL CRISIS------------------PAGE 7

3.1.1. CAUSES------------------------------------------------------------- PAGE 7-11

3.1.2. IMPACTS------------------------------------------------------------ PAGE 12

4. ROAD TO RECOVERY--------------------------------------------------------------PAGE 13-15

5. CASE STUDIES------------------------------------------------------------------------PAGE 16-20

6. CONCLUSION-------------------------------------------------------------------------PAGE 21

7. REFERENCES----------------------------------------------------------------------------PAGE 22

1. EXECUTIVE SUMMARY

The global economic turndown has led to an unprecedented hardship in the lives of those that came after the great depression of the 1930s. The word financial crisis or global recession generally suggests a decline in economic activities, exceeding a period of six months

The root causes of the financial crisis have been suggested as bust in the housing bubble (an artificial inflation in real estate prices) and bust of commodity boom. Other causes of the current financial crisis include, Easy Credit, Sock Market Collapse, Dollar Crisis, Media Influence and Power- Mediocrity Grip.

A lot of governments worldwide are currently working round the clock, looking for ways to resolve the current financial crisis, a number of ways have been proposed and some have been adopted. Proposed solutions include Optimism, halting the circle of fear and inspiring hope in people, to believe that better days are around the corner. Another solution is curbing extravagance, advising as well as enforcing legislations that will enable people to live within their means. Economic Stimulations are already obvious in most countries of the world; the Obama administration had already pumped $800Billion in the economy so as to stimulate/revamp the economy. Merger and Cooperation involving equal partnership are encouraged; the new US-Russia alliance on Global Financial and Energy Securities is one way forward. Expansion of G8 to G20 and the current G20 summit held in London offers more and stronger participations.

Two case studies are considered here, to offer historical perspective and hindsight knowledge on the financial crisis--- The Great Depression of the 1930s in the US and around the world and the lost decade of the 1990s in Japan. The lessons learned from the great depression and the lost decades provides solid exist strategies to the current financial crisis.

In conclusion serious efforts should be undertaken to avoid unnecessary speculations giving rise to a series of bubbles, legislations should be on ground ensuring stricter restrictions within the financial sectors. It is also important to note that the most probable route to recovery from the crisis will involve an articulation of all the possible solutions

2. INTRODUCTION

The aim of this project is to identify the possible causes of the world's financial crisis and to extrapolate ways of recovering from the crisis. The world is currently experiencing an economic downturn and everybody is wondering what could be responsible.

The words 'financial crisis', 'the global meltdown', 'economic recession' are now used interchangeably, "A recession is defined as a prolong period of economic slowdown" (Vijay Ghosh, The Economic Recession Simplified).

The slow down is generally characterized by a slowdown in purchase of consumer goods, reduction in the production of goods, increase in unemployment and decrease in salaries and incomes and unhealthy stock market. The slowdowns generally have to be sustained for at least six months to be classified as a recession.

The recession is also likely to lead to baby bust as well as increases in abortion and consequently a reduction in world's population. "As individuals begin to feel the effects of the recession on their personal lives, commentators are wondering about the impact on the birth rate" (Jennie Bristow, Abortion Review, March 3rd 2009)

A recession could easily cause other loans going bad as well. Many economist on the right and left now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the fed under the bush-Obama administration have started doing, otherwise called bailout

On the 15th of April 2009 thousands of people rallied on "tea parties" staging protests that tapped into the collective angst stirred up by bad economy, government spending and bailout. At the Iowa Capitol Doug Burnett lamented "this country has been on a spending spree for decades, a spending spree we can't afford" (Joe Biesk, Associated press, 15th April 2009)

Our financial system accelerates the human instinct to go wild during good times. Perhaps we need some automatic breaks (Daniel Gross, Newsweek, Feb. 28th 2009)

The money market that represents the market for short-term debt, which companies used to smooth out mismatches in their cash flows, is gradually running into extinction.

This project also aims at exposing the strong interrelationship and inter-dependence amongst nations. It calls for extra care in dealing with "issues" It holds nations of the world more accountable for their actions.

Gone are the days when a nation can freely and nonchalantly decide to run her affairs as she deems fit, as it will gradually and inevitably create a ripple effect that jeopardizes the fate of other nations.

The U.S. financial crisis quickly spread worldwide given the interconnectedness of the global economy in trade, finance and investments. The impact on and reaction from developed countries and emerging markets differ based on their global economic integration and policy responses.

(www. Brookings.edu/financial markets)

When the US sneezes, the world catches a cold. This adage of the twentieth century has never been truer than today (The European Magazine, the 2008 economic crisis explained).This truism by extension (due to the strong links amongst nations) has included many other nations of the world.

The question therefore is how did this monumental financial crisis erupt?

3. THEORIES/LITERATURE REVIEW

3.1. CAUSES AND IMPACTS OF THE FINANCIAL CRISIS:

3.1.1 CAUSES

Most scholars have argued that the chief and root cause of the global financial crisis started with

3.1.1.1 BURST OF THE HOUSING BUBBLE

In 2004, during the housing bubble, everyone; Lenders, Borrowers, Banks, Construction Companies, realtors seemed to be in for a big party, and lenders were beginning to lend to risky borrowers that will normally be incapable of repaying the loans. The idea of lending to borrowers that are likely to default on their loans, was that if they were unable to pay back their loans, then their assets (Houses) can be resold, but as expected most of the risky borrows could not afford to pay, but in putting too many foreclosed houses for sale at the same time, the over priced /inflated housing market plummeted. The unprecedented drop in housing prices proved fatal for most banks as they had already invested most of their money in the speculative deals. The sub prime mortgage was such that borrowers were charged low interest rate for the first few years and subsequently there was a drastic rise in the interest…… unsuspecting borrowers were oblivious of the "clauses" attached to the loans and they were simply told that they will easily refinance their mortgage in few years and still keep their interest rate low. "With banks whispering sweet encouragement, people bought homes they cannot afford, and now they are falling behind in paying their mortgages" (David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)

Hence the chief cause of the global Meltdown and the world's financial crisis…… was excessive Greed from US Lenders

Lord Myners, the British government financial services secretary, has said that British banks are partly to blame for the current global recession (Mathew Tanner, Banks and the Recession, Jan 26 2009)

Poor government regulation on UK's banks and financial institutions has also been blamed for the recession. The Golden days of huge bonuses in The US and UK and most other parts of the developed world led banks and other financial executives to lose a broader sense of the world around them.

A number of economists seem to agree that the main causes of the housing bubble that led to the burst are --agency problems, the mis-pricing of risk and the failure of securitization to distribute risks across the financial market (New York Times, Pressured to take on risk, Fannie Hit a Tripping Point Oct. 4th 2008)

2005 to 2006 was time to pay the piper who ultimately dictates the market. The interest rate on the sub prime mortgage has skyrocketed, and borrowers were unable to pay or refinance their loans. The Question here is; why is the whole world affected? The whole world comes into the picture because the world is now tied together in a common global economy.

The pipers here are the investors and banks that US lenders sold the debts to. Hence the US lenders were simply using other people's money the world over to fund the sub prime mortgages.

2007 ushered in the year of the credit crunch; by 2007 nearly 1.3 million US houses were subject to foreclosure, up 79% from 2006. The collapse of the sub prime lending market resulted in a credit crunch for consumers. "The combination of decreasing home prices and higher mortgage payments due to increase in the adjustable rate mortgage market caused a perfect storm' (Jason Maples, Personal Finance, Denver Business Journal. April 11th 2008)

"The freeze in the credit markets sent stock markets gyrating, caused the collapse of Bear Sterns, left the economy on the brink of the worst recession in a generation and forced the federal reserved to take its boldest action since the depression". (David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)

No one seems to know the mysterious owners of the worthless debts spread all over the world. But soon banks refuse to lend to each other resulting in little liquidity (Money) in the system otherwise termed credit crunch.

Ethan Harris a top Lehman Brothers Economist once warned "We are exposing parts of the capital market that most of us have never had of". Robert Rubin former treasury secretary and current Citigroup executive has said he hasn't heard of "liquidity puts" an obscure financial contract until they started causing big problems for Citigroup.

Ben Benanke himself has suggested that the only thing that can end the financial crisis is the end of the housing bust.

Firms are now hoarding cash instead of lending it, until they understand how bad the housing crash has become and how exposed they are to it. (David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)

Lenders are shutting the doors, the conservatism has gone so far that it is affecting many solid would be borrowers which is turn is hurting the broader economy and aggravating wall street fears

2008 brought in a wave of losses, it was the year of reckoning, by July 2008 the heat of the crisis approached a climax, banks and financial institutions around the world reported a whooping 435 billion dollar loss. Today banks can hardly get credits and are stock with bad assets, A number of banks and financial institutions the world over have declared bankruptcy, e.g. Freddie Mac, Fanny May and AIG in US, Northern Rock in UK and Fortis and Dexia in Belgium. A number of Countries such as Mexico, Venezuela, Argentina and more, with strong trading ties to the US are experiencing enormous economic contractions. China just posted (15th April 2009) the lowest GDP in a decade of only 6.1 growth rate. "The Japanese gross domestic product shrank 15.2 percent on an annualized basis. It marked a fourth straight quarter of contraction and the biggest decline since Japan began keeping records in 1955". (Bettina Wassener, New York Times, May 20th 2009)

IMF just (April 2009) released a gloomy growth forecast for Australia. Australia growth is expected to shrink -1.4% in 2009 (faster than the global average of -1.3%) and 0.6% in 2010

3.1.1.2 COMMODITY BOOM CAUSES BUST

The skyrocketing in oil prices at the mid-of -2008 was largely due to the increasing demands from emerging economies such as China and India which dramatically forced consumers in North America and Europe to pay more in order to fuel their cars and heat their homes.

The rise in oil prices at the mid-of -2008 shot food prices also to record high, because oil is needed to produce and transport food, leading to food riots in a number of countries.

The rise in oil price to 147USD a barrel almost completely ground economies in North America and Europe, by 30th September 2008 UK and Germany reported a zero growth for the past quarter and declared they will officially be in recession by the end of 2008.

The Center for Monitoring India Economy (CMIE) reported that prices of sugar are expected to start rising from June 2009 due to depletion of inventories that will inadvertently create a tremendous upward pressure.

The financial crisis can be explained as the product of the twin evil of the sub-prime mortgage and the unprecedented increase in oil price.

Other factors include, Easy Credits, Stock Market Collapse, Dollar Crisis and many more.

3.11.3 EASY CREDIT

Easy Credit is one of the major other factor that led to the global recession. Encouraged by the artificially low interest rates created by the US Federal Reserve people were encouraged to spend money they don't actually have, and buying assets over and over until nobody was sure if they were actually worth anything or not. Easy credit is at the heart of the crisis, most US citizens were spending money they don't have rather than living within their means

3.1.1.4 STOCK MARKET COLLAPSE

Panic and fear are everywhere in early 2008. An economic recession is now the topic on everyone's mind. Most of the world's stock market have already lost more than twenty percent of there value in the last couple of months. "The dramatic drop in stock market values signals a new bear market for domestic and international equities" (James William Smith, Navigating the economic crisis of 2008)

The inability of the US Federal Reserve chairman, Ben Bernake to see ahead of time and act decisively in response to the housing lenders sub prime mortgage problems in 2007, has been blamed as a major contributor to the 2008 financial crisis and consequently Global Meltdown.

It was a rough first quarter for the equity market in 2008. "The Dow was down 6.35%, S&P 500 lost 9.45% and the NASDAQ dropped 14.06% (Jason Maples, Personal Finance, Denver Business Journal. April 11th 2008)

3.1.1.5 DOLLAR CRISIS

Adding to the credit issues has been the steady decline of the dollar against other currencies world wide. As the federal deficit continued to spiral out of control foreign investors world wide are becoming reluctant to hold the Dollars in form of treasury notes.

"While a declining dollar makes US exports more attractive to the global consumers, the $9.4 trillion deficit (Costing the treasury more than $480 billion per year just in interest payments) has fueled fears of solvency by global investors" (Jason Maples, Personal Finance, Denver Business Journal. April 11th 2008)

3.1.1. 6 MEDIA INFLUENCE

A lot of people have strongly accused the Media as been instrumental to the recession. Kevin Phillips a former white house strategist and author of 13 books including " American Theocracy" and "bad money" also condemns the media for failure to tell the public "how big and out of control" the financial sector became for the past 25years

"As the financial sector of the U.S. economy grew from about 10 percent to 12 percent to about 20 percent to 21 percent, the speculation led to a series of bubbles from savings and loans to junk bonds in the 1980s to the technology bubble in the 1990s to the mortgage, debt and credit bubble which has led to a "massive de-leveraging and unwinding" that is still being played out" (Kevin Phillips, Bad Money). Phillips argues that all the while the media was aware of all these economic malpractices but like the rest of the US politicians remained complicit.

3.1.1.7 POWER- MEDIOCRITY GRIP

The gross power imbalance between the developed and developing world has also been blamed as having a contributing role to the crisis. The idea of the more developed world, more or less dictating to the developing world, calling the shots and naming the rules of the game have not helped in advancing the 'financial course' of humanity but rather have metamorphosed to a dependence of developing nations on the West (Developed nations). UN, WHO World Bank, IMF is largely controlled by the West, countries in Asia, Latin America, and Africa have negligible control on the world's financial instruments, the developing nations lack any solid voice, hence their interests are not adequately represented in the 'world's financial market', but the effects of the crisis are felt by all. The grip of the first world (more developed world) on the third world (developing nations) have led to a power-mediocrity grip

3.1.2 IMPACTS

3.1.2.1 BOEING AND US STEEL

Mammoth companies such as Boeing and US steel have both had tremendous lay-offs recently, companies such as McDonalds and Wal-mart are however still resilient in the face of the crisis

3.1.2.2 CHRYSLER

Chrysler lenders are considering plan for debt offer. "Chrysler LLC's lenders are in talks with US government to reduce the automaker's debt by swapping some of it out of equity, new debt or lesser amount in cash (Reuters, April 3rd 2009, New York) Chrysler is currently surviving on the $4 billion dollar emergency loan from the US government and has been given a 30 days ultimatum by the Obama's administration to complete an alliance with Italy's Fiat SpA or face a cut-off of its government funding that could force its liquidation. "They tell me, 'The only way that we can survive is if you order cars, and Fiat and the government see money coming in,' " Mr. Archer said (Nick Bunkley, New York Times, May 22nd 2009) Robert Archer, runs three Chrysler dealerships in the Houston area.

3.1.2.3 GENERAL MOTORS

General motors corps. Share plunged by 16 percent in April (Reuters, 14th April, Detroit). Traders are shedding positions as they fear the US government will push General Motors into bankruptcy to wipe out existing equity.

The US government is laying the groundwork for General Motors to file for bankruptcy should it fail to reach give-back deals with stakeholders by the June 1st 2009 deadline (New York Times, GM to prepare for Bankruptcy Filing April 12th 2009)

4. THE ROAD TO RECOVERY

The road to recovery is a component of several factors, which include but not limited to:

4.1. OPTIMISM

One way of dealing with the current crisis is from a meta-physical standpoint, people need to believe again. Fear has suddenly gripped people across the globe, the psychological impact is traumatic, and there is the need for people to believe again. Here, we are looking at what hope does to the mind, the ability to awaken the "inner man" and bring out the true genius in us.

4.2. CURBING EXTRAVAGANCE

There is need for a global orientation especially for the richer nations of the world to live according to (and not in excess of) their means.

4.3. ECONOMIC STIMULATION

Governments of the world are taking steps to stimulate and revamp the economy, the US under the Obama administration passed a historically unmatched 780 billion dollars in Stimulus Bill. The Wall Street says it needs bailout, but what happens if Wall Street collapses completely? The inevitable consequence will be "a drying up of the system" "There is no industry in America that does not depend upon Wall Street. If credit seizes up and the banks fail, everyone will suffer deeply as businesses cut back for lack of capital, mortgage capital dries up, credit card rates rise and car loans become hard to get" (Megan McArdle, Asymmetrical information, the Atlantic, September 22nd 2008). Fruits of the economic stimulation are becoming evident. "The recent bounce in the stock market more than 20% from its march lows-has everyone looking for more signs of a stabilizing economy" (Dan Caplinger, The Crystal Ball That Could Make You Rich, April 7th 2009)

4. 4. MERGERS AND COOPERATION

The G-20 summit March 30th 2009 offer new hope of a collective determination in dealing with the financial crisis. The new forged alliance between the US and Russia for Global Financial and Energy Security offers promise for new models of cooperation aimed at long term solution.

"Partnership and cooperation amongst nations is not a choice, it is the only way" (Barrack Obama, 24th July 2008, Berlin Germany)

"True partnership and progress requires constant work and sacrifice" (Barack Obama, 24th July 2008, Berlin Germany)

4.5. NEED FOR WORLD PEACE

The need to create stable democracies and sustainable peace round the world can never be over-emphasized. Tremendous amounts of world resources (human, intellectual and natural) are lost yearly to wars and civil unrest. The war in Iraq and Sudan, the nuclear threat and proliferation in Iran, the distrust of the US in Venezuela, the kidnapping of expatriates in the Niger Delta region of Nigeria, the tirades of attacks by pirates on sea have all led to the fluctuations in oil prices

4.6. LEGISLATIONS

A. Stronger regulations should be adopted on financial documents such as: commercial paper, Accommodation Endorsement and Accommodation Paper

4.6.1 Commercial Paper

Commercial Papers are unsecured short term-debt issued to corporations, typically for financing accounting receivables, inventories and meeting short term liabilities, issued at a discount with maturity of about 270 days (www.investopedia.com). Commercial papers usually go without any collateral and are not registered with securities and exchange commissions (SEC) as long as it matures within 9 months 270 days

4.6.2 Accommodation Endorsement/Accommodation Paper

Regulations on written agreement from one entity to back the credit liability of another otherwise termed accommodation endorsement should be stiffen. This insurance is usually done with many considerations, and adds strength to the credit worthiness of the insured entity. This should normally be made by a parent company to a subsidiary, so as to allow the subsidiary company to take on the parent credit standing. Accommodation endorsement is similar to a government guaranteeing a third party's debt with his full faith and credit. For example an adolescence that does not qualify for a credit card may obtain one if the parent or guardian co-signs. In contributing to the global meltdown, Banks in the US and in some other countries have long borrowed money the world over, using their credit worthiness. But following the real estate boom of 2004 in the US bank executives became excessively greedy and went in for the kill. They started lending to risky-borrowers, the normal calculation would have been that if the borrower fails to pay his/her house will be foreclosed, sold at a profit. But unfortunately the boom was unsustainable and following the bust (meaning the houses will now be sold at a lower price than the original amount) couple with the inability of borrowers to pay back, banks stood at the crossroads, at a very precarious position and unimaginable nightmare that defiled any quick solution

4.6.3. REGULATIONS ON EXECUTIVE THEFT

There is the need for stronger regulations against executive theft, although white collar crimes are unlawful, executive theft appears to be within the ambits of the law and is only a matter of morality. Governments of the world most enforce stringent legislation that forbids CEOs and other executives from excessive enrichment of their pockets to the detriment of the society.

Imagine a CEO who is ready to spend 70,000USD of taxpayer money for ONE dinner, not to mention the endless travel (interstate and overseas), lengthy sabbaticals (overseas of course), retreats at luxury resorts (not with chateau cardboard of course!), overly generous and dishonest superannuation,

5. CASE STUDIES

The great depression of the 1930s in US is a valuable case in hindsight as well as the "lost decade" of the 1990s in Japan.

5.1. GREAT DEPRESSION

Lessons should be learned from history--the great depression of the 1930s offers a hindsight perspective on the current economic/financial crisis.

The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries. (Wikipedia). The Great Depression signaled the largest and most important economic depression in the 20th century, and is used in the 21st century as an example of how far the world's economy can fall.

The Great Depression was triggered by a sudden, total collapse in the stock market. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.

In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing (Charles Hugh Smith, the coming great depression, leaving Fantasyland, November 29 2008) By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931.

5.1.1 LESSONS TO LEARN FROM THE GREAT DEPRESSION

One crucial lesson from the 1930s is that a small fiscal expansion has only small effects.

The key fact is that while Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem. When Roosevelt took office in 1933, real GDP was more than 30% below its normal.

The result was that the total fiscal expansion in the 1930s was very small indeed. As a result, it could only have a modest direct impact on the state of the economy.

This is a lesson the Administration has taken to heart. The American Recovery and Reinvestment Act, passed less than thirty days after Roosevelt's Inauguration, is simply the biggest and boldest countercyclical fiscal action in history. The nearly $800 billion fiscal stimulus is roughly equally divided between tax cuts, direct government investment spending, and aid to the states and people directly hurt by the recession. The fiscal stimulus is close to 3% of GDP in each of the next two years.

A second key lesson from the 1930s is that monetary expansion can help to heal an economy even when interest rates are near zero.

The United States was on a gold standard throughout the Depression. Part of the reason the Federal Reserve did so little to counter the financial panics and economic decline was that it was fighting to defend the gold standard and maintain the prevailing fixed exchange rate. In April 1933, Roosevelt temporarily suspended the convertibility to gold and let the dollar depreciate substantially. As a result large quantities of gold flowed into the U.S. Treasury from abroad. These gold inflows serendipitously continued throughout the mid-1930s, as political tensions mounted in Europe and investors sought the safety of U.S. assets.

Under a gold standard, the Treasury could increase the money supply without going through the Federal Reserve. It was allowed to issue gold certificates, which were interchangeable with Federal Reserve notes, on the basis of the gold it held. When gold flowed in, the Treasury issued more notes. The result was that the money supply, defined narrowly as currency and reserves, grew by nearly 17% per year between 1933 and 1936

This monetary expansion couldn't lower nominal interest rates because they were already near zero. What it could do was break expectations of deflation.

Beneficial impact on consumer and firm behavior was a turned around on interest-sensitive spending. For example, car sales surged in the summer of 1933. One sign that lower real interest rates were crucial is that real fixed investment and consumer spending on durables both rose dramatically between 1933 and 1934, while consumer spending on services barely budged.

a third lesson from the Great Depression: beware of cutting back on stimulus too soon. Monetary policy was very expansionary in the mid-1930s. Fiscal policy, though less expansionary, was also helpful. Indeed, in 1936 it was inadvertently stimulatory.

The fourth lesson to draw from the recovery of the 1930s is that financial recovery and real recovery go together. When Roosevelt took office, his immediate actions were largely focused on stabilizing a collapsing financial system. He declared a national Bank Holiday two days after his inauguration, effectively shutting every bank in the country for a week while the books were checked. This 1930s version of a "stress test" led to the permanent closure of more than 10% of the nation's banks, but improved confidence in the ones that remained. Nevertheless, the immediate actions to stabilize the financial system had dramatic short-run effects on financial markets. Real stock prices rose over 40% from March to May 1933, commodity prices soared, and interest-rate spreads shrank, the actions surely contributed to the economy's rapid growth after 1933, as wealth rose, confidence improved, and bank failures and home foreclosures declined. But, it was only after the real recovery was well established that the financial recovery took firm hold. Real stock prices in March 1935 were more than 10% lower

The fifth and final lesson to draw from the 1930s is perhaps the most crucial. A key feature of the Great Depression is that it did eventually end. Despite the devastating loss of wealth, chaos in the financial markets, and a loss of confidence so great that it nearly destroyed Americans' fundamental faith in capitalism, the economy came back. Indeed, the growth between 1933 and 1937 in US was the highest ever experienced outside of wartime.

This fact should give Americans and people of the world hope. The US is starting from a position far stronger than it was in 1933. And, the policy response has been fast, bold, and well-conceived. If the US and the world continue to heed the lessons of the Great Depression, there is every reason to believe that the world will weather this trial and come through to the other side even stronger than before.

5.2 LOST DECADE OF THE 1990s IN JAPAN

Japanese asset price bubble was an economic bubble in Japan from 1986 to 1990, in which real estate and stock prices greatly inflated. The bubble's collapse lasted for more than a decade with stock prices bottoming in 2003, until hitting an even lower low amidst the current global crisis in 2008.

In the decades following World War II, Japan implemented stringent tariffs and policies to encourage people to save their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies. This allowed local companies to invest in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.

With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. Additionally, banks granted increasingly risky loans.

Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over 100 million yen (approximately $1 million US dollars) per square meter ($93,000 per square foot). Prices were only marginally less in other large business districts of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped to less than 1 percent of its peak, and Tokyo's residential homes were less than a tenth of their peak, but still managed to be listed as the most expensive in the world until being surpassed in the late 2000s by Moscow and other upstarts. Tens of trillions of dollars worth were wiped out with the combined collapse of the Tokyo stock and real estate markets. Only in 2007 had property prices begun to rise; however, they began to fall in late 2008 due to the financial crisis.

With the economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral. The Japanese Central Bank set interest rates at approximately zero. When that failed to stop deflation some economists, such as Paul Krugman, and some Japanese politicians, advocated inflation targeting.

The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low probability of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. They would sometimes resort to depositing their block of investment cash, as ordinary deposits, in a competing bank, which would bring howls of complaint from that bank's Loan Officers and Investment staff. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses" The time after the bubble's collapse which occurred gradually rather than catastrophically, is known as the "lost decade" or end of the century in, Japan. In October 2008 the Nikkei 225 stock index reached a 26-year low of 6994.90.

5.2.1 LESSONS TO LEARN FROM JAPAN LOST DECADE

"The Japanese have been here before. They endured a "lost decade" of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures. " (Hiroko Tabuchi, In Japan's Stagnant Decade, Cautionary Tales for America, New York Times, Feb 12th 2009)

Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

By then, Tokyo's main Nikkei stock index had lost almost three-quarters of its value. The country's public debt had grown to exceed its gross domestic product, and deflation stalked the land. In the end, real estate prices fell for 15 consecutive years.

Some students of the Japanese debacle say they see a similar train wreck heading for the United States. "I thought America had studied Japan's failures," said Hirofumi Gomi, a top official at Japan's Financial Services Agency during the crisis. "Why is it making the same mistakes?"

Many American critics of the plan unveiled Tuesday by Treasury Secretary Timothy F. Geithner said the plan lacked details. Experts on Japan found it timid - especially given the size of the banking crisis the administration faces.

"I think they know how big it is, but they don't want to say how big it is. It's so big they can't acknowledge it," said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. "The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks."

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying - ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

6. CONCLUSION

In conclusion serious efforts should be undertaken to avoid unnecessary speculations giving rise to a series of bubbles, legislations should be on ground ensuring stricter restrictions within the financial sectors. It is also important to note that the most probable route to recovery from the crisis will involve an articulation of all the possible solutions

7. REFERENCES

1. Vijay Ghosh, the Economic Recession Simplified
2. Jennie Bristow, Abortion Review, March 3rd 2009
3. Biesk, Associated press, 15th April 2009
4. Daniel Gross, Newsweek, Feb. 28th 2009)
5. Brookings.edu/financial markets
6. The European Magazine, the 2008 economic crisis explained.
7. David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)
8. Mathew Tanner, Banks and the Recession, Jan 26 2009)
9. New York Times, Pressured to take on risk, Fannie Hit a Tripping Point Oct. 4th 2008)
10. Jason Maples, Personal Finance, Denver Business Journal. April 11th 2008)
11. David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)
12. James William Smith, Navigating the economic crisis of 2008)
13. Reuters, April 3rd 2009, New York
14. Nick Bunkley, New York Times, May 22nd 2009
15. Megan McArdle, Asymmetrical information, the Atlantic, September 22nd 2008
16. Dan Caplinger, the Crystal Ball That Could Make You Rich, April 7th 2009)
17. Hiroko Tabuchi, In Japan's Stagnant Decade, Cautionary Tales for America, New York Times, Feb 12th 2009

INTRODUCTION

The explosive growth of international financial transactions and capital flows is one of the most far-reaching economic developments of the late 20th century. Net private capital flows to developing countries tripled - to more than US$150 billion a year during 1995 to 1997 from roughly US$50 billion a year during 1987 to 1989. At the same time, the ratio of private capital flows to domestic investment in developing countries increased to 20% in 1996 from only 3% in 1990. Hence, this has effected a shift from the national economy to global economies in which production and consumption is internationalised and capital flow freely and instantly across borders.

Powerful forces have driven the rapid growth of international capital flows, including the trend in both industrial and developing countries towards economic liberalization and the globalisation of trade. Revolutionary changes in information and communications technologies have transformed the financial services industry worldwide. Computer links enable investors to access information on asset prices at minimal cost on a real time basis, while increased computing power enables them to rapidly circulate correlations among asset prices and between asset prices and other variables. At the same time, new technologies make it increasingly difficult for governments to control either inward or outward international capital flows when they wish to do so.

In this context, perhaps financial markets are best understood as networks and global markets as networks of different markets linked through hubs or financial centres.

All this means that the liberalisation of capital markets and with it, likely increases in the volume and volatility of international capital flows is an ongoing, and to some extent, irreversible process.

It has contributed to higher investment, faster growth and rising living standards. But this can also give rise to shocks and stresses resulting in financial crisis as we have all witnessed in 1997 and 1998.

Testimonies to the risks of open capital markets are the several waves of instability in the financial markets in early 1998 and again in the wake of the Russian crisis in August/September 1998. To illustrate, net private capital outflows from the five countries most affected by the crisis, namely, Indonesia, Korea, Malaysia, Thailand and the Philippines rose to US $28.3 billion in 1998, reflecting mainly the decline in net bank and non-bank lending. Meanwhile, foreign direct investment which had been one of the main sources of growth during the pre-crisis period in these countries remained sluggish in 1998, amounting to US$8.5 billion as compared to an average amount of US$17.8 billion during the period 1995 to 1995.

Global trade has experienced a slowdown over the past two years due to trade contraction of East Asian economies. Generally, world GDP and trade growth slowed in the past 1997/1998 as the East Asian crisis deepened and its repercussion were felt increasingly outside the region. Asia recorded the strongest import and export contraction in volume and value terms of all regions of the world. The dollar value of Asia's imports registered an unprecedented decline of 17.5%. The five Asian countries most affected by the financial crisis that broke in mid-1997, that is, Malaysia, Indonesia, Philippines, the Republic of Korea and Thailand experienced import contraction by one-third.

In the context of these powerful trends, I like to discuss a few significant the issues relating to them, particularly from a capital market regulator's perspective. Given the breadth of the topic at hand, and in the interest of keeping to time, please allow me to focus particularly on current trends and difficulties faced in the capital markets.

DEVELOPMENTS IN ELECTRONIC COMMERCE AND CAPITAL MARKET REGULATION

Developments in computer and information technology have made dramatic changes to the way the financial services industry operates. These changes are affecting and will affect every aspect of the financial services industry and offer the possibility of reduced costs in raising capital, greater efficiencies in the mobilisation of domestic and international savings and the provision of better, cheaper investment products more closely tailored to the needs of different investor segments. The convergence of computer and communications technology is promoting the development of computer mediated networks, allowing for users to communicate and transmit data and other information regardless of boundaries and distance. As communication costs continue to fall, the potential of outsourcing grows.

These changes will affect -

• The way investment products are offered, distributed and marketed and the way in which investors access information about the products and entities involved;
• The activities of financial services intermediaries, especially advisers, and the way they deal with investors;
• The continued blurring of product and institutional boundaries, and even the scope of financial services sector itself as non-traditional entities take on some of the functions of financial intermediaries;
• The methods of distribution and marketing of investment products which will increasingly draw upon the techniques of mass marketed consumer products; and
• The way secondary trading in investment products takes place as greater scope for direct investor transactions and low cost competitors to established securities and futures markets becomes more of a reality.

Just as electronic commerce affects investors and providers of financial products and services, it will affect the role of corporations and capital market regulators. Just as electronic commerce facilitates activities across jurisdictional borders, it poses in clear terms questions about the practical enforceability of national laws. As well as practical enforcement questions, electronic commerce also raises issues about the role that capital market regulators should play and the effectiveness of many of the traditional regulatory approaches and mechanisms that have been employed by them. An example might be an offering of securities made without a prospectus or registration statement on the Internet by a person in a jurisdiction with which the capital market regulator has no regular contact or mutual enforcement arrangements. There are also concerns about illegal and fraudulent activity on the Internet.

In this regard, the Malaysian position is that it is committed towards a structured development of electronic commerce. Towards this end, Malaysia has proposed to introduce a National E-Commerce Masterplan. This Masterplan should focus on key initiatives which will create momentum in trading via e-commerce. Besides looking at developing the technological infrastructure such as telecommunications infrastructure and systems providing for electronic delivery of goods as well as payment, the Government is also aware that there are legal and regulatory issues which will arise with regard to e-commerce. Malaysia has introduced several sets of laws catered towards proper regulation of e-commerce known as 'Cyberlaws'. The Cyberlaws which have been introduced include, among others :

(i) Computer Crimes Act 1997

This Act provides for a framework to counter computer offences such as unauthorised access to computer material, crimes of fraud and dishonesty through the computer, unauthorised modification of contents of a computer and so on. The Act is not limited by jurisdiction. It has effect outside as well as inside Malaysia. Where a computer crime is committed outside Malaysia in respect of computers or data in Malaysia or that which may be connected to or used in Malaysia, the crime may be treated as a crime within Malaysia and the perpetrator may be dealt with under the provisions of this Act; and

(ii) Digital Signatures Act 1997

This Act addresses issues of security and authenticity of electronic transactions and it allows for greater confidentiality and integrity of messages. It allows for businesses to use electronic signatures instead of hand-written counterparts in legal and business transactions. The Act provides for the treatment of document signed with a digital signature created in accordance with this Act to be treated as legally binding as if the document was signed with a handwritten signature.

The development of an effective regulatory framework is essential in attracting and maintaining confidence for the world in trading with Malaysian counterparts via electronic means. The regulatory framework as it stands is currently incomplete as many other areas such as electronic banking and broking are still in the process of development.

To instil confidence, Malaysia must be able to provide for regulatory certainty and coherence as well as prevent regulatory capriciousness. In relation to financial services, a major consideration is cross-border implications. The Securities Commission, as an example, is currently looking at issues relating to Internet offering of securities and fund management and broking services over the Internet. A re-examination of current laws would need to be conducted to ensure that they have not been overtaken by technology and to restructure the laws so that they are technology neutral.

As far as the capital market is concerned, the Securities Commission recognises that electronic commerce is an area where it is important that the regulatory infrastructure responds in a positive and timely way to facilitate market developments and not hinder innovation in market products and processes. We believe that there are important benefits to be gained through the Commission's facilitation of market developments in this area for the competitiveness of the Malaysian capital market, efficiencies in the operation of our capital markets and the better making of investors at lower cost. At the same time, the Securities Commission considers that it is important for the successful implementation of electronic commerce that investors retain confidence in the integrity of the market for investment products.

LIBERALISATION VS. PROTECTIONISM

On the issue of liberalisation vis-à-vis protectionism, there has been a proliferation of multi-lateral trade agreements since the middle of the century. Such agreements provide for a framework of rules within which nations are 'obligated' to assure other nations signatory to the agreement of a sovereign's approach towards international trade. For example, Malaysia is a member of, among others, the World Trade Organisation through which it is a signatory to the GATS (General Agreement on Trade in Services) and GATT (General Agreement on Tariffs in Trade), APEC as well as ASEAN, all of which have the objective of achieving liberalised trading of goods and services within specified, albeit not immediate, time frames. Through these trade blocs, Malaysia has committed itself to progressive liberalisation which essentially entails a gradual opening of the economy to foreign participants.

The globalisation of economies is intrinsically linked to the internationalisation of the services industry. It plays a fundamental role in the growing interdependence of markets and production across nations. Information technology has further expanded the scope of tradability of this industry. Access to efficient services matters not only because it creates new potential for export but also it will be an increasingly important determinant of economic productivity and competitiveness. The main thrusts of the 'services revolution' are the rapid expansion of the knowledge-based services such as professional and technical services, banking and insurance, healthcare and education. Responding to this phenomenon, regulatory barriers to entry in service industries are being reduced worldwide, either through unilateral reforms, reciprocal negotiation or multilateral agreements. Developing countries such as Malaysia are increasingly looking at foreign direct investment in services as an especially powerful means of transferring technical and managerial know-how, besides attracting foreign capital and investment to the country.

Malaysia has made a commitment under GATS under legal services covering advisory and consultancy services relating to home country laws, international law and offshore corporation laws of Malaysia. Under the GATS commitments, commercial presence of foreign legal firms is not available except in relation to the Federal Territory of Labuan and in such a case, their services are limited to legal services given to offshore corporations established in Labuan. However, there are no limitations placed on the provision of legal service cross-border, that is, provision of such service from a foreigner without having a legal presence in Malaysia. This may be done via fax, telephone or the Internet. As stated before, most aspects of legal services does not need the physical presence of the service provider except perhaps where a court appearance is necessary. Furthermore, a Malaysian may obtain legal services abroad without any limitation either.

Malaysia is also signatory to the ASEAN Framework Agreement on Trade in Services (AFAS). The AFAS is an agreement made within the auspices of the GATS. In very basic terms, commitments under AFAS are GATS-plus which means that liberalisation of trade is accelerated within the ASEAN region under the AFAS as compared to the world at large under GATS. Its ultimate aim is to achieve regional integration and free flow of services within the region. In achieving integration and free flow of services within the region, many issues would need to be ironed out. Issues such as harmonisation of professional standards, acceptable levels of accreditation between member countries, movement of labour in relation to provision of these services, licensing and certification of service suppliers are still under intense discussion within the Member Countries. Taking into account the different levels of economic and regulatory maturity of Member Countries within the ASEAN, it is understandable that it would be a long process of consultation before a consensus may be achieved.

LIBERALISATION OF CAPITAL ACCOUNT

A most obvious impact of globalisation of trade are pressures exerted on developing nations to liberalise their financial markets and capital accounts. However, it is important to recognise that domestic and international financial liberalisation heighten the risk of crises if not supported by prudential supervision and regulation and appropriate macroeconomic policies. Domestic liberalisation, by intensifying competition in the financial sector, removes a cushion protecting intermediaries from the consequences of bad loan and management practices. It can allow domestic financial institutions to expand risky activities at rates that far exceed their capacity to manage them. By allowing domestic financial institutions access to complex derivative instruments it can make evaluating bank balance sheets more difficult and stretch the capacity of regulators to monitor risks. External financial liberalisation in allowing foreign entry into the domestic financial markets may facilitate easy access to an abundant supply of offshore funding and risky foreign investments. A currency crisis or unexpected devaluation (such as in the Asian crisis) can undermine the solvency of banks and corporations which may have built up large liabilities denominated in foreign currency and are unprotected against foreign exchange rate changes.

The ideal free market is one that every one should be free to enter, to participate in and to leave. However, events in the recent financial crises have led many of us to believe that in the freest of markets, there is a need to ensure that free flow of capital does not destabilise the market itself.

Indeed, calls for reform have gained increasing support and credence within the international community with the unfolding of the devastating effects of the crisis beginning mid-1997. The SC's work within IOSCO's Emerging Markets Committee has drawn attention to fundamental weaknesses in the existing global financial infrastructure that have caused and exacerbated these effects. These weaknesses include the inordinate power of highly leveraged institutions to move markets, the destabilising force of volatile short-term capital flows and the failure of existing credit assessment systems to adequately inform market participants of increasing risk of default.

One example of this mounting consensus was the express recognition by G7 countries at their recent meeting in Cologne of the need to strengthen the international financial architecture.

There are now increasing calls for greater transparency and regulation of hedge funds and greater awareness of the dangers of volatile short-term capital flows. To rebuild East Asia and the global economy, we now urgently need to engage in a sincere discussion about what constitutes sound governance in the contemporary world.

On the domestic front, we would have to ask ourselves this question: has our financial markets kept pace with change? Whilst markets have become global, applicable rules and regulations remain predominantly parochial or local. From a regulator's perspective, the challenge for us in a global market is to design the regulatory and structural framework which will allow the market to function efficiently, competitively in a fair and level playing field environment, ensuring at the same time that the market is not subject to highly concentrated or destabilising forces that would disrupt its functioning.

The recent crisis also shows up the need for a careful and sequenced approach towards liberalising a country's capital account. The experiences of Thailand, Korea and Indonesia clearly tells us that there is no prescribed formula on sequencing. However, it is important to recognise that countries vary greatly in their levels of economic and financial development, in their institutional structures, in their legal systems and business practices, and their capacity to manage change in a host of areas relevant for financial liberalisation. It is in recognition of this that the IMF policy-setting committee and subsequently the Finance Ministers and central bank governors of the G7 industrial nations, in the fall of 1998, stressed that a country opening its capital account must do so in an orderly, gradual and well sequenced manner.

Issues of liberalisation versus protectionism would need to be considered at great length to ensure that a country is competitive in a global trading environment. In a developing nation such as Malaysia, a protectionist policy towards local financial services industry and industry participants have been adopted to assist the local industry to develop to international standards. In the area of financial services, for example, the Government's stance has been that consolidation of local financial services providers is necessary to ensure the development of a core group of strong and stable financial institutions to be able to withstand international competition when the financial services markets are opened to international participants.

Indeed, the Malaysian experience clearly shows that a premature freeing up of the capital account, which was done in 1988, without the requisite reforms and institutional arrangements in order to withstand the shocks, can result in debilitating effects as was faced in the Malaysian financial services industry.

MALAYSIA'S EXPERIENCE

Perhaps the most important lesson learnt from the Asian financial crisis was the interdependence of financial markets. Even the most developed economies were not spared of the effects of the financial turmoil which began as a result of Thailand's default on its eurobond issue in February 1997. By May, 1997, the Malaysian Ringgit was under severe pressure from currency speculators and interest rates had risen from between 7% to 9%. It was reported that Bank Negara Malaysia expended about RM1.2 billion of its foreign exchange reserves to try to stave off the attack of currency speculators. However, this was the first of many repeated attacks on the currency.

The effects of the currency crisis began to take its toll on the country in 1998. Interest rates were rising to above 11% and the Ringgit had dipped to an unprecedented low of RM4.71 in January, 1998. All sectors of the economy experienced severe contraction as access to liquidity and credit became more scarce. Bank Negara had made many attempts to quell the effects of the financial crisis through imposition of tight monetary policies and attempts to ease credit to certain sectors of the economy to no avail. But the avalanche would not stop.

Malaysia's sovereign credit rating was downgraded by international rating agencies to just above so-called junk bond status. Malaysia was facing a serious credit squeeze. Raising international capital was prohibitively costly. Flight of capital from the country resulted in a sharp decline in the stock market which fell to levels of 250 before bottoming out in the second half of 1998.

As many of you are aware Malaysia's response to the crisis was one that was totally unexpected by the global community. The Government decided that it needed to protect the economy from increasing global pressures on the Malaysian economy. On 1 September, 1998 the Government introduced selective exchange controls with the intention of curbing and preventing further manipulation and speculation on the Ringgit. The Ringgit was pegged at RM3.80. The Government took further measures to discourage short-term flows of money by requiring that inflow of funds should remain in the country for at least one year. On 15 February 1999, this was replaced with an exit levy for repatriation of capital. The selective exchange control measures imposed by the central bank on 1 September, 1998 were directed towards reducing the internationalisation of the Ringgit by eliminating access to Ringgit by speculators and reducing offshore trading of the Ringgit. This involved the introduction of rules relating to the external account transactions of non-residents and currency of settlement of trade transactions. However, general payments, including movement of funds relating to long-term investments and repatriation of profits, interest and dividends remain unaffected. Payment for the import of goods and services must be made in foreign currency. All export proceeds must be repatriated back to Malaysia within six months of the date of export and proceeds from exports must be received in foreign currency.

The selective exchange control regime is intended to provide the time and opportunity for the Government to institute the necessary financial reforms in the Malaysian financial markets. This is in fact in progress in the work of Danamodal (the equivalent of the Resolution Trust Corporation of the US) to alleviate non-performing loan from banks' balance sheets and Danamodal which is to recapitalise the banks. The Government is also committed to consolidating the domestic financial services industry in having few but strong and viable financial services providers in order to be prepared for financial liberalisation.

GIVING CERTAINTY TO INTERNATIONAL FINANCIAL TRANSACTIONS AND PROTECTION TO FOREIGN INVESTMENTS

International trade and finance, because of its global nature, necessarily involves many areas which may give rise to uncertainty as to the applicability of the contract under which certain trade and financing arrangements are made. These areas range from political issues and political stability to sovereign intervention of the economy, certainty of applicable laws as well as independence of the judiciary.

The Asian lawyer will be fascinated by the rapid changes which are taking place in foreign investment law both within this region as well as in the rest of the world. In less than half a century, the states of Asia have moved through a whole range of stances which could be adopted towards foreign investment. The immediate post-colonial period was characterised by a period of hostility towards foreign investment, motivated by the belief that the ending of economic imperialism alone will bring about true independence. The ensuing period was dominated by a debate about the regulation of multinational corporations and the fear that they posed a threat to state sovereignty. In this period, laws were devised to control the entry of foreign investment and the manner in which such foreign investment operated in the host country after entry. The third and present period is a period of pragmatism where the dominant view is that foreign investment, if properly harnessed, can be an instrument which generates rapid economic development. Competition for the limited investment that is available means that each state country which is bent on a foreign investment led growth strategy must make its laws as hospitable to the foreign investor as the other state which is also bent on a similar strategy.

As much as there is competition among countries to attract foreign investment, there is competition among multinational corporations to enter host countries. Whereas previously the market was dominated by large multinationals, now, there are small and medium enterprises which can transfer more appropriate technology and bring sufficient assets for investment.

This "open door" policy towards foreign investment in developing countries is typically achieved through careful screening of entry by administrative agencies which have been established for the purpose and regulation of the process of foreign investment after entry has been made. After entry, there is continued surveillance of the foreign investment to ensure that the foreign investment keeps to the conditions upon which entry was permitted. In this regard, attitudes to foreign investment protection and dispute resolution will be affected by the new strategies adopted towards foreign investment.

In the context of the new strategies which have been developed by controlling entry and the later surveillance of operations of foreign investment, the foreign investment has ceased to be a contract based matter and had become a process initiated by a contract no doubt but controlled at every point through the public law machinery of the state. The old notions of foreign investment protection which concentrated on the making of the contract and the contract as the basis of all rights of the foreign investor would inevitably become obsolete. This transformation which has taken place is crucial to the devising of effective methods of foreign investment protection. The subject matter of the protection has also changed in that not only physical assets of the foreign investor but his intangible assets which includes intellectual property rights as well as public law rights to licences and privileges have become the subject of protection.

The proposition that contractual provisions in an agreement concluded with a host country offer little protection to foreign investment must be qualified in a situation when a bilateral investment treaty has been entered between the state of the foreign investor and the host country. The result will be different, for the contract becomes effectively internationalised as a result of the existence of such a treaty. It is a basic proposition of international law that any matter that is essentially within the domestic jurisdiction of any state could be internationalised if it is made the subject of an international treaty. The existence of a bilateral investment treaty which covers the foreign investment then internationalises the whole process of foreign investment which would otherwise have been a process that takes place entirely within the sovereign jurisdiction of the host state. But, whether this result will follow depends on the terms of the bilateral investment treaty.

As a matter of general international law, the position seem to be that a contract between a party and host country must always be subject to a national legal system. Those who seek to prove the contrary have an onerous task of showing that his accepted proposition has undergone a change. There are a few usually uncontested arbitral awards which support the view that a foreign investment contract is subject to international law or some other supranational system.

Bilateral investment treaties are obviously regarded as important by both capital exporting and capital importing states. But, these treaties are not uniform and they do not have the ability to create any uniform law on foreign investment protection. But their existence adds to investor confidence and creates an expectation of investor protection. The importance of these treaties lies in the several results they achieve. The first is a signaling function about the national policy towards foreign investment.

Another advantage is that the foreign investment contract in the context of a bilateral investment treaties could have the effect of forming assets protected by the bilateral investment treaties. This will also include licences and other advantages obtained from the government during the course of the foreign investment. Whereas without the bilateral investment treaty these licences and advantages may have been without protection under general international law, they new receive protection as a result of the wide definition of property in the bilateral investment treaty. Whether the host country did intend that its administrative decisions be subjected to international review as a result of the treaty, will remain a moot point. But, it remains a possible result if the treaty.

In Malaysia, efforts have been made by the Government to ensure a level of certainty between international trading partners trading with Malaysian counterparts. The Government has expressly guaranteed that foreign companies acquiring equity participation in local companies would not be required to restructure its equity at any time[1]. Further to this, the Government has taken many steps to increase confidence of foreign investors in Malaysia.

INVESTMENT GUARANTEE AGREEMENTS (IGA")

The Investment Guarantee Agreement protects parties involved in an international transaction from non-commercial risks such as nationalisation and expropriation. The IGA will provide a foreign investor with the following :

• protection against nationalisation and expropriation;
• prompt and adequate compensation in the event of nationalisation or expropriation under a lawful or public purpose;
• free remittance of currency, profits, capital or other fees on investment;
• settlement of investment disputes either through a process of consultation through diplomatic channels or if such process fails, for referral to the International Court of Justice. Disputes in connection with investments, under IGAs should first be resolved through local judicial facilities. In the event of failure to settle, it would be referred to the Convention on the Settlement of Investment Disputes or the International Adhoc Arbitral Tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law.

Malaysia has concluded IGAs with about 64 trading nations including trading blocs such as ASEAN and major trading partners such as the United States of America, United Kingdom, Germany, Taiwan, etc.

TRADE DISPUTE SETTLEMENT

Another aspect of international trade is the availability of acceptable dispute resolution form. Globalisation of trade obviously involves greater potential for generating international trade disputes. The international business community looks for prompt, economical and fair conflict-resolution mechanisms. Negotiation, conciliation, litigation, and arbitration are well-known conflict-resolution devices. Direct negotiations and conciliation may resolve a conflict. However, when parties fail to solve the controversy through direct negotiations, they have two choices: litigation or arbitration.

Within the context of the GATS, there is an express provision for trade settlement dispute where countries have disputes in relation to commitments made under the agreement. The WTO have provided for procedures in relation to a dispute settlement process. The dispute settlement procedure is considered to be the WTO's most individual contribution to the stability of the global economy. The WTO's procedure underscores the rule of law, and it makes the trading system more secure and predictable. It is clearly structured, with flexible timetables set for completing a case. First rulings are made by a panel, appeals based on points of law are possible and all final rulings or decisions are made by the WTO's full membership. No single country can block a decision.

Malaysia is also signatory to the Convention on the Settlement of Investment Disputes established under the auspices of the International Bank for Reconstruction and Development that establishes facilities for international conciliation or arbitration. Further to this, the Kuala Lumpur Regional Centre for Arbitration was established in 1978 with the objective of providing a system for the settlement of disputes for the benefit of parties engaged in trade, commerce and investments with and within the Asian and Pacific region.

In conclusion, as we draw close to the new millennium, it is indeed a challenge to us all to be able to grapple with some of the abovementioned issues and adopt appropriate responses.

Thank you.