Since the founding of the Bretton Woods Institutions, there have been profound changes in the global economy. The world is no longer on a fixed exchange rate system; capital now flows rather freely across national borders; and Asia’s relative economic importance has greatly increased. While there have been important structural changes at the IMF and World Bank over the past sixty years, these have hardly kept pace with the dramatically changed global economic landscape.

Three basic structural changes are now needed at the IMF, especially in light of today’s unprecedented large external payment imbalances. First, the IMF should strengthen its surveillance efforts, in part through a reintroduction of special consultation procedures, with a view to exerting pressure on countries that routinely manipulate their currencies for competitive gain. Second, the Fund should reintroduce strict access limits in its emerging market lending policies in order to remove moral hazard from the system. Third, the Fund’s Executive Board and voting procedures should be changed to reflect Asia’s increased economic importance.

If far-reaching change is needed at the IMF, radical reform and an important downsizing should be the order of the day at the World Bank. First, the World Bank should refrain from lending to those middle income emerging countries that now can readily access the global capital markets. Second, the Bank’s financial operations with the poorer countries should mainly take the form of grants in recognition of those countries’ highly limited debt capacity.