Production Relationships in Pakistan's Manufacturing Industries

Shahnaz Kazi, Zahira Saleem Khan, Seemin Anwar Khan


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
[13] 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.

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