That dowel, or pin, is part of the advancer, and not available as a separate part; it was originally pressed into the hole. Yes, it is definitely needed, as it indexes the advancer to the crankshaft, and without it there is no way to set the ignition timing by the marks.
I have seen the pins in 3mm and 4mm, while the crankshaft hole is 4mm. You *might* be able to fabricate a replacement pin to press in, but it would be easier to just buy a replacement advancer.