The world's leading countries are constructing something that is starting to resemble an international monetary system, if ever so slowly.
Finance ministers and central bank governors from the Group of 20 countries on Friday adopted the methodology they will use to measure whether the world economy is drifting off course.
Between now and the fall, the International Monetary Fund will measure the biggest members of the G20 against historic norms to assess whether their fiscal, currency and trade policies are dangerously skewing trade and investment flows. And in coming to an agreement, the G20 found a way to convince China that the attempt to better monitor the global economy wasn't a backdoor attempt to embarrass Beijing into raising its exchange rate.
For the first time, finance ministers will be assessing the health of the global economy with a full assessment presented by a neutral party, rather than from what individual governments choose to disclose.
"The facts will be known and that makes all the difference in the world," Canadian Finance Minister Jim Flaherty told reporters after the meeting. "We got surprised, let's face it, in 2007 with the credit crisis. That's exactly the kind of accident we want to avoid in the future."
Finance ministers started working on what they call their "framework" for stable economic growth in October, 2009, in Istanbul, and Friday's resolution came only after an all-night negotiating session by treasury officials.
The snail's pace contributes to deep skepticism that the G20 can achieve anything significant. "The structure of the world economy is what it is," Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the IMF, said in an interview. "What traction do you get through this G20 process? Not much is the answer."
In the aftermath of the financial crisis, ministers and central bankers accepted that the worst recession since the Second World War was in part the result of poor policy making over the previous decade.
To keep its exchange rate low against the dollar, China purchased record amounts of U.S. debt, which contributed to unusually low interest rates in the United States. Americans took advantage of cheap money to go on a credit-fuelled spending binge, which authorities did little to stop. While not directly responsible for the banking collapse that triggered the global recession, economists generally agree that these policies created the conditions for the implosion.
Hence the framework for sustainable growth.
G20 members pledged to hold each other accountable in regular peer reviews of their economic strategies. They avoided hard rules and penalties in recognition that national governments routinely ignore their obligations under institutions such as the IMF and the World Trade Organization. The bet is that moral suasion, coupled with the hard lessons of the financial crisis, stands a better chance of securing co-operation among economies as disparate as Germany and Brazil.
The plan has the backing of G20 government leaders, adding a political imperative that didn't exist when these issues were being debated between various treasury officials and bureaucrats at the IMF.
Despite the elegance of the concept, it has proved difficult to put into practice.
To work, the process needs a neutral means for assessing the global economy. The IMF was appointed to do the work, but the U.S. and Europe had to acquiesce and allow China and other emerging economies to have a greater role in the management of the fund.
The challenge for much of the past year has been choosing the economic indicators that would best demonstrate if the world economy was becoming unbalanced.
An easy task for economists, the effort was quickly overwhelmed by politics, as old suspicions got in the way of an agreement. A proposal by U.S. Treasury Secretary Timothy Geithner last year to limit trade surpluses or deficits to 4 per cent of gross domestic product flopped. Economists approved of the idea, but countries such as China, Germany and Japan sensed an attempt by the Obama administration to undermine their exporters.
A fair assessment of the G20's progress to date must take into account that major changes in global governance happen incrementally. The Bretton Woods agreements that established a system of fixed exchange rates along with the IMF and the World Bank came after two years of negotiation. There also were only two major players: the U.S. and Britain. Today, the U.S., several European countries, China, India and Brazil all have considerable political clout. Getting all those countries on the same page is no easy task.
The strength of a credible mutual assessment process is that it will help international investors understand better the weak points in the global economy. They have plenty of options these days, and their decisions about where to put their money is as good a way to keep countries honest as any arbitrary rule.
But to silence the critics, the G20 must continue to make identifiable progress that shows it is more than a crisis committee. Ministers seem to appreciate this. "We've accomplished now the agreement on the process and the elements of the process," Mr. Flaherty said. "Now we need to execute."