Asia now has a platform at the global level to deliver on its growing international responsibilities, in the form of the G20 process. The G20 includes China, Japan, Korea, India, Indonesia and Australia. But it is not clear how or whether established regional arrangements can relate to that process and be engaged to strengthen the region’s role in the international economic system.

How well can the established arrangements for regional cooperation in Asia be co-opted to support Asia’s participation in building a global economic system that is more capable of dealing with the big policy problems at the heart of Asia’s global and regional interests today?

The enduring characteristic of the Asia Pacific region is its continuing economic and political transformation. Asia Pacific strategies toward regional cooperation need to be based on an understanding that this change will continue, that it is positive, and that choking it off will damage the prospects for prosperity and the region’s and the world’s political, as well as economic, security. It is an approach to international cooperation that encourages accommodation of emerging economies within the global system.

The model is an asset which Asia now brings to global cooperation in the G20 which must be managed without deep institutionalisation and the supranational legal authority that ensures that member and non-member nations follow through on commitments. Do the unique modalities of East Asian and Pacific cooperation mean that its effect on member economies is not significant? There is ample evidence that suggests otherwise.

What needs to be done now?

On the economic front, the areas in which there is an immediate priority in strengthening institutional arrangements and policy strategies that connect more effectively regional action to global action are in financial cooperation and in trade policy.

On the issue of financial cooperation, an inward looking set of financial cooperation arrangements that are de-linked from global institutions are not in Asia’s interest, although some advocate delinking to intensify regional cooperation. Asia is already too prominent a part of the global system. The region does not have either the technical capacity or the political trust necessary for effective surveillance, monitoring and credible implementation of large scale support programs. The EU, where surveillance, cooperation and analytic capacities are well developed, cooperates closely with the IMF in rescue packages for European economies.

The IMF is undergoing reform and Asia should push the process forward. The G20 allows this.

Asia could also make a positive contribution by establishing a functioning Asian Financial Stability Dialogue (AFSD) that draws in the whole region and complements the work of the Financial Stability Board (FSB). A question is whether this can or should be effected under the aegis of the East Asian Summit or the APEC Finance Ministers’ process.

A second important component is exchange rate policy and greater exchange rate flexibility. Increased exchange rate flexibility is necessary in order to encourage relative price shifts between tradable and non-tradable activities and economic rebalancing. Exchange rate flexibility will assist in shifting the economy towards more productive use of resources and make it easier to control inflation and to manage external shocks. Asian experience in the 1980s and the 1990s shows that major Asian economies have a strong national interest in deploying increasingly flexible exchange rate adjustment for these tasks along with supportive monetary policy. The structure and timing of such reforms will depend on each country’s economic circumstances and institutions and is correctly a matter for national policy decision.

On the issue of trade strategy, East Asia’s deep specialisation in the international economy, most efficiently and intensively with other economies in the region but importantly also through access to global markets, was a necessary condition for successful East Asian modernisation and industrialisation.

Asia’s position in the world trading system now puts it in the spotlight in terms of what is at stake in managing the global trading system and who needs to shoulder the responsibility. Not so long ago, Asia could afford to be a free-rider in trade policy leadership. This is no longer the case. China is now the largest exporter and second largest trader in the world, largest destination for foreign direct investment and the sixth largest source of foreign direct investment. Asia is already the second largest centre of world trade; by 2020 it will likely be the largest.

A key issue in international economic policy today is the re-balancing of growth in the global economy. It is an issue that is fundamental to the sustainability of successful regional development in a global economy that can welcome and accommodate the scale of what is required to lift the next 2 billion people in our region out of poverty, as we have done with three-quarters of a billion over the past 30 or 40 years.

Behind the push for re-balancing regional and global growth is the recognition that continuation of ‘growth as usual’ will no longer deliver on these objectives. The old open trade, open investment strategy is not enough. Global markets will find it very hard to absorb the pressures of Asia’s growth. The pressure of current account imbalances is only one dimension of this, a symptom of the problem and not the most important dimension that needs to be dealt with in achieving a better balance in regional and global growth.

The imbalances that have emerged in our economies, at their core, are a product of the whole range of structural and institutional impediments to efficiently mobilising resources for production and investment and delivering output so that the benefits of growth are spread widely across our communities; they are not the product of savings imbalances or exchange rate misalignments but they underlie them.

On both these issues − how to re-position trade negotiation strategies to serve both regional and global objectives and how best to make progress in opening markets through regulatory and institutional reform −  Asia will be expected to deliver.

Asia can show leadership, through commitment to reform of the WTO, through further opening up its markets, helping to conclude the Doha round, connecting and ‘multilateralising’ its web of FTAs, and promoting the structural reform agenda. Asia now has the forum at the global level, in the G20, to display this leadership.

Whatever is done to re-position Asian regional architecture so that it takes more account of, and connects with, Asia’s new role in global economic governance, as well as the implications of Asia’s rise for political and security affairs, needs to build on the foundations of established regional structures – APEC and East Asian arrangements.

There are two big gaps in the structure and operation of regional architecture. The first is its failure to connect to evolving global arrangements, including the G20 process. The second is that it does not yet encompass the political and security dialogues that are a necessary anchor in managing the impact on political and security affairs of the huge changes in the structure of economic power that are taking place in the region.

Success will turn heavily upon the logistical detail. Indeed, the legitimacy of the G20 will depend on how the interests and views of non-G20 members are brought to the G20 process. Structuring the timing of Asia’s regional meetings around the G20 to give the regional non-G20 members input to and ownership of initiatives is an important start.

The second issue is one that leaders throughout the region have been struggling with in different ways. At the core of this issue is the development of a framework which might help to reduce the risk of a fracture in political confidence around the rise of China’s (and India’s) political influence alongside the established military and political power of the United States, consistently with growing East Asian economic cooperation.

The United States has pre-empted this issue by announcing that it wants to join the East Asia Summit and that is a move that ASEAN, strategically, was in no position to resist. Let me say bluntly, that it is by no means clear where this development will eventually lead, nor that it will serve to mitigate the possibility of growing political tensions across the Pacific. Should EAS become primarily a dialogue for political affairs without the ballast of economic dialogues to which the United States can effectively relate, that would likely exacerbate rather than calm trans-Pacific tensions. That ballast is currently lodged in APEC and that is not going to be changed quickly. There needs to be much careful thinking and more dialogue on this and the evolution of regional arrangements, beyond the Washington beltway, across the whole East Asian and Pacific region.

Developing these structures right so that they are representative of, and connect to, all the regional arrangements, and carry Asian interests constructively into the G20 process will be crucial to whether Asia becomes a pillar for entrenching the G20 process or eventually comes to tear it apart.

Peter Drysdale is Professor Emeritus at the Australian National University, Head of the East Asian Bureau of Economic Research and Editor of the East Asia Forum.

An earlier argument along these lines is set out in detail in a forthcoming Asian Economic Policy Review paper. See the working paper version.