No one likes to admit failure. But the hard reality is that the United States and its major allies last year were frustrated in their efforts to manipulate exchange rates. Washington, Bonn and Tokyo were anxious to prevent the American dollar from rising, but didn't succeed.
"There were signs that the impact of intervention was beginning to wear off and that -- on most occasions -- more and more of it was required to achieve the same result," said the recent annual report of the Bank for International Settlements in Basel, Switzerland. The BIS, along with some others, calls for a resumption of the decline of the dollar against the yen and the mark to avert the probability that rich-country trade surpluses -- especially Japan's -- will begin to swell again.
Many reasons can be assigned for the declining potency of the currency-management effort that was launched at the Plaza Hotel by former Treasury secretary James A. Baker III in September 1985. Perhaps most important, every major country has become more concerned with domestic than with international problems. Therefore "no country wanted a really weak exchange rate," the BIS notes. Moreover, speculators in the private exchange markets perceived that at times authorities within each nation were not always on the same wavelength on the "right" dollar-yen or dollar-deutsche mark level.
Assessing the only limited success of exchange-rate management since the Louvre Accord of early 1987, the BIS suggested that, "It may be time to take a fresh look at official exchange-rate strategies and international policy coordination, and to consider ways in which their coherence and effectiveness might be improved."
Another advocate of trying to regenerate some of the spirit and power of the Group of Five and Group of Seven process is C. Fred Bergsten, director of the Institute for International Finance. In the current Foreign Affairs, Bergsten suggests that the topic is important enough to be placed on the agenda for the Houston summit.
There is another, and more skeptical view: Deutsche Bank adviser Mieczyslaw Karczmar, for example, warned immediately after the Plaza Accord nearly five years ago that the dollar- depreciation effort would fail to cut the American trade deficit.
Now, Karczmar points out in International Economy magazine that despite a declining trend in the post-Plaza Accord years, the American trade- and current- account deficits, though below their peaks, still are in the ballpark of $100 billion annual rates, and "are likely to start rising again." His argument is that the Plaza Accord may have helped weaken the dollar, but failed to dent Japan's ability to penetrate the American market.
Bergsten is quick to suggest that without the dollar's 40 percent drop between 1985 and 1988, America's global trade- and current-account deficits might have doubled to $300 billion from 1987's peak of $152 billion. What's needed now, Bergsten contends, is not only a further depreciation of the dollar (after all, the recent dollar trend has been perversely higher), but a reinvigorated Group of Seven process that will attempt to control fluctuations of rates in even tighter bands.
Somewhere in the middle of the debate are the current key managers of the G-7, including U.S. Treasury Secretary Nicholas Brady and Federal Reserve Board Chairman Alan Greenspan; Bundesbank president Karl Otto Poehl; and French central bank governor Jacques de Larosiere. This internal power core wants to keep the process alive, but shuns major departures as suggested by either the BIS or Bergsten.
There can be little doubt that problems associated with modulating swings in exchange rates have turned out to be more difficult than imagined -- either at the Plaza or the Louvre in 1987. Nevertheless, Brady likes to point out that rates today are pretty close to what they were at the time of the Louvre agreement.
But that ignores the fact that there have been large and frequent swings in between. And as the BIS points out, the actual fluctuations "understate the strength of exchange market pressures," given the heavy intervention at times.
Karczmar sees the disappointing results of the past five years as demonstrating a flaw in traditional theories of foreign trade, which are based on the assumption that international markets respond to price changes that are influenced by exchange rates. Japan demonstrated that a high yen could not keep it from being fully competitive. And trade in capital and high-tech goods depends more on availability and quality than price.
The American trade deficit with Japan persists, he says, whether the dollar is strong or weak. This makes it clear that the driving force is made up of "many other factors, such as low costs and high quality of Japanese products, trade barriers in Japan, anti-competitive business practices there, relatively low level of domestic consumption and many others."
In the end, as I perceive it, the current G-7 managers will stumble along much as they have for the past couple of years, making little progress on exchange-rate management. It will take some sort of global crisis to force political leaders to seek new ways of coping with the huge trade imbalances between North America, Asia and Europe.