Technical Change, Efficiency, and Capital-labour Substitution in Pakistan's Large-scale Manufacturing Sector

Abstract

Pakistan's manufacturing sector is characterised by relatively high capital intensity and the level of absorption of labour in industry is low. This paper estimates the elasticities of substitution in Pakistan's large-scale manufacturing sector to determine the potential for switching to relatively more labour-intensive production techniques. Data for the years 1960 to 1986 have been used and a total of seventeen industry groups have been analysed. This involved the aggregation of data from the Census of Manufacturing Industries (CMI). Industry groups were aggregated while keeping in mind the structural and economic similarities within the groups. The functional form used for the estimation is the CES production function and direct estimation procedures have been used. Industries in Pakistan are generally considered to be characterised by low substitution between capital and labour, near-constant returns to scale, high capital intensity, and low exogenous technical change. The results of this study bear this out with a few exceptions and the policy implications are interesting. The level of capital intensity in the manufacturing sector is not commensurate with the relative factor endowments, and there is a need to redirect the industries towards greater use of labour-intensive technology. In the short term, there appears to be little scope for altering the capital-labour ratios in the manufacturing sector. In the long run, however, measures aimed at the gradual replacement of capital with labour in production techniques may come to fruition.