Thirty years ago, the U.S. dollar was greatly overvalued, allowing for a trade imbalance that favored both Japan and Germany. As discussed at the recent Baker Institute event Currency Policy Then and Now: 30th Anniversary of the Plaza Accord, we face a similar set of circumstances today. U.S. economic growth is steady, but not spectacular, and the global economy has not fully recovered from the Great Recession of the late 2000s. In the 1980s, in order to prevent Congress from taking isolationist measures (similar to those that helped cause the Great Depression), the dollar was devalued, leveling the trade playing field between the major economic powers of the world. Today, as former Secretary of the Treasury James A. Baker, III, noted, if our goal is to maximize long-term growth and more stable exchange rates, a similar coordinated effort is needed.
This then begs the question: what stands in the way of another Plaza Accord?
The G20 is certainly an obstacle: In the 1980s, it was apparent that there were only five major economies in the world: Germany, Japan, France, the U.K., and the United States. Today however, 20 countries are considered to be large or emerging economies. The G20 was founded in order to foster discussion of economic issues and to promote international financial stability; in 2009, it was announced that the G20 would replace the G8 as the main global economic council. As pointed out by International Credit Suisse Vice Chairman David Mulford (at 1:12:56 here), the diffusion of economic power throughout the world has involved more countries. This makes consensus. on a course of actions much harder than when there were only five countries at the table. Furthermore, as proven with other examples of international policy coordination, there must be very strong consensus. in order for a treatment to be effective. Each country involved must be willing and able to perform their role in the accord, otherwise, they will have no incentive to fulfill the agreement and the policy will not be completed to its maximum and expected potential.
The inclusion of Saudi Arabia in the G20 exemplifies such problems. Saudi Arabia is one of the few countries in the world with a fixed exchange rate: their Riyal has been pegged to the U.S. dollar since 2003. Whatever currency intervention the U.S. would be willing to use to maximize long-term growth would therefore have direct repercussions on Saudi Arabia. With Saudi Arabia having a similar voice to the U.S. in the G20, the country may become an obstacle in achieving consensus for coordinated G20 currency intervention.
Concerns about the perhaps too large of a role monetary policy plays in today’s economy were also brought up at the Baker Institute event. Since monetary policy is determined by the central banks of each country, there is a disparity between what occurs at the G8 or G20 summits and what occurs back home at the central banks. With more control given to the central banks, monetary policy is the primary tool governments use to stimulate growth today. Although there is growth, it is lower than what is possible through fiscal policy. Mulford also noted (at 1:15:01) that positive structural change is in decline. In the U.S. for example, there has been little headway in terms of finding ways to close the deficit. Gridlock between Democrats and Republicans and a lack of leadership has contributed to weakened fiscal policy effectiveness. Because of this and other governmental barriers, fiscal policy needs to be reformed first in order to have a second Plaza Accord.
The current stalemate between the U.S. political parties also demonstrates another issue brought up at the event: the U.S. economy’s lack of global respect. In order for the U.S. to initiate such talks like the Plaza Accord, there must be leadership. What Secretary Baker did was certainly against the natural inclinations of Congress. Politicians, if they are to lead the charge of international economic policy reform, must be headstrong and not afraid of the repercussions. The Plaza Accord was held in private, and the secret nature of the gathering was a large part of the reason why it was so successful: any leak could have given opponents an opportunity to decrease its effectiveness according to Baker. Today, in a society where dialogue between Congress and the executive branch is championed, similar secretive policy coordination (or even meetings) would not be preferred by today’s politicians.
Ironically, such action is needed in order for the U.S. to gain the respect of other nations and the other major economies. Although the U.S. is the world’s strongest economy and will continue to be for years to come, the respect it commands is weakening. While countries may still look up to the U.S. as an economic standard, the U.S. has slipped in terms of being able to provide basic economic infrastructure for all of its citizens, such as affordable and high quality primary education (according to the Council on Foreign Relations in this article), and it is ranked lower than many other developed countries in health care. The implications of this is that the U.S. has lost some of its former respect, while countries like Japan and Germany, which rank higher in health care and education have gained it. A move like the Plaza Accord however, would prove that the U.S. still is just as much of a standard as it once was: the U.S. still can call the shots. The U.S. and its leaders need to understand and show that the fact that it is still the largest economy in the world gives it power, a fact the county currently seems to be hiding from.
Overall, it seems that the international cooperation achieved at the Plaza Accord is not possible in the more decentralized global economy. The rise of emerging markets and their inclusion in the G20 makes dialogue extremely difficult. The back-seat role fiscal policy has taken hinders the creation of any meaningful global fiscal reform. Finally, the United States’ lack of leadership and respect needs to be overcome in order to set the stage for such reform.
Franklin Shen is a Rice University sophomore majoring in economics.