Technical Change, Efficiency, and Capital-labour Substitution inPakistan’s Large-scale Manufacturing Sector

Pakistan’s manufacturing sector is characterised by relativelyhigh capital intensity and the level of absorption of labour in industryis low. This paper estimates the elasticities of substitution inPakistan’s large-scale manufacturing sector to detennine the potentialfor switching to relatively more labour-intensive production techniques.Data for the years 1960 to 1986 have been used and a total of seventeenindustry groups have been analysed. This involved the aggregation ofdata from the Census of Manufacturing Industries (CM!). Industry groupswere aggregated while keeping in mind the structural and economicsimilarities within the groups. The functional fonn used for theestimation is the CES production function and direct estimationprocedures have been used. Industries in Pakistan are generallyconsidered to be characterised by low substitution between capital andlabour, near-constant returns to scale, high capital intensity, and lowexogenous technical change. The results of this study bear this out witha few exceptions and the policy implications are interesting. The levelof capital intensity in the manufacturing sector is not commensuratewith the relative factor endowments, and there is a need to redirect theindustries towards greater use of labour-intensive technology. In theshort tenn, there appears to be little scope for altering thecapital-labour ratios in the manufacturing sector. In the long run,however, measures aimed at the gradual replacement of capital withlabour in production techniques may come to fruition.