Substitution Elasticities in the Large-Scale Manufacturing Industries of Pakistan - A Rejoinder

Estimates of the elasticity of substitution between capitaland labour in 16 manufacturing industries and the manufacturing sectorof Pakistan as a whole were reported in [18]. In most of the industriesand the manufacturing sector as a whole substitution elasticities werefound to be rather low. In the Spring 1982 issue of this Review, Ahmed{I] has suggested that the estimates of substitution elasticities mayhave been biased downwards due to the irrelevance of productionfunctions in the developing countries and the nature of data employed inthe study. He also believes that the evidence we presented regarding lowsubstitution elasticities in the other developing countries wasselective because according to him Morawetz [23J provides evidence tothe contrary. Furthermore, he argues that low substitution elasticitiesare inconsistent with the declining share of labour in the output. Inthe following, without being drawn into polemics, we shall show thatAhmed's comments are a result of his misunderstanding andmisinterpretation of our study.