In today’s globalized economic environment, government action on macroeconomic policy can have a significant impact on business activity. Interest rates, trade policy, and currency exchange rates are but a few areas in which a central government can make changes to improve the overall business climate. In commemoration of the thirtieth anniversary of the Plaza Accord, Rice University’s Baker Institute of Public Policy recently held a conference to examine the impact of the agreement on macroeconomic policy and lessons learned.
For those unfamiliar with the Plaza Accord, more information with some historical perspective can be found here. The quick version is that in 1985, the U.S. government, in coordination with the governments of West Germany, Japan, France, and U.K. implemented complementary currency policies to assist their respective economies’ growth and boost trade. For the U.S., the Plaza Accord was a particularly important agreement because a highly overvalued U.S. dollar was reducing exports and creating a huge call for protectionist legislation. Although the Plaza Accord provided a short-term boost to those involved, long-term non-commitment to the agreement and unintended consequences –the runaway over valuation of the Yen—brought the economic policies to an end within a few years. The Plaza Accord did show that if committed, coordinated government policy could result in tangible benefits, although that depended on a number of internal factors aligning.
So thirty years on, why does the Plaza Accord still matter for business? For starters, it shows how government action can have a positive direct impact on the global business environment. Trade, currency, and monetary policy, all dictated by a state’s central government, determine how competitive that state’s businesses will be internationally. The Plaza Accord also showed how a move towards international economic coordination can generally have greater benefits for businesses than individual nations taking on protectionist policies. While it is easy for businesses to see governments as a source of rules and regulations, the Plaza Accord also showed that government and business goals can come together for a commonly desired outcome.
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