SINGAPORE - The International Monetary Fund (IMF) and the World Bank were set up at a time when the United States was dominant, and allowing the status quo to remain when the balance of the world economy has changed could result in questions about their legitimacy, said Prime Minister Lee Hsien Loong.

The two institutions were founded at the Bretton Woods Conference in 1944, where countries came together to establish a framework for economic cooperation and development after World War II.

Under the longstanding gentleman's agreement established then, the IMF managing director would be a European, and the World Bank president an American, and the voting shares of IMF and World Bank members reflected the weight of the economies at that time, said PM Lee in a dialogue with The Wall Street Journal.

He noted that the shares have been somewhat modified over time, but only very partially.

"So, the question is not why you want to give China more influence, but what is the legitimacy of an institution, which was created at a time when the balance of the world economy was quite different, and what is the implication of letting that remain the status quo, when you cannot really prevent the Chinese from being part of the world economy?" he said, when asked why the US should give China more influence in these international institutions.

The US can opt to keep the status quo, but the Chinese would then set up their own institutions as another way to engage with the world, as it has with the Asian Infrastructure Investment Bank, he observed.

But it would probably be even better for all countries to operate within one global framework, he said.

"But is it possible for us to say, no, you must not do that, that is wrong? The Chinese want to engage, they want to invest and do business, other countries also want to do business with them, this is a mechanism by which they can do so."

PM Lee said a similar conversation had cropped up in the 1980s, when the world was deciding whether to bring the Soviet Union into the General Agreement on Tariffs and Trade - the precursor of the World Trade Organisation (WTO).

At that time, excluding the Soviet Union was workable as the country accounted for a negligible part of world trade, PM Lee noted.

But excluding China would be more complicated as it has a substantial share of world trade now, he said.

PM Lee was asked why China should be brought into the fold if it has been propping up countries like Cuba and Venezuela, and other dictatorships that destabilise US interests. To this, he said influence operations happen in a lot of countries.

But the counterfactual is that keeping China out of the existing system - to make it poorer off and less powerful - might not be any less destabilising, he noted.

The bet was that as China developed and became more affluent, it would grow a middle class that would develop a vested interest in the status quo and in the international system that they will profit from, he noted.

"China needs the international finance system; they own several trillion dollars of US Treasuries. They need the world trade system because they export, they do business around the world. And it is better that they be part of this system than not be part of it," he said.

If the US and China decouple, the extent of repercussions on the world economy and trade will depend on whether the crack that has emerged between the two will become a larger one, he said.

"We do not quite know how far the crack will extend and whether it is possible to stop it - all right, this part we agree to stay at arm's length but in other parts we do business together," he added.

"I hope it will be possible and we at least still have if not a whole cloth, at least one connected world, and that means you have investments in China, technology in China, production in China and exports and interdependence. And more or less, life can still go on."

In such a scenario, the US will probably be thinking about reshoring - bringing the production and manufacturing of goods back to the US from overseas - as well as making supply chains more secure, he said.

South-east Asia could then become a part of its strategy, as a place for companies to locate their manufacturing facilities to hedge their bets, he added, noting that this is something the region has been promoting for years.

"So, if we preserve one international system, we can still make a living. We will try to enhance our trust indicators and develop our networks. That way, our supply chains can connect and operate, and we will be part of a trusted network, part of the world strategic resilience," he said.

If the cracks widen and countries decide that they must have their own national resilience, then the world would be a completely different place, he added.

"Countries accuse China of state intervention, subventions and distortions. But if you decide that for strategic reasons, you must put a lot of things onshore, then you will in effect be taking similar actions. And then what are the rules?"

This would go much further than current WTO fair trading rules, which allow countries to deviate from strict free trade and no subsidies, but only within legal limits, noted PM Lee.

"Everybody is saying that we must have national resilience, but if we all push that without limits, then we will end up with law of the jungle again," he added.

"If it is not going to be the law of the jungle - do or die I must have everything in my country, and I am willing to pay a lot of money to bring the activities here - then we do need new rules as to what is reasonable and acceptable, what are the limits and how do we agree on them."