THE PAKISTAN DEVELOPMENT REVIEW
Production Relationships in Pakistan’s Manufacturing Industries
Despite the fact that there are great disparities in factor endowments, techniques employed in the manufacturing sector of underdeveloped labour surplus countries are comparable to those of highly industrialized capital -abundant countries like the United States. A.R. Khan in his paper on capital intensities and factor use  concluded from an international comparison of factor intensities that Pakistani capital intensities are near the American level in a number of industries while in some cases they are even higher. Explanations of this paradox are based on two different assumptions regarding the magnitude of the elasticity of substitution between capital and labour. On the one hand it is assumed that the elasticity of substitution and thereby the possibility of labour absorption via changes in factor prices are very limited due to the dominance of techniques borrowed from the West and oriented to the needs of capital rich nations. On the other hand, significant substitution possibilities are assumed in production techniques and the presence of high capital intensities in the industrial sector is attributed to distortions in the factor markets in the form of exchange rate regulations, low rates of bank borrowing, etc., which lead to the price of capital being much lower than it’s social cost.