IMF projections show that global current imbalances will rise for some time as growth recovers in the period to 2015. With US unemployment still above 9 per cent, Asian economies must rely less on the US consumer for final demand and more on domestic and regional demand as Asia continues to increase in importance as a growth pole in the world economy. In much of Asia and the other emerging economies, strong growth will require moderation of government spending to allow private spending to accelerate without inflation.

Averting worldwide depression in 2008 was made possible by the major economies working together to re-start their economies and refraining from systematic resort to protectionism or competitive devaluations. Their action created the confidence needed to stimulate demand sufficiently to avoid a depression, through setting fiscal and monetary policy appropriate to national economic conditions.

In 2010, leaders can agree to continue the coordination of policies, informed by the work they commissioned from the IMF. The IMF’s Mutual Adjustment Process scenarios set out two vastly different prospects for employment and living standards in the next 5 years:

• either weak recovery, and a second wave of recession, with poor coordination of macro-economic policy settings;
• or a sustained recovery from the global financial crisis with rising employment, if G20 governments adopt an approach that is coordinated around re-balancing growth.

Sustained and balanced growth will need to be backed by leaders’ commitment to carefully calibrated macro-economic policies, including exchange rate policies and structural change policies, that maintain confidence in markets at the same time as they address the fundamental causes of imbalance in national economies as well as the global economy.

Correcting imbalances will require continued macro-economic policy adjustment and fiscal and structural reform in both countries with current account deficits and those with current account surpluses. In countries with current account surpluses, of which there are in several in Asia, the priority should be on substantial restructuring, which strong capacity for growth both allows and recommends for national development. While current account surpluses are falling in key Asian economies, it will be important to avoid their growing again. Asian members of the G20, drawing on their own past experience and success, can help to set ambitions for structural reform and change that are crucial to achieving more balanced and sustainable global growth.

Two key lessons are, first, that rebalancing strategies will not succeed if they are one-dimensional — they need to involve a suite of complementary policy measures — and, second, they take time to implement. There are no simple measures that can make large imbalances disappear rapidly. But establishing confidence in the direction of change will restore the confidence of investors, consumers and bankers that the recovery is sustainable.

One vital component of policies for rebalancing growth is structural reforms that strengthen domestic demand and improve productivity though measures such as:

• strengthened social safety nets including pension and health insurance programs
• enhanced physical infrastructure that reduces supply bottlenecks to sustainable growth
• reform of factor markets to remove distorting subsidies to industrial production.
• investment in the engines of sustainable long-term growth such as energy and resource efficiency, renewable and clean energies, green transportation and cities, quality-of-life services such as health care and sanitation

Household demand can be expected to expand as wages rise, labour mobility is enhanced and households are provided with capital income-generating opportunities. The structure and timing of particular reforms will depend on each country’s economic circumstances and institutions.

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.

Recent suggestions for a multilaterally agreed exchange rate re-alignment do not suit present circumstances. Indeed, very large one-off exchange rate changes would likely disrupt trade and currency markets and could threaten the stability of the international monetary system.

The idea that exchange rate re-alignments should alone carry most of the burden of correcting national and global economic imbalances is seriously misguided. Reform of structural impediments in national financial, factor and commodity markets will also be needed. Sustained recovery needs flexible exchange rate regimes, not a series of negotiated adjustments. Exchange rate flexibility will sensibly constitute one part of a package of policy measures available to governments.

Effective coordination to underpin future stability of the international monetary system could be undermined by asymmetrical adjustment between deficit and surplus countries. While current account deficit countries cannot sustain their deficits and are forced to run down their reserves or depreciate their currencies, surplus countries can find it politically convenient to maintain nominal values of exchange rates and run up foreign exchange reserves. Cooperative action to avoid this is highly desirable – and it will depend on surplus countries having more say in, and having confidence in, international monetary arrangements. IMF governance reform is essential to building this confidence.

On the question of making financial market regulation more effective and robust, Asia could make a positive contribution to strengthening global financial system governance 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). This would add to the work of building confidence globally in financial market regulation.

The task of avoiding a second round of recessionary pressure on the international economy induced by trade or currency measures highlights the importance of using the window of political opportunity that exists in 2011— prior to major political transitions in a number of countries scheduled for 2012 — to complete the Doha round. The Seoul agenda needs to underscore the centrality of trade policy to recovery and development.

The Doha Round has dragged on for far too long. At Seoul, leaders can agree on a balance of interests and direct negotiators to complete the Doha Round as soon as possible and no later than the end of 2011. The time has come to give Trade Ministers permission to conclude the Round to lock in the gains already available. They can then address the issue of WTO reform: its negotiating modalities and the problem of bilateral and regional arrangements not being subject to effective discipline so that they serve core global trade objectives at a critical time for global trade openness. Re-positioning the WTO so that it can deal with all dimensions of contemporary international commerce is central to the G20’s development agenda.

The G20 provides the opportunity for Asian economies to address all these and other problems that need global solutions. Asian economies need to decide how best to take up these issues through the G20, especially by putting forward options which support and complement the interests of other regions. Conscious that the G20 process will work most effectively if there are clear priorities given to the discussion of major issues, it will be helpful to flag and position issues of importance to the region for future meetings and give fuller consideration to issues of global priority through regional meetings.

An early opportunity to establish productive interaction between the global and regional processes is the Yokohama APEC leaders summit immediately after the G20 Seoul summit. APEC leaders can link the pursuit of their five-part growth strategy to G20 priorities, with emphasis on rebalancing growth. Careful thought needs to be given to how Asian members of the G20 can best link their participation in trans-Pacific and East Asian regional arrangements to their individual responsibilities in the G20 and to the representation of broader regional interests. How regional structures should develop or be re-organised to serve these purposes is an important issue for further consideration.

Peter Drysdale is editor of EAF and Emeritus Professor in the Crawford School of Economics and Government at the ANU and Dr Soogil Young is chair of the Korean Economic Cooperation Committee (KOPEC), co-chair with the Prime Minister of Korea’s Presidential Committee on Green Growth and Chair of Korea’s National Strategy Institute.

This essay summarises the report of the Asia G20 Roundtable, a Korea-Indonesia-Australia initiative to help with the work of preparation for the Seoul G20 and Asia’s continuing contribution to the G20 process. They were assisted in this work by colleagues throughout the region.