Input substitution in manufacturing for three LDCs: translog estimates and policy implications

Abstract

Demand and subsititution elasticities from a translog cost model are estimated for the manufacturing sectors of India, Pakistan, and Bangladesh. Conventional formulae for the standard errors of the estimated elasticities are checked by a bootstrap experiment, and their validity is confirmed for the moderate-sized samples of India and Pakistan. The elasticity estimates indicate a high degree of substitutability among capital, labour, and energy resources in manufacturing sectors of these countries. The result yields important policy implications for employment expansion through changing relative resource prices and the ability of these three economies to adjust to energy price shocks without serious impairment to economic growth.