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 detennine 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 (CM!). Industry groups
were aggregated while keeping in mind the structural and economic
similarities within the groups. The functional fonn 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 tenn, 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.
INFLATION RISK AND OPTIMAL MONETARY POLICY