Thursday, September 27, 2012

Agbetsiafa's retracted 2012 Research in Business & Economics article





This posting shows similarities in wording between the following (now retracted) article by Douglas Abetsiafa and the works of other, earlier published authors:

Abgetsiafa, Douglas, Fiscal deficit-interest rate link: evidence from G5 countries. Research in Business and Economics Journal, Volume 5 - February, 2012.

This article was retracted by the journal.  While the journal has not made a formal announcement of the retraction, the paper is no longer available on the journal website: http://www.aabri.com/rbej.html (see Feb 2012 Issue), nor can it be found at the original link to the article http://www.aabri.com/manuscripts/11875.pdf

Douglas Agbetsiafa is Professor of Economics and Chair of the Economics Area at Indiana University South Bend (IUSB).  He holds a PhD in Economics from the University of Notre Dame that also contains similar wording to earlier published works.

The text that follows compares wording in Dr. Agbetsiafa’s retracted Research in Business & Economics paper with wording that is largely identical to wording of others, earlier published authors.  Notably, most of the examples that follow have wording that is identical (or largely identical) to a 2010 International Monetary Fund Paper (http://www.iepecdg.com.br/uploads/artigos/1008wp10184.pdf).

Wording from Agbetsiafa paper, page 2:

Recent sharp spike in fiscal deficits and sovereign debt, especially in advanced economies, raises a number of important issues regarding their impact on short-term interest rates and long-term bond yields.  

Compare this to:

The recent sharp increase in fiscal deficits and public debt, particularly in advanced economies, raises a number of important issues regarding their impact on long-term interest rates.
See  first sentence of introduction.

Wording from Agbetsiafa paper, page 2:

Although there is a significant existing literature exploring the relationship between deficits and interest rates, there is diversity of findings.

Compare this to:

Although there is a significant existing literature exploring the relationship between deficits, public debt, and interest rates, there is a diversity of findings, and several of the specific issues explored in this paper have not been examined before.
[last sentence of first paragraph]

Wording from Agbetsiafa paper, page 2:

A key channel through which large deficits could be expected to have an impact on long- term interest rates is its impact on national savings. In the standard classical model, fiscal deficits reduce national savings and increase aggregate demand. This creates an excess supply of government debt, leading to higher real interest rates. The yield curve is also expected to become positively sloped in anticipation of continuing large deficits. Although short-term real rates reflect cyclical conditions and the stance of monetary policy, and influence real medium-and long-term rates, the latter are likely to rise more in response to the anticipated deterioration of the fiscal deficits and debt (Blanchard, 1984).

Compare this to:

A key channel through which large fiscal deficits could be expected to have an impact on long-term interest rates occurs via the impact on national savings. In the standard neoclassical model, fiscal deficits (other things given) reduce national savings and increase aggregate demand (Elmendorf and Mankiw, 1998). This creates an excess supply of government debt, leading to higher real interest rates.
The yield curve is also expected to become positively sloped in anticipation of continuing large fiscal deficits. Although short-term real interest rates reflect cyclical conditions and the stance of monetary policy, and influence real medium- and long-term rates,[2] the latter are likely to rise more in response to the anticipated worsening of fiscal deficits and debt (Blanchard, 1984)
[bottom of page 3 and top of page 4]

Wording from Agbetsiafa paper, page 3:

The conventional closed economy macroeconomic model views an increase in government spending, which is equivalent to an increase in the deficit ceteris paribus, as resulting in a higher nominal interest rate and output, given an upward-sloping LM curve. Thus a positive association exists between government spending, deficits and the interest rate. In the open economy version of the IS-LM model, often called the Mundell-Fleming model, expansionary fiscal policy generally results in higher interest rates and output, under fixed or flexible exchange rates.

Compare this to:

The conventional closed economy macroeconomic paradigm, the so-called IS-LM model, views an increase in government spending, which is equivalent to an increase in the deficit ceteris paribus, as resulting in a higher nominal interest rate (and output), given an upward sloping LM curve. Thus, a positive association exists between government spending, deficits and the interest rate.[2]  In the open economy version of the IS-LM model, called the Mundell-Fleming model, expansionary fiscal policy generally results in a higher interest rate (and output), under either fixed or flexible exchange rates, although in the former case there is a further money supply change and, in the latter, a change in the exchange rate.[3]

Wording from Agbetsiafa paper, page 3:

Nominal yields on bonds could also increase due to higher inflation expectations, particularly in an environment where output gaps are positive, or where there are concerns about monetization of debt.

Compare this to:

Nominal yields on sovereign securities could also increase due to higher inflation expectations, particularly in an environment where output gaps are positive, or where there are concerns about monetization of debt.
[page 4, start of second paragraph]

Wording from Agbetsiafa paper, page 3:

These results may not hold fully when assumptions about agents’ behavior are modified (Rebelein, 2006). If agents are forward looking, there may be some “Ricardian equivalence” with private saving increasing as fiscal deficits increase, in anticipation of future tax increases to fulfill the inter-temporal budget constraint.

Compare this to:

These results may not hold fully when assumptions about agents’ behavior are modified (Rebelein, 2006). If agents are forward looking, there may be some “Ricardian equivalence” with private saving increasing, as fiscal deficits increase, in anticipation of future tax hikes to fulfill the intertemporal budget constraint.
[page 4, start of third paragraph]

Wording from Agbetsiafa paper page 3:

If taxes are non-distortionary and individuals are heterogeneous (Mankiw, 2000), debt accumulation can be consistent with a short-term rise in interest rates, but would not have a pronounced impact on bond yields in the long-run.[1] Additional factors may weaken the link between deficits and interest rates. For example, in an open economy, domestic savings may be complemented over a period of time by capital inflows (Feldstein, 1986a) leading to real exchange rate appreciation rather than higher interest rates in response to lower government savings. It is unclear, however, to what extent large deficits could be financed by foreign savings on a sustained basis, so that eventually higher deficits may still have an impact in domestic bond yields. In an earlier comprehensive study, Gale and Orszag (2002) summarized the conclusions of almost 60 studies: of these fifty percent found a “predominantly insignificant” effect of fiscal deficits on interest rates and the other fifty percent a “mixed “or “predominantly insignificant” effect.[2] A similar conclusion was reached by Engen and Hubbard (2004). See Kumar and Woo (2010) for a complimentary analysis of the adverse effect of large public debt on potential growth.

Compare this to:

If taxes are nondistortionary and individuals are heterogeneous (Mankiw, 2000), debt accumulation can be consistent with a short-run rise in interest rates, but may not have a pronounced impact on bond yields in the long run.[5] Additional factors may weaken the link between debt, deficits, and interest rates. For instance, in an open economy, domestic savings may be complemented over a period of time by capital inflows (Feldstein, 1986a) leading to real exchange rate appreciation rather than higher real interest rates in response to lower government savings. It is unclear, however, to what extent large deficits and debts could be financed by foreign savings on a sustained basis, so that eventually higher deficits may still have an impact on domestic bond yields.

Existing studies
Given the above a priori considerations, it is perhaps not surprising that there has been a heterogeneity of findings regarding the impact of fiscal deterioration on interest rates. Many country-specific and cross-country studies have found a diversity of results. In an earlier comprehensive survey, Gale and Orszag (2002) summarized the conclusions of almost 60 studies: of these, around one-half found a “predominantly positive significant” effect of fiscal deficits on interest rates and the other half a “mixed” or “predominantly insignificant” effect.[6]
See pages 4 to 5.
FOOTNOTE 7: See also Kumar and Woo (2010) for a complementary analysis of the adverse impact of large public debt on potential growth (in part due to the impact of debt on interest rates).

Wording from Agbetsiafa paper, page 3 (footnote):

In his model with heterogeneous individuals, temporary tax cuts initially crowd out capital accumulation as agents’ disposable incomes rise, leading to higher private consumption. However, with investment falling as a result of lower savings, the marginal product of capital and interest rate would rise. This provides incentives for higher savings until the marginal product of capital is restored. Therefore, in the medium term, interest rates return to the optimal level even if public debt is permanently higher.

Compare this to:

In his model with heterogeneous individuals, temporary tax cuts initially crowd out capital accumulation as agents’ disposable incomes rise, leading to higher private consumption. However, with investment falling as a result of lower savings, the marginal product of capital and interest rate would rise. This provides incentives for higher savings until the optimal level of the marginal product of capital is restored. Therefore, in the medium term, interest rates return to the optimal level even if public debt is permanently higher.

Wording from Agbetsiafa paper, page 3 (second footnote):

… of fiscal expansion (e.g. , because of foreign capital savings replacing domestic savings) economic performance may still be negatively affected by persistent fiscal imbalances as capital stock accumulation declines (either because of a fall in domestic or foreign net investment).

Compare this to:

Gale and Orszag (2002) argue that even when interest rate do not increase as a result of fiscal expansions (e.g., because of foreign capital savings replacing domestic savings) economic performance may still be negatively affected by persistent fiscal imbalances as capital stock accumulation declines (either because of a fall in domestic or foreign net investment).

Wording from Agbetsiafa paper, page 4:

… Estimated coefficients are considerably larger and found more frequently when expected deficits are used (see, for example Feldstein, 1986b). Findings by other researchers also point to a positive relation between fiscal deficits and long-term interest rates, when there is uncertainty on the composition of fiscal policy (Balduzzi, Corsetti, and Foresi, 2007). Ardagna (2009) explores the behavior of government (and corporate) bond yields in times of large changes in fiscal position for the OECD countries (over the period 1960-2992). She finds that 10-year nominal yields on government bonds increased by 180 basis points during the years in which the primary fiscal deficit widened by more than one-and-a-halve percent of GDP in one year or 1 per cent of GDP per year in two consecutive years.

Compare this to:

It is considerably larger and found more frequently when expected deficits (Feldstein, 1986b)[8] are used.[9] Results also point to a positive relation between fiscal deficits and long-term interest rates when there is uncertainty on the composition of fiscal policy (Balduzzi, Corsetti, and Foresi, 2007).[10] Ardagna (2009) explores the behavior of government (and corporate) bond yields in times of large changes in the fiscal stance for the OECD countries (over the period 1960–2002). She finds that 10-year nominal yields on government bonds increased by more than 180 basis points during years in which the primary fiscal deficit widened by more than 11⁄2 percent of GDP in one year or
1 percent of GDP per year in two consecutive years (the definition of “large change” in fiscal stance is consistent with Alesina and Perotti, 1995).[11]

Wording from Agbetsiafa paper, page 4:

Cross-section studies indicate a smaller impact than analysis of individual countries. The difference may be due to pooling of the country specific data, and the coefficients are heterogeneously affected by institutional and structural factors which are generally not explicitly taken into account in many of such studies.

Compare this to:

Studies for a cross-section of economies indicate a smaller impact than analysis of individual countries. This may be because in the pooling of data, country-specific coefficients tend to be heterogeneously affected by institutional and structural factors, which are generally not explicitly taken into account in many of the studies.

Wording from Agbetsiafa paper, page 4:

Also, countries with large debt accumulation tend to be more at risk of inflationary pressures raising governments will be less able to service their liabilities, and therefore increase credit risk. Also, nominal short-term interest rates. These factors affect the long end of the term structure, and raise borrowing cost for long-term government securities nonlinearly3
A number of studies have considered the impact of public debt on credit risk spreads in countries sharing the same currency to avoid the risk that expectations regarding exchange rates may affect the results. For instance, some studies have examined the spread of European Union sovereign yields over the German bonds, and found that an increase in public debt has a significant but small impact on bond yields. However, this result holds only in countries with high debt levels (Paesani, Strauch, and Kremer, 2006.)

Compare this to:

Also, countries with large debt accumulation tend to be more at risk of inflationary pressures raising nominal short-term interest rates. These factors affect the long end of the term structure and raise borrowing cost for long-term government securities nonlinearly.[13]
A number of studies have considered the impact of public debt on credit risk spreads in countries sharing the same currency to avoid the risk that expectations regarding exchange rates may affect the results. For instance, some studies have examined the spread of EU sovereign yields over the German bonds, and found that an increase in public debt has a significant but small impact on bond yields. However, this result holds only in countries with high debt levels (Paesani, Strauch, and Kremer, 2006).[14]

Wording from Agbetsiafa paper, pages 6-7:

Some of these differences in the findings may be accounted for by country-specific factors such as nonlinear effects of large fiscal deterioration and the country’s conditions of the deficit, the country’s institutional set up, and the possible exposure and spillovers from other global financial markets.
These domestic and international factors are likely to determine the magnitude of the impact of the deficits on interest rates.

Compare this to:

It complements and extends the existing literature by exploring in particular the nonlinear effects of large fiscal deterioration and initial fiscal conditions, the impact of countries’ institutional set up, and the likely spillovers from global financial markets. The evidence shows that large deficits and debt can have a marked adverse impact on bond yields, but that a variety of domestic and international factors are likely to determine the magnitude of this impact.


Simlar wording in Dr. Agbetsiafa's Notre Dame Doctoral Thesis [1980]


This posting shows similarities between text in Dr. Douglas Agbetsiafa’s doctoral thesis and writing by other, earlier published, authors.  Dr. Agbetsiafa’s thesis is titled “External Resource Utilization and Debt-Management Problems in Ghana”, and was submitted for a doctorate of economics at the University of Notre Dame in 1980.  Dr. Agbetsiafa is now Professor and Chair of Economics at Indiana University South Bend (IUSB).

The comparisons that follow show text taken directly form Dr. Agbetsiafa’s doctoral thesis versus text with the works of others that have largely similar wording.  Note that multiple instances of similar wording occur between Dr. Agbestiafa’s thesis and a source that does not appear to be mentioned at all in his thesis, namely the following book: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977).  Also, no mention is made in the thesis of the following article, which has several paragraphs in common with Dr. Agbetsiafa’s thesis: Garg, R.C. (1977) Debt Problems of Developing Countries.  Intereconomics, 12(3-4):  93-97.

From page 22 of Agbetsiafa’s doctoral thesis:

This will imply purchasing of goods abroad that the debtor country cannot produce efficiently at home, and also being in position to translate the surplus of domestic savings over domestic investment requirements into foreign exchange without much difficulty. Thus, if if  [sic] the international demand for the products of the debtor country rises only sluggishly, or if domestic production is not competitive, or if export sales fluctuate persistently, the country will experience limits on the rate of savings surplus that is needed for debt-service payments.

Compare this to Avramovic (1964):

… translate the surplus of domestic savings over domestic investment requirements into foreign exchange without much difficulty. If international demand for the products of the debtor country rises only sluggishly, or if domestic production is not competitive, or if export sales fluctuate persistently, this country will experience limits on the rate of real income growth that it can sustain over time and hence on the savings surplus that is needed for debt servicing abroad.

From page 23 of Agbetsiafa’s doctoral thesis:

The procedure involves a short-term balance of payments forecast designed to show the degree of strain on the balance of payments in a hypothetical future two-year period in which export earnings are assumed to taper off to the maximum extent which can reasonably be expected in the individual debtor country.

Compare this to Avramovic (1964), within Introduction:

… involves a short-term balance of payments forecast designed to show the degree of strain on the balance of payments in a hypothetical future two-year period in which export earnings are assumed to fall off to the maximum extent which can reasonably be expected in the country concerned.

From page 32 of Agbetsiafa’s doctoral thesis:

The pioneering article integrating foreign finance as an additional factor of production into a model of the development process was published in 1966 by Hollis Chenery and Alan Strout.[6] Although its simplistic reliance on projections of growth based solely on an aggregate capital output ratio has been severely criticized, it remains a basic framework of analysis; and subsequent use of its terminology, especially in a disaggregated form, provides a basis for useful research. It has also been the bais [sic] of global estimates by international bodies of the time and foreign resources required for developing countries to achieve self-sustaining growth.
[7] Chenery, H. B. and Strout, A.M, "Foreign Assistance and Economic Development," American Economic  Review (September 1966), Vol. 56, pp. 6789-733.
[Note: reference at bottom of page appears to be mis-numbered]

Compare this to Newlyn (1977), page 93:

This chapter can be developed conveniently within the framework of the· pioneering article integrating foreign finance 'as an additional factor of production' into a model of the development process by Hollis Chenery and Alan Strout, published in 1966.[1] Although its simplistic reliance on projections of growth based solely on an aggregate capital output ratio have been severely criticized,[2] it remains a basic analytical instrument and subsequent use of its technology, especially in a disaggregated form,[3] has given rise to useful research. It has also been the basis of global estimates by international bodies of the time and foreign res6urces required for developing countries to achieve 'self-sustaining growth'.
See: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977). 

From page 33 Agbetsiafa’s doctoral thesis:

The model is based on the identification of three constraints on the rate of growth: the capacity consstraint, [sic] the savings constraint, and external trade constraints. The objective of the analysis is to estimate the extent to which foreign finance can remove constraints, how long the process will take, and how much external finance will be required. Two important assumptions are implicit in the specification; namely, that all of the foreign finance is in the form of grants and that it is one hundred percent effective in raising the investment rate and, hence, the growth rate. Furthermore, it is assumed that there is sufficient foreign finance in this form to overcome the constraints specified above in the successive stages in which they operate. These assumptions are purely theoretical but necessary for the purpose of investigating the full extent to which foreign finance can contribute to the acceleration of the income growth rate of developing countries. The model is highly linear in conception and relies exclusively on the automatic effect of capital investments increasing growth via the capital-output ratio.

Compare this to Newlyn (1977), pages 93 and 94:

The model is based on the identification of three constraints on the rate of growth: 1. the capacity constraint; 2. the savings constraint; 3. the external trade constraint; and the objectives were to estimate the extent to which foreign finance can remove constraints, how long the process will take, and how much external finance will be required. Two important hypothetical assumptions are implicit in the specification, namely that all of the foreign finance is in the form of grants and that it is one hundred per cent effective in raising the investment rate, and hence the growth rate. Furthermore, it is assumed that there is sufficient foreign finance in this form to overcome the constraints specified above in the successive stages in which they operate.

These assumptions are purely hypothetical but are necessary for the purpose of investigating the full extent to which foreign finance can contribute to the acceleration of the income growth rate of the poor countries. The model is highly linear in conception and exclusively reliant on the automatic effect of capital investment increasing growth via the capital output ratio but because of the wide currency of such projections they must be examined on their own terms.
See: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977). 

From Agbetsiafa’s doctoral thesis, bottom of page 33, page 34, and top of page 35:

In the first phase of development it is visualized that the rate at which investment can be increased is limited by the absence of appropriate cooperating factors and therefore only that amount of external resource can be absorbed as is consistent with raising the investment rate at a constrained rate. This phase lasts until the target rate of investment is achieved which, given the capital-output ratio, will be associated with a substantial increase in income. In this second phase, the gap between savings and the target rate of investment is being closed by external resources and the condition required for the termination of th.is phase is that the marginal savings rate must exceed the target rate of investment in order that rising income eventually enable national savings to finance investments at the target rate. If this phase were to be completed without the emergence of external trade limit, this constraint would almost certainly constitute a third phase, because with the reduction in external resources during the second phase, the gap between exports and imports which it had previously financed would open up. Thus the trade gap will either take over as the binding constraint during the second phase, or it will succeed it and will persist unless the rate of growth of exports exceeds the rate of imports by more than the reduction in foreign finance. This possibility of overlap between the trade constraint and the savings constraint has led to a considerable amount of literature on two-gap models, and in particular to methods of determining which gap is binding ex-ante, in spite of the fact that ex-post they must be equal because the excess of imports over exports is equal to external resource inflow.

Compare this to Newlyn (1977) page 94:

In the first phase of development it is visualized that the rate at which investment can be increased is limited by the absence of appropriate co-operating factors and therefore only that amount of aid can be absorbed as is consistent with raising the investment rate at a constrained rate. This phase lasts until the target rate of investment is achieved which, given the capital/output ratio, will be associated with a substantial increase in income per head. In this second phase the gap between savings and the target rate of investment is being closed by foreign aid and the condition required for the termination of this is that the marginal savings rate must exceed the target rate of investment in order that rising income should eventually enable national savings to finance investment at the target rate. If this phase were to be completed without the emergence of the external trade limit this constraint would almost certainly constitute a third phase because, with the reduction in aid during the second phase, the gap between exports and imports which it had previously financed would open up. Thus the trade-limited phase will either take over as the binding constraint during the second phase or it will succeed it, and will persist unless the rate of growth of exports exceeds the rate of growth of imports by more than the reduction in foreign finance.
This possibility of overlap between the trade constraint and the savings constraint has led to a considerable literature on 'two gap models' and in particular to methods of determining which gap is binding ex ante, in spite of the fact that ex post they must be equal because the excess of investment over savings and the excess of imports over exports are both equal to the inflow. …
See: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977). 

From page 35 and top of page 36 of Agbetsiafa’s doctoral thesis:

The Chenery-Strout model was applied to thirty-one countries using United Nations and International Monetary Fund (IMF) statistics for the period 1957 to 1962. The median values of the crucial parameters for that period were a marginal propensity to save 0.19 and an incremental capital-output ratio 3.52. Assuming that the trade constraint does not operate, these values would imply that a country starting from an initial savings level of 0.08, which is the bottom of the distribution, would take forty-five years to achieve self-sustaining growth at a five percent growth rate. A similar projection (using the same kind of model) was made by the Commission of International Development established by the World Bank--the Pearson Commision.[8] The three basic assumptions of this commission's projections were: (1) that the total flow of financial resources (net of repayment of loans) to the developed countries will reach the target of one percent of the gross national products of the developed countries belonging to the Development Assistance Committee by 1975; (2) there will be a simultaneous increase in official development assistance--concessionary loans and grants--to 0.7 percent of the base; (3) the Commission assumed that there would be more favorable terms for official loans. The conclusion derived from these assumptions is that the majority of developing countries will be able to reach self-sustaining growth by the end of the present centiry.[sic] Self sustaining growth in this context is the point at which a country is able to finance from its own resources the amount of investment required to maintain a target rate of growth of national product of six percent.

Compare this to pages 94-95 of Newlyn (1977):

The Chenery/Strout model was applied to thirty-one countries using United Nations and I.M.F. statistics for the period 1957 to 1962. The median values of the crucial parameters for that period were: the marginal propensity to save 0.19 and the incremental capital/output ratio 3.52. Assuming that the trade constraint does not operate, these values would imply that a country starting from an initial savings level of 0.08, which is the bottom of the distribution, would take forty-five years to achieve self-sustaining growth at a 5 per cent growth rate.
A similar projection (using the same kind of model) was made by the Commission of International Development set up by the World Bank (the Pearson Commission) which reported in 1969.[4] The three basic assumptions of the Pearson Commission's projections are: 1. that the total flow of financial resources (net of repayment of loans) to the developed countries will reach the target of one per cent of the gross national products of the developed countries belonging to the Development Assistance Committee by 1975; 2. that there will be a simultaneous increase in official development assistance ( concessionary loans and grants) to 0.7 per cent of the same; and 3. That there should be more favourable terms for official loans. The conclusion derived from these assumptions is that it will enable the majority of developing countries to reach 'self-sustaining growth' by the end of the present century. Self-sustaining growth in this context is clearly the point at which a country is able to finance from its own savings the amount of investment required to maintain a target rate of growth of national product, in this case 6 per cent.
See: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977). 

From page 36 and top of page 37 of Agbetsiafa’s doctoral thesis:

The difference between these two projections is not great, considering the fact that the Chenery/Strout projection starts from the investment-savings point. If, as is appropriate in such crude estimates, these projections are regarded as indicative of orders of magnitude, the difference is explicable by the use by the Pearson Commission of a somewhat lower incremental capital-output ratio rather than the 3.52 used by Chenergy [sic] and Strout, thus compensating for the less favorable assumptions regarding the terms and composition of inflow. This would seem reasonable having regard to the interval between the two projections and to the fact there is strong evidence that the incremental capital-output ratio becomes more favorable as infrastructure becomes less dominant within the range of income per head in the lower quarter of the per capita income distribution.

Compare this to Newlyn (1977) page 95:

The difference between these two projections is not great having regard to the fact that the Chenery/Strout projection starts from the lowest savings point. If, as is appropriate in such crude estimates, these projections are regarded as indicative of orders of magnitude, the difference is explicable by the use by the Pearson Commission of a somewhat lower incremental capital output ratio than the 3.52 used by Chenery and Strout, thus compensating for the less favourable assumptions regarding the terms and composition of the inflow. This would seem reasonable having regard to the interval between the two projections and to the fact that there is strong evidence that the incremental capital output ratio (ICOR) becomes more favourable as infrastructure becomes less dominant within the range of income per head in the lower quarter of the per capita income distribution.[5]
See: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977). 

From pages 40 and 41 of Agbetsiafa’s doctoral thesis:

The conclusions of most empirical work on the relationship between the target external capital flow and performance of the host countries' economies indicate that both of the necessary conditions for self-sustained growth are only half realized. The net inflow is about half the gross inflow and the addition to investment is about fifty percent of the net flow. Hence the effect on growth is reduced to a quarter of that assumed in the more optimistic projections and the position is likely to get worse as the cost of increased commercial borrowing mounts. The time taken and the resources required to achieve sustained growth must be quadruppled to the extent that such projections are meaningful. On the other hand, the propensity to consume out of foreign financial resources is, in general, lower than the propensity to consume out of income, and, in general, a considerable number of countries are being successful in their tax efforts to overcome the savings constraint.

Compare this to pages 144 and 145 of Newlyn (1977):

Summarizing the conclusions of all the empirical work and combining these with the relationship between the target flow and performance, it can be briefly said that both the necessary conditions for self-sustained growth are only half realized. The net flow is about half the gross flow and the addition to investment is only half the net flow. Hence the effect on growth is reduced to a quarter of that assumed in the more optimistic projections and the position is likely to get worse as the cost of increased commercial borrowing mounts with ODA static in real terms. The time taken, or resources required, must therefore be multiplied by four to the extent that such projections are meaningful. On the other hand, the propensity to consume out of foreign financial resources is in general lower than the propensity to consume out of income and a considerable number of countries are being successful in their efforts to overcome the savings constraint, especially by taxation, as shown in Chapter III. …
See: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977). 

From page 41 of Agbetsiafa’s doctoral thesis:

There are, however, two consequences of the use of foreign resources to accelerate the attainment of self-sustaining growth. which may in fact frustrate it. The first is the difficulty, to which Douglas Dacy[16] has recently drawn attention, of adjusting the government budget to the discontinuation of foreign finance, given the built-in character of government consumption expenditure patterns resulting from the use of foreign finance. This is essentially a domestic, fiscal problem which is capable of solution with appropriate phasing of tax effort. The other consequence of dispensing with foreign finance is the almost certain emergence of the trade constraint which is chronic and becomes acute with the combination of three factors.

Compare this to Newlyn (1977) page 145:

There are, however, two consequences of the use of foreign resources to accelerate the attainment of self-sustaining growth which may in fact frustrate it. The first is the difficulty, to which Douglas Dacy[41] has recently drawn attention, of adjusting the government budget to the discontinuation of foreign finance, given the built-in character of government consumption expenditure patterns resulting from the use of foreign finance. This is essentially a domestic, fiscal problem which is capable of solution with appropriate phasing of tax effort. The other consequence of dispensing with foreign finance is the almost certain emergence of the trade constraint, the formidable character of which will be discussed in the final chapter.
See: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977). 

From pages 41-42 of Agbetsiafa’s doctoral thesis:

The other consequence of dispensing with foreign finance is the almost certain emergence of the trade constraint which is chronic and becomes acute with the combination of three factors. The first is that the structural change in the economy, which is associated with the development process, causes the ratio of imports to Gross National Product to rise in spite of import substitution. The second factor is that the mounting reverse flow of foreign investment income with respect to loan service and profits on existing capital reduces the capacity to import. The third factor, which must operate if self-sustained growth is to be attained, is the elimination of new borrowing and new inflow of capital plus amortization of existing debt, the continued effect of which would require a net outflow on capital account. The condition for emerging from the trade constraint, assuming that the savings constraint has been overcome, is that export proceeds as a percentage of GNP exceed the sum of imports, reverse flows and net outflow on capital account.

Compare this to Newlyn (1977), page 336:

For the rest, the trade constraint is chronic and becomes acute with the combination of three factors. The first is that structural change in the economy, which is associated with development, causes the ratio of imports to gross national product to rise in spite of import substitution. The second factor is that the mounting reverse flow of foreign investment income (FY) in respect of loan service and profits on existing capital reduces the capacity to import. The third factor, which must operate if self-sustained growth is to be attained, is the elimination of new borrowing and new direct foreign investment plus amortization of existing debt, the combined effect of which would require a net outflow on capital account (CO).
See: W.T. Newlyn, ed., The Financing of Economic Development (Clarendon Press, Oxford, 1977). 

From pages 55 and 56 of Agbetsiafa’s doctoral thesis:

Capital inflow assists development in two distinguishable ways. On the one hand, it adds to the total volume of resources at the country's disposal and thereby the amount of resources which can be devoted to capital formation without a reduction in consumption. On the other hand, it increases the country's ability to import goods and services of certain specific kinds which are important to development, but which could not be produced domestically, or which could only be produced domestically at very high cost.

Compare this to Garg (1977) at page 94:

Capital inflow assists development in two distinguishable ways. On the one hand, it adds to the total volume of resources at the country's disposal over and above those used for consumption, which can be devoted to capital formation.  On the other hand, it increases the country's ability to import goods and services of certain specific kinds which are important to development but which could not be produced domestically, or which could only be produced domestically at very high cost.
See: Garg, R.C. (1977) Debt Problems of Developing Countries.  Intereconomics, 12(3-4):  93-97.

From page 56 of Agbetsiafa’s doctoral thesis:

The need for external resources is thus determined by two separate sets of forces. Increased investment is required to support a more rapid increase in gross domestic product, and there is a limit to the amount of savings which can be generated from a given amount of income. The difference between investment needs and savings potential determines the amount of external capital needed to obtain and sustain a given growth rate. Similarly, a certain level of gross domestic product generates a demand for an indispensable minimum of imports. The minimum trade gap for this level of GNP is equal to the difference between this value of imports and the value of exports for a given year. Growth will be limited to the largest volume of GNP that can be sustained by the inflow of capital to ful-fill [sic] both of these requirements.

Compare this to Garg (1977), page 94—end of column 1 and start of column 2:

The need for external resources is thus determined by two separate sets of forces. Increased investment is required to support a more rapid increase in gross domestic product, and there is a limit to the amount of savings which can be generated from a given amount of income. The difference between investment needs and savings potential determines the requirement for external cap1tal .to sustain a given growth rate. Similarly, a certain level of gross domestic product calls for an indispensible minimum of imports.  The minimum trade gap for this level of GOP is equal to the difference between this value of imports and the value of exports that can be sold in a given year. Growth will be limited to the largest volume of GDP that can be sustained by the inflow of capital to fulfill [sic] both these requirements, i.e., by the larger of the two gaps as determined above.
See: Garg, R.C. (1977) Debt Problems of Developing Countries.  Intereconomics, 12(3-4):  93-97.

From page 56 (bottom) and top of page 57 of Agbetsiafa’s doctoral thesis:  

The savings-investment and export-import gaps will necessarily be equal. For the gap, according to each of these two views, is the excess of the amount of resources required over and above the amount of resources which can be mobilized within the economy. There is only one gap to be filled by external resources; however, the necessary equalization between the two gaps is brought about by a process of adjustment. The underlying strains, determining the amount of capital inflow needed to make possible a given rate of growth of output and income, may in many cases be stronger on the foreign sector variables of the economy.

Compare this to Garg (1977), at p. 94, Column 2:

In any actual situation (ex-post identity), the savings-investment and export-import gap will necessarily be the same, for the gap, on each of these two views, is the excess of the amount of resources used over the amount of resources produced by the economy. There is only one gap to be filled by capital inflow; however, this necessary identity of the savings-investment and export-import gap is brought about by a process of adjustment. The underlying strains, determining the amount of capital inflow needed to make possible a given pace of development, may be predominantly on the export-import side.
See: Garg, R.C. (1977) Debt Problems of Developing Countries.  Intereconomics, 12(3-4):  93-97.

From page 65 of Agbetsiafa’s doctoral thesis:

Broadly speaking, the two-gap analysis accepts that at an early stage of technological development, growth of GNP may depend critically on importation of goods and services. Since domestic resources may not always be freely convertible into foreign resources, due to limited potential for expanding exports, foreign capital inflow has to fill the bigger of the savings and trade gaps. Within the framework of national income accounting, it can be shown that the two gaps are necessarily equalized.

Compare this to page 88 of Burrows (1975)

Broadly speaking, the approach accepts that at an early stage of technological development, growth may depend critically on importing goods and services from abroad, and that domestic resources may not always be freely convertible into foreign resources due to the limited potential for expanding exports. In this situation, foreign capital inflows have to fill up the bigger of the two gaps-trade gap and saving gap.

From page 67 of Agbetsiafa’s doctoral thesis:

The literature on debt-financed economic development pictures the process as a race between two variables growing at compound rates: debt and income. Debt is generated by the gap between domestic saving and investment, which can increase in absolute terms over time. As the gap widens and debt accumulates, interest charges also cumulate, and the country must borrow increasing amounts just to maintain a constant flow of net imports. It must also borrow to refinance maturing debt obligations against any option of default. The capacity to service debt depends critically on the continuing growth of national output which makes it ultimately desirable to close and, if possible, reverse the gap between domestic resources and investment.

Compare this to Solomon (1977), at p. 485:

The literature on debt-financed economic development pictures the process as a race between two variables growing at compound rates: debt and income.[6]  Debt is generated by the gap between domestic saving and investment, which can increase in absolute terms over time. As the gap widens and debt cumulates, interest charges also cumulate, and the country must borrow increasing amounts just to maintain a constant flow of net imports. It must also borrow to refinance maturing debt obligations. Income, in tum, grows as a result of the investment process. The capacity to service debt depends fundamentally on the continuing growth of output, which makes it feasible ultimately to close and then reverse the gap between domestic saving and investment.

From page 68 of Agbetsiafa’s doctoral thesis:

Solomon[1] depicts this process by the use of a modified version of the difference equation model presented by Avramovic and others. Assume that growth proceeds as a result of increasing investment and a fixed incremental capital-output ratio. External debt finances the gap between investment and domestic saving; changes in reserves and capital inflows other than interest-bearing debt are ignored for the moment. Amortization of past loans is also ignored on the plausible assumption that, as long as the gap exists, scheduled loan repayments will be offset by new borrowings. Thus debt accumulates as the result of the gap between investment and saving and of the interest
on the growing debt.

Compare this to Solomon (1977) at page 485:

The process can be depicted by a simplified model adapted from the difference-equation model presented by Avramovic and his associates.[7] In the model below, growth proceeds as the result of increasing investment and a fixed incremental capital-output ratio. All external debt is assumed to finance the gap between investment and domestic saving; changes in reserves and capital inflows other than interest-bearing debt are ignored and all prices are assumed to be constant. Amortization of past loans is also ignored on the plausible assumption that, as long as the gap exists, scheduled loan repayments will be offset by new borrowings. Thus debt accumulates as the result of the gap between investment and saving and of the interest on the growing debt.

From page 70 of Agbetsiafa’s doctoral thesis:

It is clear from equation (8) that the second derivative is negative if r > i. The debt-income ratio is thus asymptotic to (kr-a)/(r-i) since the maximum is reached only when T is at infinity. Thus with an unchanged (kr-a)/(r-i), the rate of growth of the debt income ratio will decelerate over time as long as r > 1, an essential condition. Debt accumulation need not be an explosive process. However a more relevant question may be posed, namely, whether the limit is a reasonable one in terms of the ability of the borrowing country to service debt.
[note that in original thesis wording the letter r had a bar over it, but that was not duplicated above]

Compare this to Solomon (1977), at page 487:

It is clear from equation 3 that the second derivative is negative if r > i. The debt-income ratio is thus asymptotic to (kr- s)/(r- i) since the maximum is reached only when T is at infinity.
Thus with an unchanged (kr- s)/(r- i), the rate of growth of the debt-income ratio will decelerate over time as long as r > i, an essential condition. Debt accumulation need not be an explosive process. The question may still be asked whether the limit is a reasonable one in terms of the ability of the borrowing country to service debt. ….

From pages 74 and 75 of Agbetsiafa’s doctoral thesis:

By making possible a higher rate of investment than would otherwise be feasible, foreign capital raises the rate of income growth. The magnitude of this acceleration depends on the size of capital inflow and on productivity. The size of the capital inflow, in turn, is determined by a number of factors. Among the economic ones are the amount of resources which the borrowing country itself is ready to provide for economic development and the rate of return. In macroeconomic terms, the rate of return in indicated by the numerical relationship between capital invested and the output generated. This relationship is itself determined by the following factors: the availability of human skills, the capacity to combine and organize the factors of production in an optimal fashion, natural resource endowment, the sectoral distribution of investment, and the rate of capacity utilization. The capital-output ratio in this sense is an index of the strength of the dynamic sectors in relation to the stagnant or slow-growing sectors, as well as the efficiency measure of resource utilization. The higher the return on investment, the lower the incremental capital-output ratio, the faster the increase in real income and the greater the availability of resources for additional investment and for servicing foreign capital.

Compare this to Avromac (1964):

By making possible a higher rate of investment than would other-wise be feasible, foreign capital raises the rate of income growth. The magnitude of this acceleration depends on the size of capital inflow and on the productivity of capital. The size of capital inflow, in turn, is determined by a number of factors; among the economic ones, decisive are the amount of resources which the borrowing country itself is ready to put up for its economic development, and the rate of return, i.e., the productivity of capital. In macro-economic terms, the latter is indicated by the numerical relationship between capital investment and the output generated. This relationship, in turn, is also determined by a number of factors: the availability of human skills, the capacity to combine and organize the factors of production in an optimal fashion, natural resource endowment, the sectoral distribution of investment, the rate of capacity utilization, the durability of assets created by investment. In a way, the incremental capital-output ratio, used as a link between investment and product increase, is an index of the strength of the dynamic sectors in relation to the stagnant or slow moving sectors, and also, it is an index of the efficiency with which resources are used.' The higher the return on investment-i.e., the lower the incremental capital-output ratio-the faster the increase in real income and the greater the availability of resources for new investment and for servicing foreign capital.

From page 75 of Agbetsiafa’s doctoral thesis:

The "plough-back" out of increased income generated by such investments must be sufficiently high to make it possible for the borrowing country to reach a stage in which it can pay for all its investment needed to attain a satisfactory rate of growth, out of its own resources.

Compare this to Avromac (1964)

The plough-back out of increased income must be sufficiently high to make it possible for the country to reach a stage in which it can pay out of its own resources for all its investment that is needed to attain a satisfactory rate of growth (vi).

From page 12 of Agbetsiafa’s doctoral thesis:

Once we determine GNP growth rate, the first step in the projection is to estimate the level of investment. This implies that we assume that output is determined by the supply of factors of production and not be demand. This is a reasonable assumption for medium term analysis but not for analyzing year-to-year variations in output. It is recognized, however, that the problem of demand becomes even more important when one is considering a disaggregated approach.

Compare this to: 

Given the target growth rate, the first step in the analysis is to estimate the investment required. This implies that we assume that output is determined by the supply of factors of production and not by demand. This is a reasonable assumption for medium and long term analysis, but cannot be used to analyze year-to-year variations in output. The problem of demand becomes even more important when one is considering a disaggregated approach, as the Plan does (and as we are doing in this annex).
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2000/07/26/000178830_98101911114540/Rendered/INDEX/multi_page.txt [page 90]

From page 113 of Agbetsiafa’s doctoral thesis:

In estimating investment requirements for a given rate of growth, the parameter used is the incremental capital-output ratio. We would want to caution, however, that we do not treat this as a technological parameter, but rather as an economic parameter that is influenced by such factors as the rate and pattern of growth, technical change, and, most importantly, relative factor prices.

Compare this to:

In estimating investment requirements for a given rate of growth, the parameter that we use is the incremental capital output ratio (ICOR). This does not imply that we assume capital as the only factor of production. We treat ICOR not as a technological parameter, but as an economic parameter influenced by the rate of growth, pattern of growth, technical change, and relative factor prices.



From page 128 of Agbetsiafa’s doctoral thesis:

The debt-service ratio has been calculated for various maturity period and interest rates assumed in this study. The summary of all cases is contained in the Appendix (B). This ratio is a convenient indicator of debt-servicing burden in the short-run; Debt service is contractually fixed; in contrast, export earnings continuously fluctuate. The higher the ratio of fixed service payments to export earnings, the greater the strain which a debtor country may experience when export proceeds contract sharply. It is noted, however, that while the debt-service ratio is an incomplete indicator of present or potential liquidity problems, it does draw attention to the cash flow squeeze to which an economy in the process of growth may be exposed.

Compare this to:

The debt service ratio-ratio of service payments on external fixed-term debt to foreign exchange earnings on current account-is a convenient indicator of debt servicing burden in the short run.' Debt service is contractually fixed; in contrast, external earnings-particularly of primary producing countries-continuously fluctuate. The higher the ratio of fixed service payments to external earnings, the greater the strain which a debtor country may experience when external earnings contract sharply. While the debt service ratio is an incomplete and imperfect indicator of present or potential liquidity problems and should never be used in isolation of all other variables relevant to the appraisal of these problems, it does draw attention to the cash flow squeeze to which an economy-and particularly an economy in the process of growth-may be exposed.
(in Introduction to ESSAY I)

From page 128 of Agbetsiafa’s doctoral thesis

The choice of long maturity periods is in recognition of the fact that the most severe crises are caused by the concentration of maturities in a short period. If the debtor country has to repay a large proportion of its debt within a few years, if no foreign exchange reserves have been accumulated to enable the retirement of the debt, and if the creditors are unwilling to undertake the refinancing of the debt, liquidity difficulties will be acute.

Compare this to

The most severe liquidity crises are caused by the concentration of maturities in a short period. If the debtor country has to repay a large proportion of its debt within a few years; if no foreign exchange reserves have been accumulated to enable the retirement of the debt; and if the creditors are not willing to undertake the refinancing of the debt- liquidity difficulties will be acute.
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2003/01/15/000178830_98101911364779/Rendered/INDEX/multi0page.txt, paragraph 71

From pages 128 and 129 of Agbetsiafa’s doctoral thesis:

Breakdown may be avoided if the debtor country drastically curtails its imports and thus releases resources for the liquidation of short-term debts. This helps to restore its credit abroad, but in the mean time the process of economic growth is arrested.
Alternatively, creditors may agree to postpone collections as has been the Ghanaian case. This provides a breathing spell. But if the postponement is only for a few years, a new liquidity crisis occurs in short order. This succession of crises inevitably affects the flow of long-term capital that is needed for development.

Compare this to:

Breakdown is avoided if the debtor country drastically curtails its imports and thus releases resources for the liquidation of short-term debts; this helps restore its credit abroad, but in the meantime the process of economic growth is arrested. Alternatively, creditors may agree to postpone collections, and this provides a breathing spell. But if the postponement is only for a few years, a new liquidity crisis occurs in short order. This succession of crises inevitably affects the flow of long-term capital that is needed for development.
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2003/01/15/000178830_98101911364779/Rendered/INDEX/multi0page.txt, paragraph 71

From page 129 of Agbetsiafa’s doctoral thesis:

Four causes of unfavorable debt structures deserve mention. First, in cases where export declines occur, the affected country usually resorts to borrowing abroad, mostly on short-term, to compensate for the fall in exchange receipts. If a quick recovery of exports follows, these short-term loans could be repaid on time. But when the export yield decline is more persistent, quick liquidation becomes much more difficult. A heavy overhang of such compensatory indebtedness usually remains in several cases.

Compare this to:

The causes of unfavorable debt structures are complex and interrelated. Four of them can easily be singled out: (a) In cases where export declines occurred, the affected countries usually resorted to borrowing abroad, mostly on short-term, to compensate for the fall in exchange receipts. If a quick recovery of exports followed, these short-term loans could be repaid on time. But when the export decline was more persistent (e.g., in the case of coffee producing countries-see para. 37), quick liquidation was much more difficult. Creditors usually agreed to extend the repayment terms, but only for a few years. Consequently, a heavy overhang of such "compensatory" indebtedness has remained in several cases.
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2003/01/15/000178830_98101911364779/Rendered/INDEX/multi0page.txt, paragraph 73:

From page 129 of Agbetsiafa’s doctoral thesis:

Secondly, unfavorable debt structure results from too optimistic expectations regarding the duration of high export prices. This is usually coupled with imperfections of the monetary mechanism and of monetary policies resulting in excessive spending, especially on imports.

Compare this to:

Too optimistic expectations regarding the duration of high prices, coupled with imperfections of the monetary mechanism and of monetary policies, have occasionally led to excessive spending and thus to excessive imports.
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2003/01/15/000178830_98101911364779/Rendered/INDEX/multi0page.txt, paragraph 73, point (b)

From page 130 of Agbetsiafa’s doctoral thesis:

Unless these pressures are accompanied either by ruthless import controls or flexible exchange rate practices, excess demand inevitably spills over not only into capital goods imports but also into additional imports of consumer goods. If sufficient foreign exchange reserves are not available, imports are bought on credit, frequently short-term and medium term. Furthermore, if monetary expansion has been accompanied by acceleration of investment, additional imports of consumer goods and raw materials. All these four casues [sic] tend to reinforce each other and worsen the debt burden.

Compare this to: 

Unless these pressures are accompanied either by ruthless import controls or by flexible exchange rate practices, excess demand inevitably spills over into extra imports; If sufficient foreign exchange reserves are not available, imports are bought on credit, frequently short- and medium-term. Furthermore, if monetary expansion has been accompanied by acceleration of investment-quite frequent phenomenon in the early stages of inflation-additional imports of capital goods join the stream of additional imports of consumer goods and raw materials.
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2003/01/15/000178830_98101911364779/Rendered/INDEX/multi0page.txt, paragraph 73, within point (d).