The Imf's Coordinated Growth Strategy of 1977/1978

Abstract

The case documents the growth strategy that the IMF wanted to orchestrate after the first oil crisis and as the world economy did not return to the growth rates of the 1960s. The case illustrates the pinnacle of Keynesian thinking that prevailed at the time: a view of the international economy as an almost hydraulic system that could be manipulated by government policies at will to reach desirable aggregate targets. The failure of the strategy, among other things, emphasizes the importance of inflationary expectations. The case is also a nice opportunity to discuss the Phillips curve as well as the current global imbalances and what can be done about them. Excerpt UVA-G-0601 Rev. Aug. 4, 2009 The IMF's Coordinated Growth Strategy Of 1977/1978 In September 1973, Dr. H. Johannes Witteveen, a former finance minister of the Netherlands, took office as the fifth managing director of the International Monetary Fund (IMF), an independent U.N. organization that like no other organization oversaw the macroeconomics of the world economy. Exhibit 1 displays the size distribution of the world economy at the time. Witteveen's tenure at the helm of the IMF would be one of the most challenging since the IMF was founded at the Bretton Woods Conference of 1944. The Oil Crisis and its Aftermath In late 1973, the world woke up to soaring oil prices, as the Organization of Petroleum Exporting Countries (OPEC) reduced the world's oil supply. The Yom Kippur War between Egypt and Israel triggered OPEC's actions. OPEC announced that it would no longer ship petroleum to nations that had supported Israel. By 1974, oil prices had quadrupled to nearly $ 12 a barrel. . . .