stock capable of competing in international markets. This is not a first best strategy. It would be better to have both an internationally competitive capital stock and reserves that were superior investments. But, if a country had to choose one or the other, a competitive capital stock may well be the better choice. It is clear that capital controls are necessary to keep residents of the periphery country from offsetting the governments second best international investment decisions. Nevertheless, with rising real wages in export industries this can be for a considerable interval a successful and politically sustainable development strategy When Europe's development strategy shifted toward free markets, financial controls were lifted and the fixed rate system soon collapsed into the floating regime of the 1970s. But in our view the system of freely floating exchange rates and open capital markets was itself only a transition during which there was no important periphery. To be more precise, there was no periphery for which a development strategy based on export-led growth was the dominant objective for economic policy During this generalized floating" transition the communist countries were irrelevant to the international monetary system. Most other developing countries, particularly the newly decolonized states, flirted with socialism or systems of import substitution that closed them off from the center. This development strategy was inhospitable to trade and the importation of long-term foreign capital. It fostered a local production of goods that could not compete globally and therefore built an inefficient capital stock that would in the end have little global value. Just as in the communist countries, when these opened to world trade and capital flows, they discovered that their cumulated capital was fit only to be junked. That is, they were in the same real capital-poor position as the post-war European countries With the discrediting of the socialist model in the 1980s and then the collapse of communism in 1989-91,a new periphery was melded to the US-Europe-Japan center. These countries were newly willing to open their economies to trade and their capital markets to foreign capital These countries all were emerging from decades of being closed systems with decrepit capital stocks repressed financial systems, and a quality of goods production that was not marketable in the center. The Washington Consensus encouraged them in a development strategy of joining the center directly by throwing open their capital markets immediately Others, mainly in Asia, chose the same periphery strategy as immediate post-war Europe and Japan undervaluing the exchange rate, managing sizable foreign exchange interventions, imposing controls, accumulating reserves, and encouraging export-led growth by sending goods to the competitive center countries It is the striking success of this latter group that has today brought the structure of the international monetary system full circle to its essential Bretton Woods era form. The Europe-Japan of the 1950s was already large enough so that in our analyses we did not have a"small country"view of the periphery but rather recognized it as the driving force of the international monetary system. Now the Asian periphery as reached a similar weight: the dynamics of the international monetary system, reserve accumulation, net capital flows, and exchange rate movements, are driven by the development of these periphery countries The emerging markets can no longer be treated as small countries, weightless with respect to the center At some point, the current Asian periphery will reach a developmental stage when they also will join the center and float. But that point will not be reached for perhaps 10 more years and, most likely, there will be at that time another wave of countries, as India is now doing, ready to graduate to the peripherystock capable of competing in international markets. This is not a first best strategy. It would be better to have both an internationally competitive capital stock and reserves that were superior investments. But, if a country had to choose one or the other, a competitive capital stock may well be the better choice. It is clear that capital controls are necessary to keep residents of the periphery country from offsetting the government’s second best international investment decisions. Nevertheless, with rising real wages in export industries this can be for a considerable interval a successful and politically sustainable development strategy. When Europe’s development strategy shifted toward free markets, financial controls were lifted and the fixed rate system soon collapsed into the floating regime of the 1970s. But in our view the system of freely floating exchange rates and open capital markets was itself only a transition during which there was no important periphery. To be more precise, there was no periphery for which a development strategy based on export-led growth was the dominant objective for economic policy. During this “generalized floating” transition the communist countries were irrelevant to the international monetary system. Most other developing countries, particularly the newly decolonized states, flirted with socialism or systems of import substitution that closed them off from the center. This development strategy was inhospitable to trade and the importation of long-term foreign capital. It fostered a local production of goods that could not compete globally and therefore built an inefficient capital stock that would in the end have little global value. Just as in the communist countries, when these opened to world trade and capital flows, they discovered that their cumulated capital was fit only to be junked. That is, they were in the same real capital-poor position as the post-war European countries. With the discrediting of the socialist model in the 1980s and then the collapse of communism in 1989-91, a new periphery was melded to the US-Europe-Japan center. These countries were newly willing to open their economies to trade and their capital markets to foreign capital. These countries all were emerging from decades of being closed systems with decrepit capital stocks, repressed financial systems, and a quality of goods production that was not marketable in the center. The Washington Consensus encouraged them in a development strategy of joining the center directly by throwing open their capital markets immediately. Others, mainly in Asia, chose the same periphery strategy as immediate post-war Europe and Japan, undervaluing the exchange rate, managing sizable foreign exchange interventions, imposing controls, accumulating reserves, and encouraging export-led growth by sending goods to the competitive center countries. It is the striking success of this latter group that has today brought the structure of the international monetary system full circle to its essential Bretton Woods era form. The Europe-Japan of the 1950s was already large enough so that in our analyses we did not have a "small country" view of the periphery but rather recognized it as the driving force of the international monetary system. Now the Asian periphery has reached a similar weight: the dynamics of the international monetary system, reserve accumulation, net capital flows, and exchange rate movements, are driven by the development of these periphery countries. The emerging markets can no longer be treated as small countries, weightless with respect to the center. At some point, the current Asian periphery will reach a developmental stage when they also will join the center and float. But that point will not be reached for perhaps 10 more years and, most likely, there will be at that time another wave of countries, as India is now doing, ready to graduate to the periphery