A part of the global reaction to the world?s problems is to suggest, somewhat wistfully, that the fulcrum should (will?) shift to Asia. That?s where the growth is and that?s where the reserves are. Also that?s where the sound policies are. At the height of the last recession, Sonia Gandhi made a statement that India?s nationalised banks were a source of strength. The financial paparazzi went at her, in spite of the run on a private Indian bank for the losses they had made.

The American and the German economies are still much too big and powerful for these fashionable statements to matter in a big way and the world literally shrugged off the ratings by agencies, which have not exactly covered themselves with glory since 2007. There will, of course, be the impact of the rating in the very short run on US bond prices and the dollar rate, but as careful commentators were saying, the markets had already factored the fundamentals in. Exports from the trading economies like Thailand and Taipei may suffer, but the big giants like Japan, China and India are much too diversified to get knocked substantially. But does more trade and investment in Asia and within Asia have no future? While the big rebalancing is a no brainer, it is incorrect to throw the baby out with the bath water. Let us, therefore, as the wag would say, begin at the beginning.

As the Cornell professor Iwan Azis, who, like our own Kaushik Basu, is spending some time away from his academic roost heading the ADB?s regional integration office, has been emphasising, markets have factored in the US economy before the ratings and 2010 growth will be moderated in Asia. The ADB, given its Japanese and Korean origin on strategic thinking, had in June this year organised a meeting on Asia at a turning point, with the Korea Institute for International Economic Policy (KIEP) in Seoul. The idea was to work on ?assistance to Asian countries in building a regional macro-financial-trade policy framework to coordinate efforts to address development issues with more comprehensive policies rebalancing?. In my inaugural keynote in Seoul, I argued that financial trade policy literature and news generally argue in an implicit comparative static framework and this was true of the rebalancing reporting concentrating on exchange rate developments and implications and issues emerging thereof. Volatility in these trends introduced greater uncertainty.

Development issues tend to be conceptually underplayed in this context even if they gain urgency in crisis situations and these have substantial investment, human development, and related trade and financial policy interrelations. This is particularly true of rebalancing, which, to be meaningful, needs a medium-term framework. Paul Krugman got the Nobel for his international trade work but his work on urbanisation, for example, as a regional scientist, was equally important in the contemporary Asian development context. We use two examples for arguing that a focus on development with an emphasis on sectors that have large employment and output consequences can trigger innovative thinking on trading potential. The requirements of a medium-term tariff policy, as also financial innovation, are critical here. Cross country FAO studies in Asia have shown the negative impacts on diversification, spread of agricultural growth, employment and poverty outcomes of static trade policy prescriptions in meltdown periods. Agriculture trade has relevance in regional trade arrangements in Asia with countries having very different agro-climatic endowments and therefore possibilities for specialisation and, consequently, trade. I advocated a counterfactual that builds a medium-term framework for agricultural tariff policies. Similarly, SME policies required in a

stimulus phase, I argued, can trigger trade

and development and the Koreans were good at that.

A stable medium-term trade policy, rule-based regime and currency arrangements could lay the foundations for rebalancing and development. The need for newer financial products to buttress such kinds of development is obvious. As the ADB IFPRI models had shown in the Asia 2020 volumes, if this kind of reform was not there, acceptable poverty-hunger outcomes would not be possible in Asia. Policies requiring a medium-term framework will need a macro policy and an exchange rate regime of the kind discussed in Seoul last year. Therefore, an attempt has to be made to link the discussion with the

contemporary policy dialogues after the Seoul G8/G20 meetings last year. Iwan Azis himself had an interesting computable general equilibrium model of

regional rebalancing which started with employment and safety net objectives in a meltdown rather than general admonitions on reform.

Large Asian countries have detailed agro-climatic inventories. It is a fascinating scientific story, but suffice it to say that the large Asian land masses, the Indonesian archipelago, the countries of what was called Indo-China, Thailand and Myanmar, and South Asia are rich in agro-climatic diversity and are what I have called in UNCED?s Sustainable Development: From Concept to Action Project, ?Worlds within the World? (YK Alagh and I Sachs in UNCED, 1991).This, in fact, becomes a very powerful argument for trade. What it says is that for each region we should look for what it can do best. Agriculture and rural development would then concentrate on specialisation and food and fibre deficits and surpluses would be cleared with trade. I have shown that agricultural growth based on agro-climatic resource endowments is sustainable in the sense that it is water, energy and land conserving.

The policy issues were an assessment of diversification processes as a part of rebalancing in terms of consumption and demand trends and a possible change in the structure of the labour force in fast growing Asian economies; the marketing, communication, first stage processing

infrastructure and knowledge and skill basis of accelerating the process and avoiding angularities and dislocation of unanticipated sharp shifts, as seen in political conflicts in countries like India and China, for example, in land acquisitions and lack of facilities for migrants in rural urban continuums. These would have trade and/or exchange policies, including tariffs and incentives for the smooth functioning of markets in a medium-term framework, rather than the impacts of volatile markets in fledgling developments needing medium-term stability. This, in turn, would need the development of financial products and markets to support the market processes at play, in diverse capital markets. There would be the need of safety nets, including employment guarantees and food security networks. Asian economies have reached a stage where advances are possible and security can provide powerful incentives for technological change, as in earlier periods of economic history.

The development of interregional profiles would give a larger context in which such policies can be followed. It is true that most of the rebalancing literature, particularly of the CGEM GTAP variety, gets dominated by US and Germany outcomes. Recognising the importance of large global economies, it is possible that exploration of comparative static Asian interregional flows will throw up interesting alternative possibilities. The macro frameworks accepted at the Seoul meetings last year could provide quantitative coordinating framework in which such possibilities could be explored. Counterfactuals where structural change of the kind discussed takes place in a benign framework as also BAU projections exist, to highlight the importance policies can make.

The author is a former Union minister