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Managing financial sector under a liberalized system is always difficult; it faces a risk of financial crisis. Financial managers in most emerging markets, be it in the corporate, banking or public sector, have experienced such a challenge, and those in East Asia have learned the hard lesson during the 1997–98 financial crisis. Although efforts have been made to restructure the domestic financial sector by imposing a better risk analysis, in a world of free capital flows there is no guarantee that the system can be totally impervious to a crisis. This implies that financial managers will continue to face a major challenge in terms of how to manage and prevent a financial catastrophe. They have given a particular attention to a possible cooperation with one another. In the case of East Asia, this will lead to the formation of a Regional Financial Arrangement (RFA). This study analyzes this process by focusing on the search for a particular form of RFA that would enable financial managers to better deal with the challenge of a crisis and prevent it whenever possible. Given the fact that the issue and the process of forming a regional cooperation/arrangement involves not only economic considerations but also political factors and other intangibles, a specific model known as the Analytic Network Process (ANP) is employed. It is revealed that financial managers and policy makers alike should not only consider the benefits and costs of each alternative form of RFA, but also the possible risks and opportunities that may arise. The extent to which financial managers will be able to cope with the challenge of a financial crisis depends on all these factors.

As discussed in the preceding chapter, the impact of a financial crisis can be very severe, creating conflicts of various types. We have also learned that formulating an appropriate policy response to a crisis is not easy, involving many trade-offs and complex chains of reaction, especially when numerous institutions get involved in business deals that have only a few same underlying transactions. The longer a crisis lasts, the more difficult to find policies that will work effectively. The experience of Japan with her long recession since early 1990s is a notable example. No one knows exactly how long the 2007/2008 crisis will last.

History is typically the story of one party (unit of organization, segment of a society, or person) dominating another, in which the dominance can come in many forms and usually involves conflict at some point. But a conflict can go beyond just clashes between parties; it can include ideological differences between countries, regions, organization, political groups, religions, and ethnicities. Economic opportunities that create greed in party that has them and jealousy in party that does not, can also create a conflict. So can disparity in socio-economic conditions, for example, the rich versus the poor. When the wealthy segment of a society gains from a particular policy, and the poor does not, inequality worsens. It, too, can create conflicts of various types. Although all these are important to recognize, however, it is imperative to understand the process through which a conflict-prone outcome is arrived at. Numerous factors associated with that process may play a key role in generating the outcome as well as in resolving the conflict.

This book is about factors that generate conflict-prone behavior and situations. These factors can of course lead to steps that later do away with conflict and hostility. But in the many cases which do not, conflict analysis must turn to examination of the earlier situations of clashes--- clashes arising from ideological differences between countries, regions, organizations, political groups, religions, ethnicities, etc. Thus, it is very often imperative to understand the process through which a conflict-prone behavior comes about. Numerous factors associated with that process may play a key role in generating the outcome as well as in resolving the conflict. In this book Azis examines conflict from global imbalances that led to the 2008 global financial crisis, to imbalances in resource endowments among nations and the resulting differences in conflict prone steps they are likely to take. The meltdown in the U.S. economy sparked such behavior in many individual nations.

A comment by an analyst-cum-investor reads, “A year ago, I didn't expect the U.S. economy to fall into recession in 2008 because I was confident consumers would continue to do what they do so well: spend money. I had plenty of company, and ultimately we were all wrong.” During the Fall of 2007, while working in Tokyo to prepare a manuscript for publication, I wrote, “I come to a rather disturbing prognosis about the U.S economy: high likelihood of a recession” (Azis, 2008). Indeed, it is always tricky to predict crisis and recession, let alone to comprehend how a small segment of a financial market, that is, subprime credit, could bring down the world's largest economy into the worst recession since World War II. Every Spring semester on the first day of my class on “Economics of Financial Crisis,” I always cautioned students that financial crisis is explainable but not predictable.

A news report from South Africa reads, “Clothing and Textile Workers’ Union (SACTWU) members held a string several meter long with 40,000 pieces of fabric attached to display their agitation over cheap Chinese imports which has claimed thousands of jobs loss. Due to cheap Chinese imports over 67,000 jobs had been lost and more than 350,000 people have been suffering who were engaged in clothing, footwear and textile sectors.” A saver in Southeast Asia once complained, “When I opened up my dollar savings account about 3 years ago, I bought a sizable amount of the green bucks at Philippine peso 56.40. Today, the peso–dollar exchange rate stands at Philippine peso 43.27. That's a net loss of Php13.13 for every dollar that I have in the bank. That loss closely amounts to a brand new car or a down payment for a house and lot. And I thought going with a dollar savings was the best fiscal move I made in years.” Other savers in many countries are also affected since their local currencies have become much stronger against the U.S. green bucks.

The proportion of long-distance migrant birds at the border of Germany, Austria, and Switzerland decreased between 1980 and 1992 because winter temperature increased. Deterioration in the Amazon, observed in the Xingu National Park, has become more serious during the past few years. The melting of Glazier in many places, especially in the European Alps and in the United States, is another classic example of changing ecosystem caused by the climate change. One prediction indicates that the glaciers in Mount Kilimanjaro will be gone by 2020. Natural disasters, also associated with climate change, are predicted to increase not only in terms of the frequency but also in the size of damages they can cause. From Bangladesh to Vietnam, from Pacific Islands to Latin America, scientists predict that hectares and hectares of mangroves will be flooded due to the rise of the sea level. People in some countries suffered from undrinkable water because of the saltwater intrusion caused by climate change–related hurricanes. In the other extreme, some places experienced drought that caused serious water shortages and loss of biodiversity and agricultural products (e.g., Australia, in 2002, and India, in 2003). Disappearance of habitats and ecosystems caused by climate change are serious, but a short-term challenge in terms of declining productivity in many farm areas are equally serious, if not more so.

Conflict in various forms is a natural consequence of the power of one party to take actions and decisions that affect others. It can be studied from many different standpoints. In policy conflict, the relative complexity or simplicity depends very much on whose interests are being considered as new measures are debated. Many policy issues are more complex than most people thought. They are simplified for public debate. Some interests are marginalized while others remain central to the discussion. Realizing the inherent trade-offs, knowing what elements of debate are present and absent, and what are the causes of the policy structure that we observe are all central to understanding the representative nature of policy conflicts. This is what the book is all about.

Global imbalances and financial crisis discussed in the preceding chapters were not the only contemporary issues that shaped the current and future landscape of the world economy. Since 2004, many countries also felt a significant shock prompted by a surge in the oil price, forcing them to look for the appropriate policy response that would produce least pain and minimum impact on welfare. The fact that oil remains an important source of energy for many countries, developed and developing alike, a price surge can trigger a new round of global conflicts. Indeed, from the hording of grain in Neolithic times to rivalry over resources in the interimperial wars of the 16th–19th centuries that laid the groundwork for World War I, and to modern nations warring over oil, competition and the desire to have a control over the possession of critical sources of vital materials had always been at the center of conflicts from the very beginning of human story. To prop up their industrialization, for a long period of time developed countries had relied on a stable supply of oil, making their political and strategic relations with oil-producing countries so critical, yet fragile and crisis prone. Conflicts and wars over oil were fought among the oil-producing countries as well.¹ Although it was not admitted by the U.S. administration, at least not publicly, the desire to have greater control over oil was also the primary reason for the 2003 U.S. invasion of Iraq.