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Production Functions In Korean Manufacturing: An Analysis Of Trade Policyand Its Effect On Technological Change

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Production Functions In Korean Manufacturing: An Analysis Of Trade Policyand Its Effect On Technological Change

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Content PRODUCTION FUNCTIONS IN KOREAN MANUFACTURING: AN ANALYSIS OF TRADE POLICY AND ITS E F F E C T ON TECHNOLOGICAL CHANGE by Changyoung Jeong A D is s e rta tio n P re s e n te d to the FACULTY O F THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA in P a r tia l F u lfillm e n t of the R e q u ire m e n ts for the D eg ree DOCTOR O F PHILOSOPHY (E conom ics) A ugust 1971 72-6068 | JEONG, Changyoung, 194-3- * PRODUCTION FUNCTIONS IN KOREAN MANUFACTURING: i AN ANALYSIS OF TRADE POLICY AND ITS EFFECT j ON TECHNOLOGICAL CHANGE. j University of Southern California, Ph.D., 1971 I Economics, general i i | University Microfilms, A X ER O X Com pany, Ann Arbor, Michigan THIS DISSERTATION HAS BEEN MICROFILMED EXACTLY AS RECEIVED UNIVERSITY O F SOUTHERN CALIFORNIA THE GRADUATE SCHOOL UNIVERSITY PARK LOS ANGELES, CALIFORNIA 9 0 0 0 7 This dissertation, w ritten by GHAHGY.QIMG:...........J-EDUG-.................................. under the direction of h i. a ... Dissertation C om m ittee, and a p p ro ved by a ll its members, has been presented to and accepted by T he G radu ate School, in partial fulfillm ent of require ments of the degree of D O C T O R O F P H I L O S O P H Y \ J JfD ean D a t e .....M S i s t * . . .19.7.1...... DISSERTATION COMMITT T A B L E O F CONTEN TS LIST O F T A B L E S .................................................................................................. iv LIST O F F I G U R E S ................................................................................................... vii C hapter I. IN T R O D U C T IO N ............................................................................... 1 P ro p o sa l F o re view of the D isse rta tio n II. TRADE POLICY IN DEVELOPING COUNTRIES: INSTITUTIONAL FRAMEW ORK................................................. 7 T ra d e P o lic y in India and P a k ista n T ra d e P o licy in K orea III. TRADE POLICY AND TECHNOLOGICAL CHANGE: HYPOTHESIS F O R M U L A T IO N ................................................. 20 T h e o re tic a l F ra m e w o rk fo r the A nalysis of T echnological Change F o rm u la tio n of H ypotheses On Efficiency On R e tu rn s-to -S c a le On C apital Intensity On In te rm e d ia te -In p u t Saving IV. PRODUCTION FUNCTIONS IN MANUFACTURING INDUSTRIES: EM PIRICA L EV IDENCE AND HYPOTHESIS T E S T I N G ......................................................................38 C la ssificatio n of In d u stries Data The A ggregation P ro b le m The P ro b le m s of M e a su re m e n t ii Identification and E stim a tio n of P ro d u ctio n Functions T e st of the Cobb-D ouglas P ro d u ctio n Function T e st of the H ypothesis on E fficiency T e s t of the H ypothesis on R e tu rn s -to -S c a le T e s t of th e H ypothesis on C apital Intensity T e s t of the H ypothesis on In te rm e d ia te -In p u t Saving V. SUMMARY AND CO N C LU SIO N ............................................. S u m m ary of the D is se rta tio n P o lic y Im plications Suggestions fo r F u r th e r W ork 113 BIBLIOGRAPHY 123 L IST O F TA BLES T able 1. The C la ssificatio n of M anufacturing In d u strie s . . . 40 a. H om e-G oods I n d u s t r i e s ................................................... 40 b. Im p o rt-S u b stitu tio n I n d u s t r i e s .................................... 42 c. E x p o rt I n d u s tr ie s .................................................................. 45 2. C ro ss-S e c tio n E s tim a te s of the E a lstic ity of Substitution in T w o-D igit M anufacturing In d u strie s (Using the M arg in al P ro d u ctiv ity of L ab o r R e l a t i o n s h i p ) .................................................................................. 60 3. C ro ss-S e c tio n E s tim a te s of the E la stic ity of Substitution in T w o-D igit M anufacturing In d u strie s (Using the M arg in al P ro d u ctiv ity of Capital R e l a t i o n s h i p ) .................................................................................. 64 4. C ro ss-S e c tio n E s tim a te s of the P a r a m e te r s of T ra n sc e n d e n ta l L o g arith m ic P ro d u ctio n Functions . . 67 5. C ro ss-S e c tio n E s tim a te s of the P a r a m e te r s of Cobb-D ouglas P ro d u ctio n F unctions, U sing C ap ital's S h a r e ...................................................................................................... 72 6 . The Rate of In c re a s e in the E fficiency P a r a m e te r , E - T r > /4 t] U sing C ro ss-S e c tio n E stim a te s w ith C ap ital's S h a re . 77 7. T im e -S e rie s of C ro ss-S e c tio n E stim a te s of the P a r a m e te r s of Cobb-D ouglas P ro d u ctio n F unctions, U sing C apital S t o c k ................................................................... 79 iv T ab le 8 . The R ate of In c re a s e in the E fficiency P a r a m e te r , [ H r ’ H U sing T im e -S e rie s of C ro ss-S e c tio n E stim a te s w ith C apital S to c k .................................................................................... 83 9. T im e -S e rie s of C ro s s-S e c tio n E stim a te s of the P a r a m e te r s of Cobb-D ouglas P ro d u ctio n F unctions, U sing C ap ital's S h are .......................................................84 10. The R ate of In c re a s e in the E fficiency P a r a m e te r , / At] U sing T im e -S e rie s of C ro ss-S e c tio n E stim a te s with C ap ital's S h a r e ............................................................................... 87 11. The R ate of In c re a s e in the Index of E fficiency, [ - W H U sing J o h a n se n 's N eu tral T echnological Change M e a s u re ..........................................................................................................91 12. C ro ss-S e c tio n E stim a te s of the P a r a m e te r s of Cobb-D ouglas P ro d u ctio n F unctions, Using C apital S t o c k ......................................................................................... g3 13. The R ate of In c re a s e in the R e tu rn s-to -S c a le P a r a m e te r , r . , Fliojil M t l L <$+?) J ................................................................ 99 14. The R ate of Change^in the C ap ital-In ten sity P a r a m e te r U sing C ap ital's S h a r e ........................................................................202 v T ab le 15. C ro ss-S e c tio n E stim a te s of the P a r a m e te r s of Cobb-D ouglas P ro d u ctio n F unctions by F a c to r- S h are M e t h o d ..................................................................... 16. The R ate of Change in the C ap ital-In ten sity P a r a m e te r , r U sing F a c to r-S h a re M e th o d ................................... 17. The R ate of Change in the In te rm e d ia te -In p u t Saving P a r a m e te r , r a * -i [ - M U sing F a c to r-S h a re M eth o d ................................... A LIST O F FIGU RES F ig u re 1. The E fficiency of the T ech n o lo g y ............................................. 22 2. The R e tu rn s-to -S c a le of the T e c h n o l o g y .......................... 23 3. The C apital Intensity of the T e c h n o l o g y ........................... 25 4. P ro d u ctio n Functions w ith a D um m y V ariab le . . . . 78 v ii C H A P T E R I INTRODUCTION P ro p o sa l The p u rp o se of this d is s e rta tio n is to exam ine how tra d e policies in the developing co u n tries have affected the d ire c tio n and the ra te of technological change in the d ifferen t s e c to rs of th e ir econom ies, h o m e-goods, im p o rt-su b stitu tio n , and export in d u s trie s . In teg ra tio n of tra d e and developm ent th e o ry would seem p a rtic u la rly re le v a n t for to d ay 's developing c o u n trie s, sin ce, for m o s t if not all, of th e se co u n tries an a u ta rk ic ap p ro ac h m a y not be sufficient to p ro m o te th e ir econom ic developm ent. In tern atio n al tra d e provides one im p o rtan t vehicle for grow th. R ecently, th e re is em erg in g a body of lite r a tu r e w hich em p h asizes both a sp e c ts for econom ic developm ent.^ We intend to connect th e se two m o s t im p o rta n t a sp e c ts of developm ent stra te g y by rela tin g tra d e p olicies to technological change in developing co u n tries. ^It is e sp ecially tru e fo r nu m ero u s publications of U nited N ations. See fo r exam ple, U nited N ations, P ro c e e d in g s of the U nited N ations C onference on T ra d e and D evelopm ent, Vol. II: P olicy S tatem en ts; Vol. IV: T ra d e in M anufactures (New Y ork: iUnited N ations, 1964). 1 T ra d e policy (governm ent in terv en tio n w ith fre e trad e ) has not b een in c o rp o ra te d in the H e c k sc h e r-O h lin v e rs io n of the c o m p a r ative advantage p rin c ip le , but, re c e n t a n a ly sis of the effective ra te of p ro tec tio n has illu s tra te d the o rd e r of m agnitude of the d isto rtio n s brought about by v ario u s tra d e p olicies adopted by d ifferent 2 g o v ern m en ts. T ra d e policy is an in te g ra l p a rt of o v e ra ll policy, p a rtic u la rly for the developing co u n tries w h ere foreign exchange is often re g a rd e d as a facto r of production o r as a binding co n strain t in the se n se that it m a k es it difficult to im p o rt all raw m a te ria ls and m a c h in e ry that would be d e s ira b le o r re q u ire d to m e e t th e ir developm ent ta rg e ts . This co n stra in t is cru c ia l b e c a u se of the lim ited su b stitu tab ility betw een d o m e stic fa c to rs and "input im p o rts" fro m the developed co u n tries. T h ese input im p o rts a r e n e c e s s a ry to avoid u n d eru tilizatio n of existing productive capacity and to avoid 3 additional bottlenecks to grow th. F o r a th e o re tic a l d esc rip tio n , see W. M. C orden, "T he S tru c tu re of a T a riff S y stem and the E ffective P ro te c tiv e R ate, " The J o u rn a l of P o litic a l E conom y, LXXIV (June, 1966) 221-237; F o r an e m p iric a l study of India, see J a g d ish N. Bhagw ati and P ad m a D esai, India: Planning In d u s tria liz a tio n --In d u s tria liz a tio n and T rad e P o lic ie s Since 1951, a volum e in a s e r ie s , Ind u stry and T ra d e in Som e Developing C o u n tries, eds. Ian L ittle, T ib o r Scitovsky, and M a u ric e bcotl (O rganization for E conom ic C ooperation and D evel opm ent; London: Oxford U n iv ersity P r e s s , 1970), pp. 335-367; F o r an e m p iric a l study of P a k ista n , see Stephen R. L ew is, J r . and Stephen E. G uisinger, "M e asu rin g P ro te c tio n in a Developing Country:- "The ca se of P a k ista n , " The Jo u rn a l of P o litic a l E conom y, LXXVI (Ju ly -D e c e m b e r, 1968), l l /U -li 9b; F o r an e m p iric a l study of K o rea, see K orean D evelopm ent A sso ciatio n , E ffective P ro te c tiv e R ates for K orean In d u strie s (Seoul: K orean D evelopm ent A sso ciatio n , 1967).! 3 Staffan B u re n sta m L in d er, T rad e and T ra d e P olicy for - D evelopm ent (New Y ork: F re d e ric k A. P r a e g e r , 1967) p. 12. 3 On the o th er hand, th e re is an in c re a sin g am ount of e m p iric a l evidence to suggest that technological change m ay be a m o re im p o rta n t facto r in explaining o v erall grow th than e ith e r of the trad itio n al capital and la b o r. U sing an a rith m e tic index in m e a su rin g technological change, A bram ovitz found that betw een the decade 1869-78 and the decade 1944-53, the so u rc e of the in c re a s e in net product p e r capita in the United States was n eith er an in c re a s e in la b o r input p e r head, n o r an in c re a s e in cap ital p e r head, as th e se 4 inputs a r e conventionally m e a su re d , but an in c re a s e in productivity. A lm ost the en tire in c re a s e in net product p er capita has been 5 a s so c ia te d w ith the r is e in productivity during the period. K endrick also found that productivity in the U nited States in c re a s e d at an a v e ra g e annual ra te of 1.7 p e r cent betw een 1889 and 1957, while re a l p riv ate d o m estic product grew at an a v e ra g e annual ra te of 3. 5 p er cent over the sa m e p eriod, so that about half of the grow th in output w as accounted for by additions to lab o r and capital inputs, and an o th er h alf w as contributed by in c re a s e s in productivity. ^ Solow, using a g e o m e tric index of productivity, estim a te d that 87. 5 p er cent of the in c re a s e in g ro ss output p er m an hour in the United States betw een the period 1909-1949, w as attrib u tab le to tech n ical change 4 M oses A bram ovitz, "R e so u rc e and O utput T ren d s in the U nited S tates Since 1870," The A m eric an Econobnic R eview , XLVI (May 1956), 6 . 5I b id .. 1 1 . | kjohn -\y. K endrick, P ro d u ctiv ity T re n d s in the United S tates, A Study by the N ational B u reau of E conom ic R e se a rc h , No. 7 1,1 G en eral S e rie s (P rin ceto n , N. J. : P rin ceto n U n iv ersity P r e s s , 1961), j p. 6 0 . ______ j 4 and the rem ain in g 12. 5 p e r cent to in c re a s e d use of cap ital p e r m a n 7 hour. Brow n and Popkin fitted the C obb-D ouglas production function to tim e s e rie s data for the United S tates n o n -fa rm d o m e stic s e c to r in th e period, 1890-1958, and found th a t output change could b e tte r be a ttrib u te d to n e u tra l and n o n -n e u tra l technological change than to input change o v er m o s t of the p erio d (1 9 1 9 -1 9 5 8 )--p erio d g c h a ra c te riz e d by constant r e tu r n s - to - s c a le . This evidence shows th a t technological change m ay be the m o s t im p o rta n t so u rc e of econom ic growth. H ow ever, it should be recognized th a t the w ay in w hich the contribution of technological change has been a rriv e d a t is ra th e r crude. G en erally quantitative e stim a te s of contributions of each tra d itio n a l facto r have been su b tra c te d fro m total productivity change, leaving an unexplained re sid u a l, w hich is w hat has been defined as the contribution of technological change. F u r th e r m o re , a lm o s t nothing has been done to explain technological change at the a g g re g a te level although m ic ro stu d ies have been und ertak en in individual in d u s trie s of individual co u n tries during sp ecific p erio d s of tim e as in the U nited S tates ra ilro a d in d u stry of the 19th C entury. In this study we co n ce n trate on the explanation of technological change in te rm s of tra d e policies in the developing co u n tries. 7R o b ert M. Solow, "T ech n ical Change and the A ggregate P ro d u ctio n Function, " The R eview of E conom ics and S ta tis tic s, XXXIX(August, 1957), 320. ^ M u rra y B row n and Jo el Popkin, " A M e a s u re of T echno- j logical Change and R e tu rn s -to -S c a le , " The R eview of E conom ics and j S ta tis tic s, XLIV (N ovem ber 1962), 409. j 5 The K o rean ex p erien ce during the period 1958-1966 has been se le c te d a s the object of our detailed in v estig atio n b eca u se of h e r g e n e ra l c h a r a c te r is tic s as an open developing econom y, and the d e lib e ra te and vigorous effo rts of K o rean a u th o ritie s to influence tra d e and r e s o u rc e allocation in the s h o r t- r u n and o v e r-tim e . K orea has re c e n tly ex p erien ced one of the fa s te s t grow ing econom ies in the w o rld , th e re fo re , we would expect m o re a p p a re n t s tru c tu ra l and technological change in the econom y. A lso, d ata av ailab ility in the fo rm of s e v e ra l m an u fa ctu rin g c e n su se s, m a d e K orea the object of our study. F o re v ie w of the D is se rta tio n The m o s t im p o rta n t p a rts of the study a re hypothesis fo rm u latio n of C h ap ter III, and te stin g of the hypothesis in C hapter IV. T h ese two ch ap ters provide the b a sic fra m e w o rk for the d is se rta tio n . In C hapter II we su rv ey the in stitu tio n al a rra n g e m e n ts of tr a d e policies in selec ted developing c o u n trie s, and the extent of th e ir effects on th e se c o u n trie s' eco n o m ies. The su rv ey is conducted in such a way as to help us in form ulating m eaningful h y p o th eses la te r . The tra d e p olicies of India and P a k ista n , and then K o re a , a r e exam ined. In C hapter III we build a th e o re tic a l fra m e w o rk for the a n a ly sis of technological change using the Cobb-D ouglas production function. Then we fo rm u late hypotheses of the effects of tra d e policy on technological change in differen t s e c to rs of th e K orean econom y 6 b a se d on our exam ination of the in stitu tio n al a rra n g e m e n ts . Hypo th e se s a r e fo rm u lated to explain changes in efficiency, r e tu r n s - to - sc a le , capital in ten sity , and in te rm e d ia te -in p u t saving. In C hapter IV we f ir s t cla ssify tw o -d ig it m an u factu rin g in d u s trie s into hom e-g o o d s, im p o rt-s u b stitu tio n , and export in d u s tr ie s . Then the data so u rc e s a re explained and the p ro b lem s of agg reg atio n , m e a su re m e n t, identification, and e stim a tio n of p r o duction functions a r e co n sid ered . We s ta r t by te stin g the assum ption th at th e C obb-D ouglas function is a reaso n ab le ap p ro x im atio n to the production function fo r K o rean m an u factu rin g in d u s trie s . We have then p e rfo rm e d e m p iric a l te s ts of the above four hypotheses of the effects of tra d e policy on efficiency, r e tu r n s - to - s c a le , capital in ten sity , and in te rm e d ia te -in p u t saving. In the la s t ch ap ter we b riefly s u m m a riz e our study and d e riv e im p licatio n s for policy. F inally, we su g g est po ssib le d ire c tio n s fo r fu rth e r w ork. C H A PT E R II TRADE POLICY IN DEVELO PING COUNTRIES: INSTITUTIONAL FRAMEWORK In this ch ap ter, we exam ine the in stitu tio n al settin g s of tra d e policies in th re e developing c o u n trie s, India, P a k ista n , and K o rea, and th e ir effects on re sp e c tiv e econom ies. T hese co u n tries have been s e le c te d as the objects of o u r in v estig atio n b e c a u se of th e ir e x p erien ce w ith a n u m b er of different tra d e po licies and the a v a ila bility of re lia b le so u rc e s of inform ation. This su rv e y is conducted in o r d e r to help in the fo rm u latio n of hypotheses in the next ch ap ter. T ra d e P o licy in India and P a k ista n We f ir s t su rv ey tra d e policy in India and its effects on h e r econom y, sin ce In d ia's tra d e policies se e m to be typical of the v ario u s fo rm s of tra d e p olicies adopted by developing co u n tries. O ur p re s e n ta tio n is b ased to a c o n sid era b le d e g re e on the su rv ey by B hagw ati and D esai. * The in d u s tria l developm ent of India has been intensively reg u la ted sin ce the beginning of the F ir s t- F iv e - Y e a r P la n period, 1951 to 1956. In v estm en ts in public e n te rp ris e s have been su b ject to ^Bhagwati and D esai, India. This is the so u rc e m a te r ia l to w hich we w ill be m o stly re fe rrin g fo r Indian tra d e p o licies. 7 8 d ire c t planning, and even the p riv a te s e c to r 's in d u stria l investm ents have been d ire c te d by an exhaustive licen sin g s y ste m com bined with 2 a d etailed setting of ta rg e ts to d e te rm in e the p a tte rn of in v estm en t. H ow ever, since plan ta rg e ts have been ign o red in the actu al p ro c e d u re by o v e r-lic e n s in g the s tru c tu re of effective p ro tec tio n , the re s u lt of v a rio u s fo rm s of tra d e p o licies in India m u s t have d eterm in e d the a ctu al inducem ents to in v e st in d iffere n t s e c to rs of the Indian 3 econom y. The c ritic a l im p o rta n c e of tra d e p olicies on the Indian econom y is w ell m a n ife ste d b y th e o b serv atio n that, for a la rg e p a rt of the in d u stria l s e c to r, the av ailab ility of c u rre n t m ain ten an ce 4 im p o rts d e te rm in e s th e level of c u rre n t production. We m ay divide tra d e policy into th a t d ire c te d to im p o rts and that d ire c te d to ex p o rts. In g en era l, the im p o rt policy has aim ed a t the co m p re h en siv e and d ire c t control o v er foreign exchange u tilizatio n . T hus, the governm ent has e x c e rc is e d its influence o ver th e allo catio n of fo reig n exchange fo r p ra c tic a lly all u se s in the 5 econom y. The effects of the d ire c t control of im p o rt and exchange on the Indian econom y a r e v ario u s. F ir s t, it has elim inated the p o ssib ility of foreign and d o m estic com petition, thus, lo w ered the le v el of efficiency in production. ^ C om petition w ith foreign p ro d u cers ^Ibid. , p. 231. | 3 ? U nited N ations, E conom ic Survey of A sia and the F a r E a s t, 1968 (Bangkok: U nited N ations, 1969),. p. 48. I 4Ibid, p. 82. 5 I B hagw ati and D esai, India, p. 283 i ^Ibid. , pp. 325-326. | 9 has been avoided by the p rin cip le of indigenous availab ility , that is , im p o rtatio n of ev ery ite m of d o m e stic production has a u to m a tic a lly been pro h ib ited , even w hen the co st of d o m e stic production exceeded the im p o rte d p ric e of the product by a la rg e m a rg in . The com petition betw een d o m estic p ro d u c e rs has also b een reduced by the a rra n g e m e n ts of C apital-goods im p o rt licen sin g , and A ctual - u s e r im p o rt licen sin g . The regulation th at each firm is entitled to its f a ir - s h a r e by A c tu a l-u se r im p o rt lic e n se s has prev en ted fre e en try by new firm s as w ell as expansion of existing efficient firm s . Second, the p ro v isio n w hich re la te s f a ir - s h a r e of a llo c a tions of im p o rte d inputs to in sta lle d production capacity has led to 7 the c re a tio n of ex ce ss capacity. When a firm w ith ex cess capacity is not able to in c re a s e its input, due to the lack of im p o rte d in te rm e d ia te m a te r ia ls , the sim p le way of solving the p ro b lem is to in s ta ll m o re capacity, and to re c e iv e an in c re a s e d quota of im p o rte d input m a te r ia ls , b ased on the in c re a s e d capacity. T h ird , an o vervalued foreign exchange ra te has led to the su b sid izatio n of capital-goods im p o rts , and th u s, re s u lte d in an g e x c e ssiv e ly c a p ita l-in te n siv e m ethod of production. ^Ibid. , pp. 326-327. 8Ibid. , p. 327. 10 F o u rth , A c tu a l-u s e r im p o rt licen sin g and the p rin c ip le of indigenous av ailab ility have given in c en tiv es to d o m e stic p ro d u c e rs Q who u se la rg e am ounts of im p o rte d inputs. Such d o m e stic p ro d u c e rs have been able to obtain im p o rte d inputs a t im p o rt-p re m iu m -e x c lu s iv e p ric e s u n d er the A c tu a l-u s e r im p o rt lic e n sin g s y s te m w hile o th er p ro d u c e rs have had to buy d o m e stic inputs at p re m iu m -in c lu siv e p ric e s u n d er the p rin c ip le of indigenous availab ility . We now su rv ey Indian export policy. O ver the F i r s t F iv e- Y e a r P lan p erio d (1951-1956), and the Second F iv e -Y e a r P lan p erio d (1956-1961), export p e rfo rm a n c e w as stagnant. This w as due to the ex isten ce of tra d e p o licies (export c o n tro ls , quo tas, and export duties), d o m e stic p olicies (prom otion of In d ia 's d o m e stic consum ption), and in flatio n ary p r e s s u r e s . The effects of th e se po licies on the d e c li ning s h a re s of In d ia's exports in w o rld tr a d e in ju te m an u factu rin g , te a , cotton te x tile s , and vegetable o ilse ed s and o ils; w hich c o m p rise d 50 ~ 5 8 p e r cent of In d ia's to tal ex p o rt earn in g s th ro u g h 1948-1960, a r e d isc u ss e d in detail by Bhagw ati and D esai. ^ H ow ever, exports w e re in c re a s e d significantly during the T h ird F iv e -Y e a r P lan p erio d (1961-1966), and this im p ro v e m e n t w as m a d e p o ssib le by ex p o rt su b sid iza tio n on a la rg e scale beginning fro m 1961 and in c re a s in g throughout th e T h ird P la n p erio d . ^ The export su b sid iza tio n m e a s u re 9Ibid. , pp. 327-328. 10Ibid. , pp. 378-389. | n ibid. , p. 397. | c o n siste d of fisc a l in s tru m e n ts , such as; exem ptions fro m sa le s ta x es and refunds of in d ire c t tax es on inputs, d ire c t-ta x c o n c e ssio n s, o u trig h t su b sid ie s, and ra il fre ig h t c o n ce ssio n s, and second, of im p o rt en titlem en t sch em e s w hich e n s u re e x p o rte rs of p re m iu m - 12 c a rry in g im p o rt lic e n s e s . Of the two m e a s u r e s , im p o rt e n ti tle m e n t sch em e s have been the m a jo r in s tru m e n t for export p ro m o tion o v er the p e rio d , and the a v e ra g e p re m iu m on the im p o rt 13 lic e n s e s has b een about 70 o r 80 p e r cent. One im p o rta n t re s u lt of the im p o rt en titlem en t sch em e is that, sin ce the sc h e m e has been b a se d on the im p o rt content of ex p o rts, it has encouraged im p o rt-in te n s iv e exports m o r e than exports with 14 high d o m e stic value added. We now tu rn to the in v estig atio n of P a k is ta n 's tra d e p olicies and th e ir effects on h e r econom y. The p rin c ip a l in s tru m e n ts of P a k is ta n 's econom ic policy in affecting the r a te and d ire c tio n of in d u s tria liz a tio n throughout the 1950's and 1960's a r e the d ire c t and in d ire c t tax s y s te m s , im p o rt licen sin g and exchange c o n tro ls, d ire c t co n tro ls on in v e stm en t and p r ic e s , and o v e r-a ll econom ic planning and foreign aid. A m ong th e se , the s y ste m of im p o rt licen sin g and 12Ibid. , p. 400. 13Ib id ., p. 406. 14 U nited N ations, E conom ic S u rv e y , p, 5 3 . 12 exchange controls has been the m o s t im p o rta n t m e a s u re , sin ce, the ov erv alu atio n during the p e rio d , has m ad e quantitative im p o rt co n tro ls the m o s t influential fa c to r in d eterm in in g the s e t of re la tiv e 16 d o m e stic p ric e s . When th e re ex ists an ex ce ss dem and for im p o rts , as it is tru e under o vervaluation, ta riffs do not have any effect on r e s o u r c e allocation, sin ce the d o m e stic p ric e s of im p o rte d goods 17 a r e d e te rm in e d by im p o rt quota alone. Although im p o rt policy has been fa r m o re im p o rta n t than ex p o rt policy fo r P a k is ta n 's econom y, the re c e n t rapid grow th in exports has b een due at le a s t in p a rt to v ario u s ex p o rt pro m o tio n m e a s u r e s , esp ecially the E x p o rt Bonus S chem e w h e re the subsidy is given in the fo rm of im p o rt bonus v o uchers w hich e x p o rte rs can se ll at a p re m iu m . Lew is has quoted s e v e ra l studies w hich show th at devaluations and th e E x p o rt Bonus Schem e have contributed su b stan tially to the g ro ss foreign exchange earnings of the country 18 and the d iv e rsificatio n of its ex p o rts. E sp e c ia lly , Isla m 15 Stephen R. L ew is, J r . , P a k ista n ; In d u stria liz a tio n and T ra d e P o lic ie s , a volum e in the s e r ie s , In d u stry and T ra d e in Som e Developing C o u n trie s, eds. Ian L ittle , T ib o r S citovsky, and M a u ric e Scott (O rganization fo r E conom ic C o -o p eratio n and D evel opm ent, London; Oxford U n iv ersity P r e s s , 1970), p. 20. ^ Ibid. , pp. 4-5 17 S. N. H. Naqvi, "T he A llocative B ia se s of P a k is ta n 's C o m m e rc ia l P olicy; 1953 to 1963," The P a k ista n D evelopm ent R eview , VI (W inter, 1966), 466-467. 18 See, L ew is, P a k ista n , pp. 122-131 13 19 is said to have shown in his study, th a t export p olicies w e re im p o rta n t in a p p ro p ria tin g an ex p o rt su rp lu s fro m a rela tiv e ly in e la stic a g g re g a te supply by in c re a s in g the re w a rd s in export 20 m a rk e ts . H ow ever, in spite of the heavy su b sid izatio n of ex p o rts, the o v e ra ll sy ste m has benefitted im p o rt substitu tio n in d u s trie s , 21 re la tiv e to export prom otion in d u s trie s . A d ire c t positive rela tio n sh ip betw een risin g im p o rts and in c re a s in g capacity u tilizatio n is also evidenced in P a k ista n , and it 22 is esp ecially tru e fo r the heavily im p o rt-d ep en d e n t in d u strie s. A study by W inston th at has been quoted by L ew is, is said to have shown th a t the low level of capacity utilizatio n (approxim ately 60 p e r cent) is due to the im p o rt su b stitu tio n policy w hich re s u lte d in g r e a te r expansion of capacity, re la tiv e to dem and in im p o rt su b sti- 23 tution in d u s trie s . P a k is ta n 's im p o rt licen sin g s y ste m has ra is e d capital in te n s itie s, and contributed to the in c re a s e in ex ce ss capacity in som e in d u s trie s , b eca u se as in India the s y ste m has b een based on 24 in sta lle d cap acity in allocating im p o rte d inputs. W inston also 19 N urul Is la m , "E x p o rt Incentives and R esp o n siv en ess of E x p o rts in P ak ista n : A Q uantitative A n aly sis, " D iscu ssio n P a p e r No. 58, E conom ic G row th C en ter, Yale U n iv ersity , O ctober 1968. 20 L ew is, P a k ista n , p. 123. 21 N urul Is la m , "C om m ents on Planning E x p erien ce m P a k is ta n ," The P a k ista n D evelopm ent Review , VIII (Autum, 1968), 377. ^ L e w i s , P a k ista n , p. 114. ^ I b i d . , pp. 114-115. ^ I b id . , p. 115. 14 found a low level of ex ce ss capacity in export in d u s trie s , due to re la tiv e ly m o re ela stic dem ands, e a s ie r a c c e s s to im p o rte d inputs, and p e r v e r s e s o r t of policy w hich sim ply d islik es the expansion of cap acity in export in d u s trie s re la tiv e to im p o rt substitution 25 in d u s trie s . This m u st have led to a re la tiv e ly low lev el of capital in ten sity in export in d u strie s. The p re s e n t s tru c tu re of the export bonus ra te is such th at export com m odities with a high im p o rt com ponent a re receiv in g su b stan tial export s u b sid ie s, thus, 2 6 encouraging the u se of im p o rte d inputs in export in d u strie s. T ra d e P o licy in K orea In this section, we exam ine the tra d e policies of K o rea and th e ir effects on h e r econom y in the period, 1958 to 1966. This period, includes the F i r s t F iv e -Y e a r E conom ic D evelopm ent P lan period, fro m 1962 to 1966. D uring the P lan p eriod, the K o rean econom y has achieved rap id econom ic grow th and s tru c tu ra l change, for the f ir s t tim e a fte r the division of the country. Since K orea is a re s o u rc e -p o o r I country, its econom ic p olicies and its p a tte rn of econom ic developm ent have been m o re "open", at le a s t in the p erio d under study, than those I ^ I b i d . , p. 115. 26 R. Soligo and J. J . S tern , "Som e C om m ents on the E x p o rt Bonus, E x p o rt P ro m o tio n s, and Investm ent C r it e r ia ," The iP ak istan D evelopm ent Review , VI (Spring, 1966), 56. ! 15 of e ith e r P a k ista n o r India. This is sim ply illu s tra te d by the ratio of the value of exports and im p o rts to G. N. P . In k o re a this ratio has in c re a s e d fro m 17 p e r cent in 1958 to 25 p e r cent in 1966 while th a t fo r P a k is ta n in c re a s e d fro m 15. 9 p e r cent in 1969/60 to 19. 2 p e r cent in 1964/65, and th a t for India d e c re a se d fro m 12 p er cent 27 28 29 in 1958 to 11 p e r cent in 1966. ’ ' With in c re a sin g re lia n c e on foreign tra d e , im p o rt and ex p o rt p olicies have been influencing national econom y in a su b stan tial scale . The rapid grow th in the m a n u factu rin g s e c to r, w hich has le t the o v e r-a ll econom ic grow th during the F ir s t P lan p e rio d , has been due m a in ly to effective policies fo r the developm ent of im p o rt-su b stitu tio n in d u s trie s , w ith the a s s is ta n c e of foreign capital and technology, and to the re m a rk a b le in c re a s e in exports w hich have benefitted fro m vigorous 30 g o v ern m en t support. We w ill now exam ine im p o rt and export policies of K o rea, and evaluate th e ir effects on the K orean econom y. 27 Bank of K o rea, E conom ic S ta tistic Y earbook 1968, (Seoul: Bank of K o rea, 1968), p. 8 . 28 L ew is, P a k ista n , p. 10 29 In tern atio n al M onetary Fund, Intern atio n al F inancial S ta tistic s Vol. XIX No. 10, and Vol. XXI No. 7. W ashington, D. C. 1966 and 1968. F o r the ra tio in India, national incom e is used in ste ad of G. N. P. 30 The K orean R e co n stru c tio n Bank, In d u stry in K orea 1967, (Seoul: The K o rean R e co n stru c tio n B ank, 1967), p. 11. 16 Im p o rt policy in K orea is la rg e ly dependent upon im p o rt licen sin g and exchange control p o licies, as in India and P ak ista n . B efo re the 1964 devaluation of ap p ro x im ately 100 p e r cent, the o vervaluation of the foreign exchange ra te w as su b stan tial. Even a fte r the devaluation, the d o m estic c u rre n c y seem e d overvalued. A p u rch asin g pow er p a rity o r an index of re a l exchange ra te s (calculated th ro u g h m odifying the actual foreign exchange ra te of the b a se y e a r by the g en era l d o m estic p ric e index in c e rta in la te r y e a rs ) was 93. 7 a t the end of 1966 (com pared to 100 in M a rc h 1965), and has 31 undoubtedly d e te rio ra te d fu rth e r sine e th a t tim e. The re a l exchange ra te , plus the im p o rt taxes e x p re ss e d in d o m estic c u rre n c y , p e r unit of the foreign c u rre n c y , w as e stim a te d to have d e te rio ra te d 32 fro m an index of 100 in 1965 to 85. 7 at the end of 1966. L ikew ise the co rresp o n d in g effective ra te of foreign exchange for ex p o rts, w ith financial support and exem ption of d o m estic taxes as export 33 subsidy, w as 95. 3 a t the end of 1966 re la tiv e to 100 in M arch 1965. T his in c re a sin g overvaluation of the foreign exchange ra te has m ade im p o rt licen sin g and exchange control sch em e s the m o s t influential im p o rt policy m e a s u re s in K orea. Im p o rt policy, in g e n e ra l, has been an in te g ra l p a rt of the whole policy fram e w o rk , and this is w ell 31 K o rean D evelopm ent A ssociation, Study on the F o ste rin g of S tra te g ic E x p o rt In d u strie s and the E sta b lish m e n ts of the D irection of the E xport P ro m o tio n P olicy, (in Korean) (Seoul: K orean D evel- opm ent A sso ciatio n , 1970), p. 712. 3 2Ibid. , pp. 715-717. 33Ib id . , p. 714-715. 17 supported by the com m on o b serv atio n th a t the le v el of production in the m a n u factu rin g s e c to r is su b stan tially influenced by the availability of the im p o rted in te rm e d ia te inputs. B esid es im p o rt licen sin g and exchange control p o licies, 34 the F o re ig n C apital Inducem ent Law has encouraged the im p o rts of foreign capital during the F i r s t P lan p erio d , along w ith the im p o rts of foreign technology. T h e re has alw ays b een ex ce ss dem and ; for foreign capital im p o rts u n d er the ov erv alu atio n of the foreign exchange ra te , am ong com peting d o m estic e n tre p re n e u rs . One of the m o s t im p o rta n t effects of the above im p o rt policy is th at it has r a is e d the lev el of capital in ten sity in im p o rt 35 substituting in d u s trie s , even though K o re a 's co m p a ra tiv e advantage m ight w ell lie in la b o r in ten siv e techniques. This is evident since foreign capital im p o rts have been subsidized under the sy ste m of overvaluation. Second, the im p o rts of foreign technology into im p o rt-su b stitu tin g and export in d u s trie s , w hich s ta rte d in I 9 6 0 , have ra is e d the g en era l lev el of efficiency in im p o rt substituting in d u strie s 3 6 on a la rg e sc a le , and a lso in export in d u s trie s to so m e ex ten t. Even though im p o rt policy has been m o re influential on the national econom y than ex p o rt policy, the re m a rk a b le in c re a s e in exports during the p erio d u n d er study is due at le a s t in p a rt to i - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - j 34 ' K o rean T r a d e r 's A sso ciatio n , T ra d e Y earbook 1970, j (in K orean) (Seoul: K o rean T r a d e r 's A sso ciatio n , 1970), pp. 747-753. j 35 ! K orean R eco n stru c tio n Bank, In d u s try , p. 15. j "^Ibid. f p. 22. v ario u s ex p o rt pro m o tio n p o licies. E x p o rt pro m o tio n po licies have co n siste d m a in ly of export financing a t p re fe re n tia l in te r e s t r a te s , financing fo r ra w m a te r ia l and capital equipm ent im p o rts for ex p o rt in d u s trie s , exem ptions fro m v ario u s kinds of d o m e stic tax es and custom s du ties, and o th er su p p o rts such as low tra n s p o rta tio n co st and im p o rte d raw m a te ria l benefits by allow ing e x p o rte rs to se ll im p o rte d raw m a te r ia ls in ex ce ss of those needed in th e production p ro c e s s in the d o m e stic 38 m a rk e t a t high p r ic e s . Am ong th e se su p p o rt s c h e m e s, export and im p o rt financing has b een the m o s t im p o rta n t policy m e a s u re 39 in in c re a s in g ex p o rts d ire c tly , sin ce it has le sse n e d the p ro b le m of sh o rta g e of s h o r t- te r m w orking cap ital of e x p o rte rs . We tu rn to th e effects of the export p o lices. The o v erv alu atio n of the fo reig n exchange ra te , in g en era l, se e m s to have d isc o u ra g e d exports to som e extent, even though m o s t p a r t of lo ss due to o v erv alu atio n has b een co v ered by vigorous ex p o rt p ro m o tio n sc h e m e s. Second, the v ario u s pro m o tio n sch em es of the G overnm ent have d iv e rte d effo rts of e x p o rte rs fro m low ering 37 F o r e m p iric a l evidence, s e e K o rean T ra d e R e s e a rc h In stitu te , On the M e a s u re s of A ttaining the Goal of 1 B illion- D o lla r E xports (in K orean) (K orean T ra d e R e s e a rc h In stitu te , 1970), Ch. 5 "A nalysis of E ffects of E x p o rt Subsidy, " pp. 427-455. 38 K o rean D evelopm ent A sso ciatio n . Study on the C om p a riso n of the In tern a tio n a l C om petitive P o w e r of K o rean E x p o rt In d u strie s (in K orean) (Seoul: K o rean D evelopm ent A sso ciatio n , 1969), pp. 365-375. 39 K o rean D evelopm ent A sso ciatio n , Study on the F o s te r in g . p. 759. 19 40 production co st to search in g fo r m o re subsidy. T hird, export prom otion p olicies as a w hole have in c re a s e d the dependence of ex p o rt in d u s trie s on im p o rte d ra w m a te r ia ls , since im p o rt financing of ra w m a te ria ls fo r export in d u s trie s has encouraged the u se of 41 im p o rte d inputs in ste ad of d o m e stic m a te r ia ls . Exem ptions fro m custom s duties on the ra w m a te r ia l im p o rts of export in d u strie s, allocation of su b sid ies on the b a sis of g ro ss foreign exchange earnings in ste a d of n et e a rn in g s, and the allow ance of m o re im p o rts of raw m a te r ia ls than needed in the actual production p ro c e s s , have also in c re a s e d the dependence on im p o rte d inputs. , p. 718. , p. 763. 40 Ibid. 41 Ibid. C H A P T E R HI TRADE POLICY AND TECHNOLOGICAL CHANGE: HYPOTHESIS FORMULATION In this c h ap ter we fo rm u late h ypotheses concerning the c a u sa l rela tio n sh ip betw een K o rean tra d e p olicies and th e ir effects on the d ire c tio n and the ra te of technological change in d ifferen t s e c to rs of the econom y, h o m e-g o o d s, im p o rt-su b stitu tio n , and e x p o rt in d u s trie s , b ased upon the su rv e y of K o rean tra d e policy and its effects p re se n te d in the la s t c h a p te r. B efo re fo rm u latin g the h y p o th e ses, we p re s e n t a th e o re tic a l fra m e w o rk fo r the an aly sis of technological change. T h e o re tic a l F ra m e w o rk fo r th e A nalysis of T echnological Change T echnological change can b e analyzed w ithin the fra m e w o rk of the production function w hich shows the rela tio n sh ip betw een output and inputs. This re la tio n sh ip is d e te rm in e d by the technology w hich is given at one point of tim e , and th u s, technology is em bedded in th e production function. In o rd e r to analyze a change in the 2 1 ! technology, o r tech n o lo g ical change, we f ir s t analyze the stock co n ce p t-tec h n o lo g y --w ith in the fra m e w o rk of the production function. Technology d ic tate s the rela tio n sh ip betw een inputs and output in a production function and has s e v e ra l d istin c t c h a r a c te r is tic s . We exam ine the technological c h a ra c te ris tic s in a p a rtic u la r type of production fu n c tio n --th e C obb-D ouglas production function. This production function can b e g en era lly w ritte n in the following a lg e b ra ic fo rm : X = ALa — i iw tifiT S'-'- w h e re X is the quantity of the output in p h y sical un its, L is the quantity of the la b o r input, K is the quantity of the cap ital input, a is th e p a rtia l e la stic ity of output w ith r e s p e c t to the la b o r input, (3 is the p a rtia l e la stic ity of output w ith re s p e c t to the cap ital input, and A is the in te rc e p t of the function. T h e re a r e four c h a ra c te ris tic s of technology, in the Cobb- Douglas pro d u ctio n function. * One is the efficiency of the technology m e a s u re d as a s c a le tra n s fo rm a tio n of inputs into output, and re p re s e n te d by the p a r a m e te r A in the above production function. Given the lev el of the inputs and the o th er c h a ra c te ris tic s of the 1 technology, the efficiency of the technology d e te rm in e s the lev el of | F o r a m o re detailed d isc u ssio n of the following see M u rra y B row n, On the T h eo ry and M e a su re m e n t of T echnological Change (London: C am b rid g e U n iv ersity P r e s s , 1966), pp. 12-17. output. T hus, if it is la rg e , the output which re s u lts is also la rg e . The efficiency c h a ra c te ris tic of the technology can be d ia g ra m m a tic a lly shown as in F ig u re 1. F ig u re 1 The E fficiency of the Technology K 0 In this d ia g ra m if we a r b itr a r ily a s su m e th at X j and a r e i iso q u an ts, w hich re p re s e n t the sa m e lev el of output X^ is m o re j efficient than X^, since X^ needs le s s am ount of inputs to produce the sam e lev el of output co m p ared to X^. j The second c h a ra c te ris tic of any technology is that of j r e tu r n s - to - s c a le w hich in the above Cobb-D ouglas production function,; j is e x p re s se d by the p a ra m e te r ( C t + £ ). Since a and /Q a r e [ individually the p a rtia l ela stic ity of output w ith re s p e c t to la b o r and j cap ital, th e ir sum ( a + f3 ), is the total ela stic ity of output w ith | | re s p e c t to la b o r and capital, o r the to tal p erce n tag e change in output J 23 fo r a given p erce n tag e change in la b o r and capital. Thus, when la b o r and capital inputs in c re a s e d by 20 p e r cent, if output in c re a s e d by m o re than, equal to, and le s s than 20 p e r cent, the production is subject to in c re a sin g , constant, and d e c re a sin g r e tu r n s - to - s c a le . The r e tu r n s - to - s c a le c h a ra c te ris tic of the technology is shown in F ig u re 2. in each of the d ia g ra m s (a), (b), and (c) in d icate s the sa m e output le v el, and s im ila rly X^ and X^ r e p r e s e n t h ig h e r lev els of output w hich a r e the sa m e in each d ia g ra m . F ig u re 2 The R e tu rn s-to -S c a le of the Technology (a) In c re a sin g (b) C onstant (c) D e c re a sin g K K K 0 L 24 T hus, the production functions re p re s e n te d in F ig u re s 2a, 2b, and 2 c a r e indicating in c re a s in g , constant, and d e c re a sin g r e tu r n s - to - sc a le , re sp e c tiv e ly . The th ird c h a r a c te r is tic of th e technology of the Cobb- D ouglass production function is th a t of cap ital in te n sity , w hich is e x p re s s e d by the ra tio , ( ^ ). The m a rg in a l p ro d u cts of la b o r and H cap ital a re : 9X . T a - 1T ,P AaLa K0 X _ _ = A a L K = E =— .a 9 .x a pT , 0 -l A I? $ K _ x n S l T = AL PK ~ “ I T - “k P The m a rg in a l ra te of su b stitu tio n of la b o r fo r capital is , then, 9X X W IT 3 . l sx x „ a k alT T ' a - In eq u ilib riu m , the m a rg in a l r a te of su b stitu tio n of la b o r for capital is equal to the p ric e of cap ital, Y , o v er the p ric e of la b o r, cj : JL. L. = X a K u i 25 y If w e a s su m e th a t the re la tiv e fa c to r p ric e , ( — ), is given, the c a p ita l-in te n sity c h a ra c te ris tic of the technology, ), is d eterm in e d by the ra tio of the two p a r a m e te r s of the production function, ( ■ — ). T hus, the la r g e r is ( @ ), the s m a lle r is ( |? ). The c a p ita l-in te n sity of the technology is shown in F ig u re 3. The isoquant X-, is cap ita l-in te n siv e technology re la tiv e to the isoquant X^, since the m a rg in a l ra te of substitution of la b o r for cap ital, o r the slope of the isoquant, is g r e a te r in X^ than in X^. This m ean s that the m a rg in a l pro d u ct of capital in X^ is g re a te r than in X^ , and thus, X^ isoquant u ses m o re capital. F ig u re 3 The C apital Intensity of the Technology K 0 26 The fourth c h a r a c te r is tic of the Cobb-D ouglas production i function is the d e g re e of the e ase w ith w hich capital can be s u b s ti tuted fo r la b o r, and is m e a s u re d by the ela stic ity of substitu tio n betw een la b o r and cap ital. The e la stic ity of substitution re la te s the p ro p o rtio n al change in the re la tiv e fa c to r inputs to a p ro p o r tional change in the m a rg in a l ra te of substitu tio n betw een la b o r and capital, or the p ro p o rtio n a l change in th e re la tiv e fa c to r p ric e 2 ra tio . A lg eb raically , the e la stic ity of substitution can be defined as follows: T T ' or = — ------------------ d X ax a L H ow ever, the e la stic ity of substitu tio n betw een la b o r and capital 3 is alw ays unity in the C obb-D ouglas production function. So fa r we have exam ined the four c h a r a c te r is tic s of the technology in the Cobb-D ouglas production function. It is now evident th a t a change in any one o r m o re of the c h a ra c te ris tic s of the technology co n stitu tes a technological change. Since the ela stic ity of substitution, is alw ays unity in the C obb-D ouglas production function,; I 2 i I b id ., p. 18. i ; I j ^ | The pro o f of this is given in, Ibid. , pp. 35-36. 27 technological changes in the C obb-D ouglas function a r e lim ite d to changes in th e o th e r th re e c h a ra c te ris tic s of technology: efficiency, r e tu r n s - to - s c a l e , and c a p ita l-in te n sity . Two v a ria n ts of technological change can be d istinguished - - disem bodied technological change and em bodied technological change. In disem bodied technological change, in c re a s e s in productivity a re co n sid ere d to be exogenous, w hile in em bodied technological change, in c re a s e s in p ro d u ctiv ity can be a ttrib u te d to im p ro v em en ts in the quality of in p u ts, such as education o r skills em bodied in the la b o r input, o r new im p ro v e m e n ts em bodied in new vintage capital inputs. We shall be co n cern ed w ith disem bodied technological change. Follow ing H ick s, d isem bodied technological change can b e divided into n e u tra l technological change, and n o n -n e u tra l 4 tech n o lo g ical change. N e u tra l change o c c u rs w hen the ra tio of the m a rg in a l p ro d u ct of capital to th a t of la b o r, o r the m a rg in a l ra te of su b stitu tio n of la b o r fo r cap ital is unchanged, and n o n -n eu tra l change happens w hen it is a lte re d . N o n -n eu tral technological change is fu rth e r divided into la b o r-s a v in g o r lab o r -u sin g change. If the m a rg in a l p ro d u ct of capital in c re a s e s re la tiv e to th at of la b o r, th e n o n -n e u tra l technological change is said to be cap ital-u sin g o r la b o r-s a v in g change, and if the m a rg in a l pro d u ct of la b o r in c re a s e s 4John R ic h ard H icks, The T h eo ry of W ages (New Y ork: St. M a rtin 's P r e s s , 1968), pp. 121-122. 28 re la tiv e to th a t of capital, the n o n -n e u tra l change is la b o r-u s in g o r cap ital-sa v in g . We can now divide the change in th r e e c h a ra c te ris tic s of th e technology in the C obb-D ouglas production function, into n e u tra l and n o n -n e u tra l technological change. A change in e ith e r the efficiency o f the r e tu r n s - to - s c a le c h a r a c te r is tic is cla ssifie d a s n e u tra l technological change, sin ce the changes in th e se two c h a ra c te ris tic s do not a lte r the m a rg in a l r a te s of su b stitu tio n betw een lab o r and capital. H ow ever, a change in the c a p ita l-in te n sity c h a ra c te ris tic of technology a lte rs the m a rg in a l r a te s of substitution betw een the two fa c to rs for each c a p ita l-la b o r ra tio , and th e re fo re , is a n o n -n e u tra l change. In this n o n -n e u tra l change, la b o r-u s in g and c a p ita l-u sin g technological change w ill b e d e s c rib e d by the d ire c tio n of the m o v em en t of the c a p ita l-in te n sity c h a r a c te r is tic , ( -g ). If /S r is e s re la tiv e to a , so th a t ( ) d eclin es, then a ca p ita l-u sin g technological change has o c c u rre d sin ce the m a rg in a l pro d u ct of cap ital has in c re a s e d re la tiv e to th a t of la b o r, for each 5 c a p ita l-la b o r com bination. Up to now we have a ss u m e d a C obb-D ouglas production function w ith only the two tra d itio n a l fa c to r inputs, la b o r and capital. The ju stific a tio n given for the tw o -fa c to r m odel is the a ssu m p tio n th at the ratio of in te rm e d ia te input to g ro ss output re m a in s constant, but, in g en era l, th e ra tio m ay decline to the extent th a t in te rm e d ia te - j I input saving technological change takes p lace a n d /o r in v en to ry ' i _____ i 5 ! B row n, T h eo ry and M e a su re m e n t, p. 40. 29 m a n ag em e n t is im p ro v ed . T hus, the o m issio n of in te rm e d ia te £ inputs m ight lead to sp ecificatio n e r r o r . F u rth e rm o re , sin ce in te rm e d ia te inputs a r e not cancelled away in an in d u stry w ith w hich we a r e co n ce rn ed , as they a r e in a w hole econom y, the in d u stry production function should include in te rm e d ia te inputs as 7 an o th er im p o rta n t fa c to r of production. E ven fo r the econom y as a w hole, im p o rte d ra w m a te ria ls a r e lik ely to s e rv e as im p o rta n t fa c to r inputs w hich can not e a sily be su b stitu ted for. In the an aly sis of technological change, D o m ar has shown th a t e m p iric a lly the m e a s u r e of tech n o lo g ical change is se n sitiv e to w h eth er o r not raw m a te r ia ls a r e sp ecified as inputs in the production function, and w hen they a r e included a s m a lle r index of technological changes obtained. G rilich es has illu s tra te d th at the effect is la rg e in the g ca se of U. S. a g ric u ltu re . In view of the im p o rta n c e of in te rm e d ia te inputs as facto r of production, the following th r e e - f a c to r m o d el can be sp ecified: O t B Y Y = AL K M M. I. N ad iri, "Som e A pproaches to the T h eo ry and M e a s u re m e n t of T otal F a c to r P ro d u ctiv ity : A S urvey, " J o u rn a l of E conom ic L i te r a t u r e , VIII (D ecem ber 1970), 1142. 7 L aw ren ce R. K lein, An In tro d u ctio n to E c o n o m e tric s (Englewood C liffs, N. J . : P re n tic e H all, 1962), p. 87. 8 L e s te r B. L ave, T echnological Change: Its Conception and M e a su re m e n t (Englewood C liffs, N. J . : P re n tic e H all, 1966), ------------------- 30 w h e re Y is the quantity of the g ro ss output, M is the quantity of in te rm e d ia te input, Y is the p a rtia l ela stic ity of output with re s p e c t to in te rm e d ia te input, and A, L., K, a ., and |3 a r e defined in the sa m e way as they w e re in the tw o -facto r m odel. As in the tw o -facto r m od el, n e u tra l technological change is e x p re ss e d by the change in eith er the efficiency c h a ra c te ris tic , A, a n d /o r the r e tu r n s - to - s c a le c h a ra c te ris tic , ( a + 0 + Y ), w hile n o n -n e u tra l technological change is indicated by the change in the c a p ita l-in te n sity c h a ra c te ris tic , a n d /o r the change in the " ra tio of in te rm e d ia te input to g ro ss output, " w hich is exhibited by the change in the ra tio , (—Q ^—) o r y itself, u n d er the a ssu m p tio n th at the change in this fifth c h a ra c te ris tic of the technology in the Cobb Douglas production function a lte rs the c a p ita l-in te n sity c h a ra c te ris tic , ("Jr) » which is quite plausible. T hus, th e ratio of in te rm e d ia te input to g ro ss output shown by (—- ■ — ) o r y itse lf, is another c h a ra c te ris tic of the technology, and the change in this c h a ra c te ris tic is m o s t likely to lead to non n e u tra l technological change. H ow ever, this can be d eterm in e d only by e m p iric a l confrontation, not by th e o re tic a l reasoning. F o rm u la tio n of H ypotheses In view of our su rv ey of the institutional a rra n g e m e n ts for tra d e p o licies, and th e ir effects on the K orean econom y in the previous c h ap ter, we can fo rm u late four specific hypotheses 31 concerning the effect of K orean tr a d e po licies on the d ire c tio n and the ra te of tech n o lo g ical change in th re e b ro a d s e c to rs of the K o rean in d u s try , nam ely the h o m e-goods (H), im p o rt-s u b stitu tio n (M), and ex p o rt s e c to rs (X). The fo u r h ypotheses co n cern changes in four c h a r a c te r is tic s of technology: efficiency, r e tu r n s - to - s c a le , cap ital in ten sity , and the ra tio of in te rm e d ia te input to g ro s s output. T h ese hypotheses a r e fo rm u lated in such a w ay th a t they could p o ssib ly be re je c te d by confrontation w ith the e m p iric a l evidence. On E ffic ie n c y - - N e u tra l T echnological Change A A __ A T T > M A A At A A A t X J H In g e n e ra l, the d e g re e s of actu al and potential c o m p e ti tiv e n e ss in the m a rk e ts w h ere th e se in d u s trie s s e ll th e ir p ro d u cts would su g g est th a t the re la tiv e lev el of efficiencies of production would b e g r e a te s t in ex p o rt in d u s trie s b e c a u se of the high d e g re e of com petition, followed by im p o rt-s u b stitu tio n in d u strie s and h o m e - goods in d u s trie s w h ere com petition is le ss keen. H ow ever, our hypothesis re a d s th a t the ra te of in c re a s e in the efficiency p a r a m e te r , A, o v e r-tim e would be g re a te s t in im p o rt-s u b stitu tio n in d u s trie s , followed by ex p o rt in d u s trie s , and lo w est in hom e-good in d u s trie s . The re la tiv e lev el of efficiency would be expected to b e j I h ig h e r in ex p o rt in d u s trie s co m p ared to im p o rt-su b stitu tio n in d u stries; sin c e the fo rm e r h as had, for a long tim e , m o re keen com petitive j 32 p r e s s u r e than the la tte r . H ow ever, the r a te of in c re a s e in efficiency w ould b e h ig h e r in im p o rt-su b stitu tio n in d u s trie s than in export in d u s trie s sin ce, to be an ex p o rt in d u stry , one in d u stry m u s t have attain e d the p o ssib le rap id grow th ra te in efficiency at its e a r l ie r developm ent stage. The ra te of grow th in efficiency would be ta p e re d off a f te r this point. The v a rio u s so rts of ex p o rt pro m o tio n policy have u n d er p r e s e n t in stitu tio n al a rra n g e m e n ts also d iv e rted efforts of the ex p o rt in d u strie s fro m low ering production cost thro u g h the in c re a s e in productivity to se a rc h in g for ev e ry new fo rm s o r lev els of governm ent subsidy. Both ex p o rt and im p o rt- su b stitu tio n in d u s trie s would be expected to have h ig h e r grow th ra te in efficiency than h o m e-goods in d u s trie s , sin ce the la tte r has had few com petitive p r e s s u r e . Im p o rt-su b stitu tin g in d u s trie s would be expected to have r a is e d th e ir efficiency lev el su b stan tially over the p erio d under study. Even though this is due to the fact th a t im p o rt-s u b stitu tio n in d u strie s have had low b a s e s to s ta r t w ith, w hile export in d u s trie s w e re re la tiv e ly m a tu re , the ra te of grow th in th e efficiency lev el of the im p o rt-s u b stitu tin g in d u s trie s has been a c c e le ra te d by the vigorous im p o rt-s u b s titu tio n policy of the G overnm ent. H om e-goods in d u s trie s , in g e n e ra l, a r e those w hich have little contact w ith fo reig n tra d e , and thus feel le s s com petitive p r e s s u r e than the o th e r two in d u s trie s . U nder this s h e lte r, the 33 lim ite d size of the d o m e stic m a rk e t, and the high lev el of effective 9 p ro te c tio n fo r h o m e -g o o d s, have contributed to the slow ra te of grow th of efficiency in hom e-goods in d u strie s. The above a n a ly sis suggests th at although th e rela tiv e le v e l of efficiency would be hig h er in ex p o rt in d u s trie s , the ra te of in c re a s e in the efficiency level would be g r e a te r in im p o rt- su b stitu tio n in d u s trie s , w hile the hom e-goods in d u strie s would be expected to be re la tiv e ly stagnant o v er the p eriod. On R e tu rn s-to -S c a le The change in th e r e tu r n s - to - s c a le c h a r a c te r is tic of the technology m a y r e s u lt e ith e r fro m changes in the scale of operation, sim ply by producing a g r e a te r quantity of p ro d u cts, o r fro m changes in technology w ith the sa m e level of production. ^ Even though we should exam ine the change in the r e tu r n s - to - s c a l e c h a ra c te ris tic a ris in g fro m changes in technology, not fro m in c re a s in g the level of production, on a th e o re tic a l b a s is , we would m e a s u r e , in re a lity , the com bination of both effects, the s c a le of op eratio n s and technology. H ow ever, the m o r e c ru c ia l p ra c tic a l p ro b le m a r is e s fro m the ex isten ce of e x c e ss capacity o r capacity u n d eru tilizatio n , and e m p iric a l e s tim a te s of the r e tu r n s - to - s c a le c h a ra c te ris tic g K o rean D evelopm ent A sso ciatio n , E ffective P ro te c tiv e R a te s , p. 18. ^ B r o w n , T h eo ry and M e a su re m e n t, p. 39. 34 w ill m ain ly re fle c t the d e g re e of capacity u tilization. Thus, if th e re is a r is e in ex c e ss capacity o v e rtim e , the re su ltin g e m p iric a l e s tim a te of the r e tu r n s - to - s c a le p a r a m e te r would d e c re a se . B ased upon our expectations concerning the change in the d e g re e of ex cess capacity o v er the p erio d we sta te the following h y p o th esis, A (a + 0 ) (a +0.) > X A (a + B) (a + B) V > M A (a + B) (a + B) At At A t H H om e-goods in d u strie s a r e expected to have the la r g e s t in c re a s e in ex ce ss capacity, b e c a u se of lim ited d o m estic dem and, thus the lo w est r is e in r e tu r n s - to - s c a le o ver the period. D ifference in the ra te of in c re a s e of the r e tu r n s - to - s c a le betw een the im p o rt-s u b stitu tio n and the ex p o rt in d u s trie s , m a y be explained by d ifferen ces in the av ailab ility of the im p o rte d m a te r ia l inputs, in the d e g re e of the capacity c re a tio n re la tiv e to the m a rk e t siz e , and in dem and conditions. The positive rela tio n sh ip betw een in c re a s in g raw m a te ria l and in te rm e d ia te im p o rts and capacity u tilizatio n , and re la tiv e ly easy a c c e s s to im p o rte d raw m a te ria ls by export in d u s trie s under the p re s e n t in stitu tio n al a rra n g e m e n ts , has led to a h ig h e r ra te of in c re a s e in the r e tu r n s - to - s c a le p a r a m e te r , and capacity u tilizatio n in the in d u s trie s . Second, the su b sid izatio n of cap ital im p o rts into im p o rt-s u b stitu tio n in d u strie s by o v e rv a l uation of the foreign exchange ra te and foreign exchange rationing, 35 h a s led to the c re a tio n of m o re and m o re ex ce ss capacity in th e se in d u s trie s , re la tiv e to the size of the d o m e stic m a rk e t. F inally, the fact th at export in d u strie s have ra is e d the level of capacity u tiliz atio n by expanding th e ir m a rk e ts beyond the boundary of lim ited d o m e stic dem and, has also contributed to a re la tiv e ly high ra te of in c re a s e in the r e tu r n s - to - s c a le c h a r a c te r is tic in the in d u strie s. The above d isc u ssio n s suggest th a t the ra te of in c re a s e in the r e tu r n s - to - s c a le c h a r a c te r is tic would be h ighest in export in d u s trie s , followed by im p o rt-su b stitu tio n in d u s trie s , and low est in h o m e-goods in d u s trie s. On C apital In ten sity A / tt . 4 ( p-) r*«f» i Mft ) - >- X A t M At _ At L a b o r-sa v in g o r cap ital-u sin g technological change is likely to o ccu r in all in d u stry groups due to a h ig h e r m a rg in a l p ro d u ct of capital re la tiv e to th at of la b o r, w ithin the range of the existing feasib le a lte rn a tiv e s of technology. A low m a rg in a l product of la b o r, and a n a rro w ran g e of the feasib le m ix es of technology a re often o b serv ed in the developing c o u n tries. The ra te of d e c re a s e in the ra tio , ), la b o r-sa v in g technological change, would be expected to be g re a te r in im p o rt- 36 I substitution and ex p o rt in d u s trie s than in hom e-goods in d u strie s w h e re capital in v e stm en ts have re lie d upon p riv a te incentives to a g r e a te r d e g re e . The im p o rt-su b stitu tin g in d u strie s would show the fa s te s t c a p ita l-u sin g technological change, sin ce gov ern m en t h as encouraged the im p o rts of foreign capital m ain ly into th e se s e c to r s , on a su b sid ized b a sis u n d er the sy ste m of overvalued exchange ra te , w hile c o m p arativ e advantage m ight ex ist in c a p ita l- saving technological change. On In te rm e d ia te -In p u t Saving r i ( a + p ) Y > L At A f 9^ ) Y 1 1 ^ P -+ • TD J ,a. + g . Y ) ( S L + J , Y ’ At J ■\/f At J As we have seen in the f ir s t sectio n of this c h ap ter, in te rm e d ia te -in p u t saving technological change m ay be e x p re ss e d , e ith e r in te rm s of the change in the ratio of — y @ — o r in te rm s of the change in Y itse lf. I The hypothesis re a d s th at in te rm e d ia te -in p u t saving technological change would be expected to be g r e a te r in hom e-goods I in d u s trie s than in im p o rt-su b stitu tin g o r export in d u s trie s , sin ce : th e se in d u s trie s have been heavily dependent upon im p o rte d raw j m a te r ia ls . This s ta te m e n t is tru e u n d er the assu m p tio n th a t im p o rted ra w m a te r ia l co st c o m p rise s a m a jo r portion of total in te rm e d ia te - input c o st, so th a t the d ire c tio n of the m o v e m en t of im p o rte d -in p u t co st la rg e ly d e te rm in e s th a t of total input cost. The ex p o rt in d u s trie s would be lo w est in in te rm e d ia te - input saving sin ce im p o rt financing of raw m a te ria ls for export in d u s trie s , exem ptions of cu sto m s duty for raw m a te r ia l im p o rts fo r ex p o rt in d u s trie s , and the allow ance of m o re im p o rts of raw m a te ria ls than needed in the actu al production p ro c e s s for export in d u strie s have all co n trib u ted to in p u t-u sin g ra th e r than in p u t-sav in g . H ow ever, sin ce we do not have data on raw m a te ria ls and in te rm e d ia te goods c la ssifie d by s o u rc e s , im p o rte d o r d o m e sti cally p roduced, we a r e not able to te s t the above hypothesis v e ry s a tis fa c to rily . We m e re ly hope to be able to shed so m e light on this im p o rta n t p ro b le m by using the a g g reg a te input data. C H A PT E R IV PRODUCTION FUNCTIONS IN MANUFACTURING INDUSTRIES: EM PIRICAL EVIDENCE AND HYPOTHESES TESTING In this c h ap ter, we te s t our four hypotheses on efficiency, r e tu r n s - to - s c a le , capital in ten sity , and in te rm e d ia te -in p u t saving by confrontation w ith e m p iric a l evidence g ath ered on K orean m a n u factu rin g . The seventeen two-digit m an ufacturing in d u s trie s a re cla ssifie d in th re e ca te g o rie s: h o m e-g o o d s, im p o rt-su b stitu tio n , and ex p o rt in d u strie s acco rd in g to p re -sp e c ifie d c rite ria . The data u se d in the study a r e explained, and the g en eral p ro b lem s of ag g reg atio n , m e a su re m e n t, identification, and estim atio n a re exam ined. Follow ing this d iscu ssio n we te s t the assu m p tio n that the Cobb-D ouglas production function is a reaso n ab le approxim ation in explaining the production p ro c e s s of K orean m an ufacturing in d u s t r i e s . F inally, we have te ste d the four hypotheses, and in te rp re te d the e m p iric a l re s u lts. C lassificatio n of In d u strie s We f ir s t divide tw o-digit m anufacturing in d u strie s into th re e c a te g o rie s: ho m e-g o o d s, im p o rt-su b stitu tio n , and export ; _____________________ 38____________________________________ 39 in d u s trie s ; The c rite rio n fo r cla ssific a tio n is the change in statu s of the in d u strie s o v er the p erio d un d er study, 1958 to 1966. H om e-goods in d u s trie s a r e defined as th o se w hich have n e ith e r in c re a s e d exports n o r im p o rt-s u b stitu tio n during the p erio d to any significant d e g re e . H om e-goods in d u strie s involve little tra d e and the ra tio of d o m estic production to to tal supply should re m a in high and re la tiv e ly constant betw een the two y e a r s , 1958 and 1 966 . Im p o rt-su b stitu tio n in d u s trie s a r e defined as those which have in c re a s e d d o m e stic production m o re rapidly than im p o rts during the period. E x p o rt in d u strie s a r e defined as th o se w hich have in c re a s e d th e ir ra tio s of ex p o rts to to tal supply over the p erio d u n d e r study. We c o m p are the ra tio s of exports to total supply at two points of tim e , 1958 and 1966, and if the ratio has in c re a s e d significantly in 1966, co m p ared to th a t of 1958, in an in d u stry , the in d u stry is defined as an export in d u stry . We have divided K o re a 's m an u factu rin g in d u strie s d is a g g reg ated to the tw o -d ig it lev el into the above th re e gro u p s, acc o rd in g to the c r ite r ia . The r e s u lts a r e shown in T able 1. Food, b e v e ra g e , fu rn itu re , prin tin g , b a sic m e ta l, and m a c h in e ry in d u s trie s a r e classified as hom e-goods in d u s trie s; p a p e r, c h e m ic a ls, p e tro le u m and coal, clay, g la ss , and stone p ro d u cts, e le c tric a l m a c h in e ry , m e ta l p ro d u cts, and tra n s p o r t equipm ent in d u s trie s a r e cla ssifie d as im p o rt-su b stitu tio n in d u s trie s ; and te x tile s , footw ear, wood and c o rk , and ru b b er in d u strie s a r e defined as ex p o rt in d u s trie s . T a b le 1 a The C la ssificatio n of M anufacturing In d u strie s H om e-G oods In d u strie s C h a ra c te ris tic s In d u strie s 1958 1966 Food Im p o rt-su b s titu tio n com pleted by E x p o rt _ -,,^ 2 the beginning of the 1960's. ^ V alue added B ev era g e 3 j No a p p re c ia b le am ounts of ex p o rts o r im p o rts o v er the p erio d , due to lo c al c h a ra c te ris tic s of b e v e ra g e p ro d u c ts, and high ta riffs . F u rn itu re Im p o rts stab iliz ed , at the le v el of 10% of value added, ^ o v er the p erio d due to lo c al fe a tu re s of fu rn itu re p ro d u cts. K o rean R eco n stru c tio n Bank, In d u s try , p. 13. 2 Bank of K o rea, R e p o rt on the F o rm u la tio n of the Input-O utput T able, 1966 (Seoul: Bank of K o rea, 1968). 3 Bank of K o rea, Y earbook, pp. 330-331. 4 U nited N ations, F o re ig n T ra d e S ta tistic s of A sia and th e F a r E a st, Vol. 4, S e rie s B, No. 1, (New Y ork: U nited N ations, 1968), pp. 66-67, and No. 2, pp. 66-67. H o m e-G o o d s In d u s trie s (C ont'd) C h a ra c te ris tic s In d u strie s 1958 1966 P rin tin g 5 No a p p re c ia b le am ounts of ex p o rts o r im p o rts during the p erio d , due to local c h a ra c te ris tic s of dem and. B a sic M etal D o m estic production supplied 70 to 80% of to tal dem and o v er the p eriod. ^ M ach in ery 7 In d u stria l production index 94.6 IPI = 101.7 . (1965 = 100) Im p o rts have in c re a s e d su b stan tially over the p eriod. 5 Bank of K o rea, Y earbook, p. 344 and 358. ^ K orean R eco n stru c tio n Bank, In d u stry , p. 217. 7 Bank of K o rea, Y earbook, p. 215. ^ Ib id ., p. 356. 4 ^ T a b le l b Im p o rt-S u b stitu tio n In d u strie s C h a ra c te ris tic s In d u s trie s 1958 1966 9 P a p e r D o m estic production / D o m estic production no oa1 T otal Supply " ,fl T otal Supply 9 ’ % (1960) C hem icals 1) M edical and p h a rm a c e u tic a l p re p a - 1) M edical and p h a rm a c e u tic a l ra tio n s: $4 m illio n w o rth of im p o rts p re p a ra tio n s : $1. 9 m illio n ( I 9 6 0 ). w o rth of im p o rts . 2) F e r tiliz e r : no d e m e stic production. 2) F e r tiliz e r : D om estic P ro d u ctio n T otal Supply 0 9 K o rean R eco n stru c tio n Bank, In d u stry , p. 301. M edical and p h a rm a c e u tic a l p re p a ra tio n s , and fe r tiliz e r a r e the two m o s t im p o rta n t s e c to rs in the in d u stry , in te r m s of contribution to value added. Soap and d e te rg e n t, and b a s ic ch em icals a lso m ove into im p o rt-s u b stitu tio n as the above two s e c to rs . See, Ibid. , pp. 141-188. C V J Im p o rt-S u b s titu tio n In d u s trie s (C ont'd) I C h a ra c te ris tic s In d u strie s 1958 1966 P e tro le u m and Coal 1) P e tro le u m : no re fin e ry plant. 1) P e tro le u m : the f ir s t r e f i n e ry plant in 1964. Im p o rt- substitution of $10 m illio n annually. * * 2) Coal: no a p p re c ia b le am ounts of exports o r im p o rts during the p erio d due to lo cal fe a tu re s of dem and. Clay, G lass, and Stone. 14 1) C em ent: until 1957, no d o m e s- 1) C em ent: com plete im p o rt- tic production. su b stitu tio n by 1963. No a p p re c ia b le ex p o rts. 2) P la te g l a s s : ^ 2) P la te g la ss: A fter 1962, com plete im p o rt-s u b s ti- ■ ' —i---- = 50% (I960) tution. In 1966, 15% of T otal Supply tQtal p ro d u cts exp0 rted. 1 1Ibid. , pp. 39-40. 12 Bank of K o rea, Input-O utput T able. 13 C em ent and plate g lass a r e the two m o s t im p o rta n t s e c to rs ; o th er s e c to rs also m oved into the sa m e d irec tio n . 14 K o re a n R eco n stru c tio n Bank, In d u s try , pp. 206-207. 15Ibid. , p. 1 9 8 . Im p o rt-S u b s titu tio n In d u s trie s (C ont'd) C h a ra c te ris tic s In d u strie s 1958 1966 16 E le c tric M ach in ery A bsolute am ount of im p o rts d e c re a s e d over the p erio d , and d o m estic production has in c re a s e d by 6 . 8 tim e s betw een I 960 and 1 9 6 6 . M etal P ro d u c ts P ro d u ctio n has in c re a s e d 8 . 7 tim e s betw een I960 and 1966 acc o rd in g to the C ensus, w hile im p o rts have in c re a s e d 6 . 3 tim e s o ver the sa m e period. T ra n s p o rt E quipm ent 18 Output in c re a s e d 7 .4 tim e s betw een I960 and 1966, w hile im p o rts did not in c re a s e ap p rec iab ly over th e p erio d , except for ste e l ship . 19 im p o rts . l 6I b id ., pp. 229-230. K o rean D evelopm ent A sso ciatio n , Study on the F o s te rin g , p. 41. 18 K o rean R eco n stru c tio n Bank, In d u stry , p. 229. 19Ibid. , p. 230. T a b le 1 c E x p o rt In d u strie s C h a ra c te ris tic s In d u strie s 1958 1966 T extiles E x p o rts . . ... ,20 W l u e ^dded = in sig m tic a n t E x p o rts V alue added 71%21 F o o tw ear E x p o rts . . ... ,20 V alue a d d ed ' = in sig n ifican t E x p o rts Value added 81%22 We b a s e our a rg u m e n t on th e fact that, in 1958, to tal ex p o rts of K o rea w e re m e a g e r, ! am ounting to $16 m illio n , w hile they w e re $250 m illio n in 1966. F u r th e r m o re , even in 1962 the m a n u fa c tu rin g -e x p o rts s h a re of to tal exports w as only 18% and the r e s t is co n siste d of p rim a ry p ro d u cts. See, K o rean D evelopm ent A sso ciatio n , Study on th e F o s te rin g , p. 37. 21 K o rean R eco n stru c tio n B ank, In d u s try , p. 18. 22 Bank of K o rea, Y earbook, p. 344. E x p o rt In d u strie s (Cont'd) C h a ra c te ris tic s In d u strie s 1958 1966 Wood and C ork P lyw ood:22 Plywood: E x p o rts _ Tin? D om estic production 0 (1 9 6 1 ) E x p o rts _ 7?% D om estic production (1 9 6 6 ) R ubber E x p o rts . . .c. ,20 ■ = ? — = — -—r-= —r- = in sig n ifican t V alue added s E xports = 6?%24 V alue added K o rean R eco n stru c tio n Bank, In d u stry , p. 297. Plyw ood production c o m p ris e s slightly m o re than h alf of th e to tal value added in wood and co rk in d u stry , acc o rd in g to the 1966 cen su s. 2 4Ibid. , p. 312. 47 Data The b a sic body of data is obtained fro m the K orean c en su ses of m a n u factu rin g fo r the y e a r s , 1958, I960, 1963, and 1 9 6 6 .^ T hese s o u rc e s provide the b a sic data for each of the following s e v e n te en tw o -d ig it m a n u factu rin g in d u strie s : (1 ) food m anu factu rin g ; (2) b ev e ra g e in d u s trie s; (3) m a n u fa c tu re of te x tiles; (4) m an u factu re of footw ear, w earin g ap p a re l and m a d e -u p textile goods; (5) m a n u fa c tu re of wood and cork; (6 ) m a n u fa ctu re of fu rn itu re and fix tu res; (7) m a n u fa ctu re of p ap er and p a p e r pro d u cts; (8 ) printing, publishing, and allied in d u s trie s ; (9 ) m a n u fa c tu re of ru b b e r pro d u cts; (10) m a n u fa c tu re of ch em icals and ch em ical products; (11 ) m a n u fa c tu r e of p e tro leu m and coal pro d u cts; (12 ) m a n u fa c tu re of clay, g la ss, and stone products; (13) b a sic m e ta l in d u strie s; (14) m a n u fa c tu re of m e ta l pro d u cts; (15) m a n u fa c tu re of m a c h in e ry ; (16) m a n u fa c tu re of e le c tric a l m a c h in e ry , ap p ara tu s and appliances; and (17) m a n u fa ctu re of tr a n s p o r t equipm ent. 25 The K orean R e co n stru c tio n Bank, F inal R ep o rt, Census of M ining and M anufacturing (Seoul; P u b lis h e rs a r e the sa m e as the au th o rs, 1959); M in istry of C o m m erce and In d u stry , and K orean R eco n stru c tio n Bank, Census of M ining and M anufacturing, I960 (Seoul: P u b lis h e rs a r e the sa m e as the a u th o rs, 1961); E conom ic Planning B oard and K o rean R eco n stru c tio n Bank, R ep o rt on Mining and M anufacturing C ensus, 1963, 3 V ols. (Seoul : p u b lish e rs a r e the sam e as the a u th o rs, 1964); E conom ic P lanning B o rad and K orean R eco n stru c tio n Bank, R ep o rt on M ining and M anufacturing C ensus, 1966, 3 Vols. (Seoul: p u b lish e rs a r e the sa m e as the a u th o rs, 1967). 48 T he th re e o th e r m anufacturing s e c to rs --to b a c c o m a n u fa c tu re , m a n u fa c tu re of le a th e r and le a th e r p ro d u cts, and m is c e l laneous m a n u fa c tu re s --w e re excluded in the study for the following re a s o n s : (1) T h e re w e re no cen su ses av ailab le for tobacco in 1958 and I960. (2) T h e re w e re too few d e g re e s of freed o m in each census fo r le a th e r. (3) T h ere w as insufficient hom ogeneity in the m isc e lla n e o u s m a n u factu rin g se c to r. The n u m b er of o b serv atio n s on inputs and output in estim atin g in d u stry production function is given by the n u m b e r of p ro v in c e s, i . e . , 10 for 1958 and I960, and 11 for 1966. The 1963 data a r e u sed only in applying fa c to r - s h a r e m ethod to e stim a te production function p a r a m e te r s . The definitions of the v a ria b le s u sed in o u r study a r e as follows: Y - - total output w hich is the value of shipm ents fo r 1958 and I960, and the value of g ro ss output for 1963 and 1966, both in thousand wons. The d ifferen ce betw een the two m e a s u r e s is th e am ount of inventory. M - - in te rm e d ia te input w hich is the su m of the co sts of m a te r ia ls , fu els, e le c tric ity , and for su b co n trac ts of p a r ts , in thousand w ons. V - - value added w hich is total output m inus in te rm e d ia te input in thousand w ons. W - - to tal em p lo y ees' w ages and s a la r ie s in thousand w ons. L - - n u m b e r of em ployees. K - - capital stock w hich is the book v alu e of tangible fixed 49 a s s e ts , i . e . , total value of land, buildings and s tr u c tu re s , m a c h in e ry and equipm ent, and tr a n s p o r t equipm ent in thousand w ons. The A ggregation P ro b le m The production th e o ry in econom ics p e rta in s to an individual f ir m and it is the e n tre p re n e u r of the firm who d e te rm in e s the am ount of output to be pro d u ced , and the am ount of each input to be used. H ow ever, m a c ro o r a g g re g a te production functions a r e often m o re useful than m ic r o o r fir m production functions. To m ak e the concept of the ag g reg a te production function accep tab le as a "production fu n ctio n ," it should p o s se ss the sam e p ro p e rtie s as th o se of a firm production function. The p ro b le m of ag g reg atio n a r is e s at this point. K lein su g g ested th at to get the a g g re g a te o r m a c ro production function and m a rg in a l productivity re la tio n sh ip s, analogous to the m ic ro o r fir m c o u n te rp a rts , it is n e c e s s a ry to c o n s tru c t w eighted g e o m e tric m e a n s of the co rresp o n d in g m ic ro o r firm 26 v a ria b le s . H ow ever, since o u r census data a r e published in the fo rm of to ta ls, not of g e o m e tric m e a n s, we a r e unable to e s tim a te I how m uch a g g reg a tio n e r r o r has been brought into the an aly sis by this ap p ro x im atio n w ith totals of v a ria b le s. j - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - i 26 A. A. W a lte rs, "P ro d u c tio n and C ost F unctions: An E co n o m e tr ic Survey, " E c o n o m e tric a , XXXI (Jan u a ry -A p ril 1963), 8-11. 50 The P ro b le m s in M e a su re m e n t B e sid e s th e p ro b le m of e r r o r s in the v a ria b le s w hich would re s u lt fro m c e rta in deficiencies in o u r c r o s s - s e c tio n census 27 d ata, th e re a r e m o r e fundam ental p ro b le m s in th e definitions of the v a ria b le s u sed , and in th e ir m e a s u re m e n t. We co n sid e r som e of the difficulties in defining and m e a s u re in g la b o r in p u ts, capital in p u ts, and output. The v a ria b le w hich has the le a s t p ro b le m s is the la b o r input (L). H ow ever, it should be re c a lle d th a t (L) is m e a s u re d as the n u m b e r of em p lo y ees (a stock v aria b le) not in te rm s of m a n -h o u rs (the a p p ro p ria te flow v a ria b le ). Only u n d er the a ssu m p tio n th at the flow v a ria b le is so m e co n stan t p ro p o rtio n of the sto ck v a ria b le of la b o r input, w ill this be an a p p ro p ria te m e a s u re of the flow of la b o r s e r v ic e s . It would be m o re d e s ira b le if we could divide la b o r input into its subgroups a cc o rd in g to education o r sk ill le v e l in a c r o s s - sectio n study, o r to ad ju st la b o r input fo r quality change in a tim e - s e r ie s study. F o r ex am p le, G rilic h e s has c o rre c te d la b o r inputs fo r d iffere n ces in quality, in a ti m e - s e r ie s study of the technological change in U. S. a g ric u ltu re , in o r d e r to re d u c e the dow nw ard bias 28 of the m e a s u r e of la b o r input. In a c r o s s - s e c tio n study fo r U. S. 27 G e rh a rd T in tn er, E c o n o m e tric s (New Y ork: John W iley and Sons, 1952), p. 28. 28 Z vi G rilic h e s , "T h e S o u rces of M e a s u re d P ro d u c tiv ity G row th: U nited S tates A g ric u ltu re , 1 9 4 0 -6 0 ," The Jo u rn a l of P o litic a l Econom y, LXXI (August, 1963), 331-346. 51 m a n u fa ctu rin g , he also co n stru cted s ta te -b y -in d u s try q u a lity -o f-th e - 29 la b o r- f o r c e v a ria b le to account fo r d ifferen ces in la b o r productivity. In explaining the in tern a tio n a l p a tte rn of la b o r productivity and w ages, M itchell has shown th at a co n sid era b le p a rt of the d ifferen ces in la b o r productivity and w ages is accounted fo r by differences in skill 30 com position of the la b o r fo rce. H ow ever, due to lack of inform ation, we have had to u se the n u m b e r of em ployees as the m e a s u re of la b o r input in o u r e m p iric a l w ork. The output v a ria b le is m e a s u re d eith e r as the value of to tal output o r value added. Since we a r e dealing w ith a g g reg a te production functions fo r highly ag g reg a ted in d u s trie s , output cannot be m e a s u re d in te rm s of ph y sical un its, as it can be in the ca se of an individual firm producing a single hom ogeneous output. The m o s t se rio u s p ro b lem , how ever, is re la te d w ith the m e a s u r e of capital input. The flow of cap ital s e rv ic e s is the ideal m e a s u r e , but it is difficult to obtain e stim a te s of such m agnitudes. The a lte rn a tiv e is , of c o u rs e , to use cap ital stock data as the m e a s u r e of capital inputs. In this c a se , b esides the p ro b lem of h ete ro g e n e ity of m a c h in e s, equipm ent, and buildings of different 2 9 Zvi G rilic h e s, "P ro d u c tio n Functions in M anufacturing: Som e P re lim in a ry R e su lts, " in the T heory and E m p iric a l A nalysis of P ro d u c tio n , ed. M u rra y B row n (Studies in Incom e and W ealth of the N ational B u reau of E conom ic R e s e a rc h , Vol. XXXI, New Y ork: Colum bia U n iv ersity P r e s s , 1967), p. 282. 30 E dw ard J . M itchell, "Explaining the International P a tte r n of L ab o r P ro d u c tiv ity and W ages: A P ro d u ctio n M odel w ith | 'Two L ab o r Inputs, " The Review of E conom ics and S ta tis tic s , L (N ovem ber 1968), 461-469. 52 v intages, th e re is also the im p o rta n t p ro b lem of ex cess capacity. In tim e - s e r ie s stu d ie s, if th e re a r e p erio d s of su b stan tial u n d e r utilizatio n of cap ital, it is not c o r r e c t to use capital stock as the input v a ria b le , sin ce, fo r the stock v a ria b le to be a m eaningful 31 input m e a s u re , we a s su m e a constant ra te of capacity utilization. Douglas did not continue his U .S . ti m e - s e r ie s studies beyond 32 1922, due to the com plications of ex ce ss capacity. To c o rre c t for capacity u tilization, Solow reduced the m e a s u re d capital stock by the fractio n of the la b o r fo rce unem ployed, a ssu m in g that la b o r and capital alw ays su ffer unem ploym ent to the sa m e 33 d eg ree . Jo rg en so n and G rilich es estim a te d the rela tiv e u tilizatio n of capital fro m the rela tiv e u tilization of pow er 34 s o u rc e s . They arg u ed th at data on the re la tiv e u tilization of e le c tric m o to rs provide an in d icato r of the re la tiv e utilizatio n of capital in m an u factu rin g , since e le c tric m o to rs a r e the predom inant so u rc e of pow er. The p ro b lem of excess capacity in m e a su rin g the capital stock is also ap p are n t in our c r o s s - s e c tio n data, but, with 31 L aw ren ce R. K lein, An Introduction to E co n o m etrics (Englewood C liffs, N. J. : P re n tic e H all, Inc. , 1962), p. 89. 32I b id ., p. 98. 33 R o b ert M. Solow, "T ech n ical Change and the A ggregate P ro d u ctio n F u n c tio n ," The Review of E conom ics and S ta tistic s, XXXIX (August 1957), JUT! 34 D. W. Jo rg en so n and Z. G rilic h e s, "T he Explanation of P ro d u ctiv ity C hange," The Review of E conom ic Studies, XXIV (July, 1967), 264-266. 53 an in su fficien t am ount of in fo rm atio n av ailab le to u s, it w as not p o ssib le to c o r r e c t cap ital stock, as the m e a s u r e of the capital input, for cap acity utilization. T h e o re tic a lly it is alw ays d e s ira b le to use the flow of cap ital s e rv ic e s as the m e a s u r e of cap ital input. F o r in sta n ce, G rilich es has m e a s u re d th e flow of cap ital s e rv ic e s as the su m of in s u ra n c e p re m iu m s , re n ta l p ay m en ts, p ro p e rty taxes paid, d e p re c ia tio n and depletion ch arg ed , and 6 p e r cent of g ro ss book 35 value of cap ital stock. H och a lso co n v erted cap ital stock into se rv ic e flows by an a s s u m e d in te r e s t ra te of 5%, i. e. , the s e rv ic e flow of cap ital input w as m e a s u re d by the sum of d e p re c ia tio n cost and 5 p e r cent of cap ital value. ^ H ow ever, even this sim p le co n v ersio n into the flow v a ria b le w as not p o ssib le due to the non ex isten ce of d e p re c ia tio n data and e x tre m e ly im p e rfe c t capital m a r k e t s . The above d is c u ss io n on the m e a s u r e of capital input m a k e s it c le a r th a t w h eth er we u se the g ro ss book value of capital stock, o r ad ju st it for the c a p a c ity -u tiliz a tio n ra te , o r co n v ert the stock v a ria b le into s e rv ic e flow, the m e a s u re of capital input would be su b ject to a la rg e m a rg in of e r r o r . In o u r e m p iric a l r e s e a r c h , in ste a d of depending on any single m e a s u re w e have applied v ario u s 35 G rilic h e s, "P ro d u c tio n Functions in M anufacturing, " p. 280. 3 6 Irving Hoch, "E s tim a tio n of P ro d u ctio n F unction P a r a m e te r s Com bining T im e -S e rie s and C ro s s-S e c tio n D a ta ," E c o n o m e tric a , XXX (Jan u ary 1962), 34-53. 54 m e a s u re s of the capital input. In this way we m a y be able to red u ce th e d an g er of draw ing false conclusions w hich m ig h t a r is e fro m dependence on a single m e a s u r e of capital input, and te s t the sen sitiv ity of the re s u lts to d iffere n ces in the m e a su re m e n t of capital. F ir s t, we u se the unadjusted book value of the capital sto ck as the m e a s u re . The s ta tis tic s a p p e a r to be fa irly re lia b le and com plete, but fo r the re a so n s given above, the capital stock data m ay not be re p re s e n ta tiv e of the flow of capital s e rv ic e s . Second, we m e a s u re the cap ital input by c a p ita l's s h a re in value added o r g ro ss output. T h ese two v a ria n ts of the m e a s u re of capital inputs a r e the ones w hich have been used in running our r e g re s s io n s . T h ird , we u se the f a c to r - s h a r e ap p ro ach to e s tim a te the coefficients of the capital input u n d er the assu m p tio n s of constant r e tu r n s - to - sc a le and p e rfe c t com petition. L astly , we apply the production function m odel w hich does not re q u ire the u se of capital input data. The re s u lts w hich would a r i s e fro m using v ario u s m e a s u r e s of cap ital input a r e then co m p ared and in te rp re te d in the la tte r p a rt of this ch ap ter. Identification and E stim a tio n of P ro d u ctio n Functions We now co n sid er p ro b lem s of identification and estim atio n in fitting the s ta tis tic a l production functions to each tw o-digit m an u factu rin g in d u stry . In the estim atio n and the identification of th e p a ra m e te rs of the Cobb-D ouglas production functions, the 55 th e econom ic in te rp re ta tio n of re s id u a ls o r d istu rb a n c e te rm s is the 37 key elem en t. Although a p a rt of re sid u a ls m a y be explained by the concepts of econom ic th e o ry , a la rg e p a rt is due to th o se fa c to rs w hich have been excluded fro m the econom ic m o d el, and the 38 d istu rb a n c e is r a th e r a n am e fo r o u r ig n o ran ce. In the following s ta tis tic a l estim atio n of the production functions, we w ill a s s u m e th at the d istu rb a n c e te r m , u, en ters as a ran d o m v a ria b le w ith the 2 n o rm a l d istrib u tio n (O, cr ). The s ta tis tic a l pro d u ctio n function in m u ltip licativ e fo rm i s : V = ALa u o r by lo g a rith m ic tra n sfo rm a tio n , log V = log A+ C L log L. + /3 log K + log u We a s s u m e h e re th a t the independent v a ria b le s , L and K, a r e given constants o r known m a th e m a tic a l v a ria b le s , th a t is , th e re a r e no fe e d -b a c k effects fro m V on L and K, and u is d istrib u te d n o rm a lly , and independently w ith re s p e c t to L and K. In o th e r w o rd s, V is a ra n d o m v a ria b le subject to e r r o r s , but the independent v a ria b le s , L 39 and K, a r e constants w hich a r e not su b ject to e r r o r s , and the 37 M a rc N erlo v e, E stim a tio n and Identification of Cobb- Douglas P ro d u ctio n Functions (A m sterd am : N orth -H o llan d P u b lish in g Com pany, 1965) p. 31. 38 A. A. W a lte rs, An Introduction to E c o n o m e tric s (New Y ork: W. W. N orton & Com pany, 1968), p. 318. _ 39 j T in tn er, E c o n o m e tric s , pp. 27-28. ___ | L ' ' .. j i | 40 d is tu rb a n c e te r m is not tra n s m itte d to inputs. In in d iv id u a l-firm production functions, this assu m p tio n is violated by u se of single equation ap p ro ac h es due to the in te rre la tio n s h ip betw een the production function and th e p ro fit function in an e n tre p re n e u ria l decisio n m aking, 41 and this lead s to the sim u ltan eo u s equation b ia s. H ow ever, in o u r in d u stry production function, the a ssu m p tio n is not v ery re s tr ic tiv e , sin ce th e re is no a p p a re n t feed-back. The G a u ss-M a rk o v th e o re m e n su re s th a t, w ith the above a s su m p tio n s, excluding the n o rm a lity a ssu m p tio n of e r r o r te r m s , th e le a s t- s q u a r e s e s tim a to rs fo r a and (3 a r e b e s t lin e a r u n b ia sed e s tim a to rs . ^ H ow ever, th e a ssu m p tio n of the n o rm a l d istrib u tio n of the d is tu rb a n c e is n e c e s s a r y to conduct t and F te s ts . To se e w h eth er this a ssu m p tio n is m e t in o u r r e g r e s s io n a n a ly sis, 43 we have plotted re sid u a ls fo r so m e ran d o m ly s e le c te d c a s e s . The r e s u lts of plotting e r r o r te r m s s e e m to su g g est th a t the a ssu m p tio n of the n o rm a l d istrib u tio n of the e r r o r te rm s is not se rio u sly ^ Y a i r M undlak and Irving Hoch, "C onsequences of A lte rn a tiv e S pecifications in E stim a tio n of Cobb-D ouglas P ro d u ctio n F u n c tio n s ," E c o n o m e tric a , XXXIII (O ctober 1965), 814-828. 41 S ee, J . M a rsc h a k and W. H. A n d rew s, "R andom Sim ultaneous Equations and the T h e o ry of P ro d u ctio n , " E c o n o m e tric a , XII (Ju ly -O cto b er 1944), 143-205. 42 • ■ i A lex an d er M. M ood and F ra n k lin A. G ray b ill, Introduction to the T h eo ry of S ta tis tic s , Second edition (New Y ork: M cG raw -H ill, 1963), p. 341. ! 43 i F o r the m eth o d of plotting re s id u a ls , se e N o rm an R. D ra p e r and H a rry S m ith, A pplied R e g re s s io n A nalysis (New Y ork: j W iley, 1966), pp. 87-88. I 57 violated in our e m p iric a l a n a ly sis , and th e re fo re , cannot be re je c te d , c o n sid erin g the s m a ll sam p le size of 10 o r 1 1 . B e fo re d isc u ssin g an a lte rn a tiv e m e a s u re for estim atio n of the production function p a r a m e te r s , we co n sid er one re la te d s ta tis tic a l p ro b lem . When we fit the Cobb-D ouglas function to c r o s s - s e c tio n data, two inputs, la b o r and capital tend to change prop o rtio n ately ? i. e . , la b o r and cap ital w ill be highly c o rre la te d . This is a c la s s ic c a se of m u ltic o llin e a rity w h e re it is not p o ssib le to find the individual r e g r e s s io n coefficients w ith sufficient 44 a c c u ra c y . H ow ever, m u ltic o llin e a rity is not n e c e s s a rily a se rio u s p ro b le m u n less it is high re la tiv e to the o v erall d e g re e of m u ltip le c o rre la tio n am ong all v a ria b le s sim u ltan eo u sly . Thus, production functions w ith o v e r-a ll c o rre la tio n s m u ch in ex ce ss of 0.95, as often o c c u r in p ra c tic e , can be w ell estim a te d with 45 m u ltic o llin e a rity betw een two inputs as high as 0. 8 to 0 . 9. If production function p a r a m e te r s a r e not w ell e stim ated due to m u ltic o llin e a rity , we would find high sam pling e r r o r s of the e stim a te d p a r a m e te r s . The a lte rn a tiv e e stim a tio n p ro c e d u re for the le a s t- s q u a r e ap p ro ac h in estim atin g the p a r a m e te r s of the production functions is the f a c to r - s h a r e m ethod w hich does not involve any s ta tis tic a l p ro b le m s for e stim a tio n and identification. U nder the assu m p tio n s of constant r e tu r n s - to - s c a le and p e rfe c t com petition in both facto r 44 T in tn er, E c o n o m e tric s , P. 33 45 ; K lein, Introduction, p. 101.________________________________ 58 and goods m a rk e ts , the m a rg in a l p ro d u cts of cap ital and la b o r in th e C obb-D ouglas function a r e re sp e c tiv e ly , BY V . - _L • a dL, L B Y _ V . o d L ” K In eq u ilib riu m , the m a rg in a l pro d u cts of la b o r and cap ital a r e equal to the re a l w age of la b o r and the re n ta l r a te on capital: a = % L p V. j8 = £ K p T hen, a and /3 can be e stim a te d fro m the following re la tio n s, as la b o r and cap ital s h a re s in value added. w L a 1 3 = PV rK PV T e s t of the C obb-D ouglas P ro d u ctio n F unction In this sectio n we te s t the a ssu m p tio n th a t th e Cobb- Douglas production function is a re a s o n a b le ap p ro x im atio n of re a lity jby estim atin g th e e la stic ity of substitution, and a lso by em ploying 59 a m o re g e n e ra l type of production fu n c tio n --th e tra n sc e n d e n ta l lo g a rith m ic production function w hich includes the Cobb-D ouglas production function as a s p e c ia l c a se . E s tim a tio n of th e E la s tic ity of Substitution, U sing M arg in al P ro d u c tiv ity of L a b o r R elatio n sh ip . We w ill te s t th e validity of the Cobb-D ouglas production function by te stin g one of its p ro p e rtie s , th a t the ela stic ity of su b stitu tio n betw een la b o r and cap ital is , unity. The e la stic ity of su b stitu tio n w ill be e stim a te d fro m th e m a rg in a l p ro d u ctiv ity of la b o r re la tio n sh ip u n d er the a ssu m p tio n s th a t th e re is p e rfe c t com petition 46 in both fa c to r and goods m a rk e t, and co n stan t r e tu r n s - to - s c a le . The e stim a tin g function is , V A W log = a + b log -j- + u A w h e re a and u a r e in te r m s of lo g a rith m s, and b is the e stim a te of the e la s tic ity of substitution. A The e s tim a te s of the e la s tic ity of su b stitu tio n , b, for th r e e c r o s s - s e c tio n census y e a r s , 1958, I960, and 1966, a r e shown in T able 2, w ith th e ir s ta n d a rd e r r o r s in the b ra c k e ts and the 2 coefficients of m u ltip le d ete rm in a tio n , R . The d e g re e s of freed o m 46 K enneth J . A rro w , H ollis B. C henery, B. S. M inhas, and R o b e rt M. Solow, " C a p ita l-L a b o r S ubstitution and E conom ic E ffic ien cy , " The R e v ie w of E co n o m ics and S ta tis tic s , XXXXIH '(August 1961), 225-250. __ 60 T able 2 C ro ss-S e c tio n E s tim a te s of the E la stic ity of Substitution in T w o-D igit M anufacturing In d u strie s (Using the M arg in al P ro d u ctiv ity of L ab o r R elationship) E la stic ity In d u strie s 1958 I 960 1966 A b R2 A b R2 2 b R Food 0.99551 (0. 25557) 0.6548 1. 11589 (0. 42236) 0.4660 1.60659 0.5971 (0.43993) B ev erag e 1.33321 (0. 17081) 0.5638 2.20486* (0.44628) 0.7532 2. 04834*0. 8182 (0. 32181) T extiles 1 . 50958* (0.17081) 0.9071 0.96756 (0 . 31069) 0. 5480 0.99440 0.6044 (0. 26817) F o o tw ear, & W earing A pparel 0. 95242 (0.20422) 0.7311 1.25405 (0. 22123) 0. 8007 0.93332 0. 6174 (0. 24490) Wood & C ork 0. 834556 (0. 53761) 0.23156 0. 030876' (0.21569) 0 . 00266 0. 168756*0. 02106 (0. 38400) F u rn itu re 0.98333 (0. 32093) 0 .5399 1.28349 (0. 30696) 0.6861 1.36537 0.8432 (0 . 1 9 6 2 6 ) P a p e r 1 . 17679 (0.28518) 0.7087 1.21603 (0.48838) 0.4697 1.54694 0.5298 (0 . 51529) P rin tin g 0.83167 (0. 32174) 0.4551 0 . 93909 (0. 15330) 0.8243 0. 709716 0.27886 (0. 38048) i _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Table 2 (Cont'd) 61 E la stic ity In d u strie s 1958 1960 1966 R ubber A 2 b R iA b R b R2 1.37111 0.7923 (0. 35098) 0. 52697A 0 . 2312A (0.42971) 0. 70836A 0. 3755A (0. 34525) C hem icals 1.14450 0.8475 (0 . 17162) 0.70915 0.6243 (0..22461) 1.07038 0.9318 (0. 10236) P e tro le u m & Coal 1.02227 0.5521 (0. 34801) 0.87434 0.5736 (0.28493) 2 .29019* 0 . 9647 (0. 14604) Clay, G lass & Stone 1.33471 0.8098 (0.22866) 1.57367 0.6157 (0. 43958) 2.46034* 0.7738 (0.44335) B a sic M etal 0 . 32891A 0. 1139A (0.34670) 1.76737* 0.8106 (0. 34876) 1.24237 0.8282 (0. 21384) M etal P ro d u c ts 1.08262 0. 6142 (0. 30336) 1.24591 0. 5169 (0.42585) 0. 92652A 0. 2301A (0.56496) M achinery 0.79357 0.4623 (0. 32348) 0. 64877. A0. 0337^ (1.22846) 0. 71242a 0.2946^ (0.36748) E le c tric a l M ach in ery ----- ----- 1.12737 0.8865 (0. 20165) 1.93237* 0.8448 (0.33807) T ra n s p o rt E quipm ent 0.70097 0.4000 (0. 30351) 0 . 36163A 0.1299^ (0. 33087 ) 0.99415 0.5814 (0.28120) 62 a r e m o s tly 8 fo r 1958 and I960, and 9 for 1966, w hich w e re c a lc u lated as (n-2). The goodness of fit has b een evaluated by the an aly sis 47 of v a ria n c e , and only in 11 c a se s out of 50, the hypothesis of no re la tio n betw een th e two v a rib a le s has not been re je c te d , using the F s ta tis tic a t 95 p e r cent confidence lev el. The m a rk A is placed 2 a t th e u p p er rig h t-h a n d c o rn e r of the value of R to show no re la tio n betw een the two v a ria b le s . The significance te s t of the e s tim a te s , b, has a lso been p e rfo rm e d , using the t s ta tis tic a t 95 p e r cent confidence in te rv a l. H ow ever, u n d er the b iv a ria te re g re s s io n , the a n a ly sis of v a ria n c e and the significance te s t fo r the e stim a te 48 of the coefficient a r e fully equivalent, and, thus, also in 11 c a s e s , the e s tim a te s of 6 a r e not significantly d ifferen t fro m 0. The in sig n ifican t e s tim a te s have the m a rk A on the u p p er rig h t-h an d c o rn e r. The u ltim a te p u rp o se of the e stim a tio n of the e la stic ity of su b stitu tio n is to te s t w h eth er the e s tim a te s a r e significantly d iffe re n t fro m unity, and, th e re b y , to te s t the validity of the Cobb- D ouglas production function. The e stim a te s w hich a r e significantly d iffere n t fro m unity a t 95 p e r cent confidence in te rv a l, have the A m a rk * on th e ir u p p er rig h t-h a n d c o rn e r. Only 9 e stim a te s of b a r e significantly d iffere n t fro m unity, and this su p p o rts o u r u se of th e Cobb-D ouglas production function. 47 i J . Jo hnston, E co n o m etric M ethods (New Y ork: M cG raw - H ill, 1963), pp. 32-34. 48 1 E d w ard J . K ane, E conom ic S ta tistic s and E c o n o m e tric s: I An Introduction to Q uantitative E conom ics (New Y ork: H a rp e r & Row, ! T% ' 81T p . 2T2.~______ | 63 E stim a tio n of the E la stic ity of Substitution, U sing M arg in al P ro d u ctiv ity of C apital R elationship T he e la stic ity of substitu tio n can a lso be e stim a te d fro m the m a rg in a l productivity of capital re la tio n sh ip u n d er the assu m p tio n s th a t th e re is p e rfe c t com petition and co n stan t r e tu r n s - to - s c a le . The e la stic ity , e stim a te d fro m this a p p ro ac h , should not b e significantly d iffere n t fro m the one e stim a te d by using the m a rg in a l productivity 49 of la b o r re la tio n sh ip . We now fit the following equation: V , V-W , log g = a + c log + u w h e re c is the e stim a te of the e la stic ity of su b stitu tio n betw een la b o r and cap ital. The e stim a te s of the e la stic ity , c, w ith th e ir sta n d a rd 2 e r r o r s in the b ra c k e ts , and R a r e shown in T able 3. As in T able 2, the re s u lts of th r e e se ts of te s ts a r e in d icated by th e sa m e m a rk s . The hypothesis of no c o rre la tio n has not been re je c te d in 15 c a se s out of 34, and also in 15 c a se s c is not significantly d iffere n t fro m 0 . This shows th a t goodness of fit is p oor co m p ared A to the p rev io u s one. F u rth e rm o re , the e s tim a te s , c, have negative signs in m o s t r e g r e s s io n s , w hich a r e not com patible w ith j econom ic th e o ry . U nder th e se c irc u m s ta n c e s , the te s t of c = 1 j is not m eaningful. ! | i ■ _______________ I 49 P . J . D h ry m es, "Som e E x ten sio n s and T e sts for the CES C lass of P ro d u ctio n F unctions, " The R eview of E conom ics and S ta tis tic s, XXXXVII (N ovem ber 1965), 357. 64 T able 3 C ro s s-S e c tio n E s tim a te s of the E la s tic ity of Substitution in T w o-D igit M anufacturing In d u strie s (Using the M arg in al P ro d u c tiv ity of C apital R elationship) E la s tic ity In d u strie s 1960 1966 A c R 2 A C R2 Food -3. 80739^ (2.22982) 0. 2671A -3. 11676* (1. 64805) 0.2 8 4 4 A B e v e ra g e -1 .8 8 8 4 3 * (1.39648) 0 . 1861 A -2.9 8 2 8 3 (1. 04276) 0.4762 T extiles -0. 72493a (0. 65143) 0.1340* -1. 75826 * (0.29424) 0.7987 F o o tw ear & W ear A pparel - 0 . 47365* (0. 25228) 0. 3058* -1.3 0 1 5 9 (0. 24215) 0.7625 Wood &Cork -0.30372** (0 . 17209) 0 . 280$ -2.18142 (0.53840) 0 . 6459 F u rn itu re -0.60863 (0.18895) 0.5646 -2 .06389* (0. 23372) 0. 8965 P a p e r -0.80878 (0.23804) 0.6225 -0 .2 5 8 8 3 * (0.45996) 0.0381* P rin tin g -0.71853 (0.12886) 0. 7954 -1.23092 (0. 33003) 0.6072 T able 3 (Cont'd) E la stic ity In d u strie s 1960 1966 R2 c R 2 R ubber -0 .2 2 5 7 0 A 0.0243A (0. 63990) -0.9 0 4 9 7 0.7782 (0 . 1 8 2 6 0 ) C hem icals -3 .70838* 0. 7676 (0. 83304) -2 .82966* 0.8152 (0.47631) P e tro le u m & Coal -0.6 1 3 1 6 0.5196 (0.22284) 0.08104 A 0 . 0027A (0.51875) Clay, G lass, & Stone - 0 . 38407A * 0 . 3927A (0 . 16888) -0.92681 0.4839 (0. 31906) B a sic M etal -0. 69370 0.5760 (0.24298) -1.18948^ 0 . 2561A (0.76624) M etal P ro d u cts - 0 . 31111* 0. 7339 (0. 06623) -1. 06046 0.5538 (0. 31727) M achinery - 0 . 43835A 0. 2002A (0 . 30979) -2 .8 6 2 4 1 * 0. 7783 (0. 50920) E le c tric a l M achinery -0. 98746 A 0.3547A (0 . 66599) -0.8 4 6 2 8 0.7656 (0.19115) T ra n s p o rt E quipm ent -0.86465^ 0.3936^ (0.37945) -1.28239^ 0. 3591^ (0.57112) 66 T ra n sc e n d e n ta l L o g arith m ic P ro d u ctio n Function We now te s t the a s s u m p tio n of th e Cobb-D ouglas production function by e stim a tin g a m o re g en era l type of the production function. The tra n s c e n d e n ta l lo g a rith m ic production function o r the tr a n s - 50 log production function is defined in the two fa c to r m odel as: V = ALa Ke ■ L * S 1oS K . u T ra n s fo rm in g into the additive fo rm by taking lo g a rith m s, log V = log A + a log L +/3 log K + ^ 8 log K ■ log L + log u w h e re K is m e a s u re d as th e capital 's s h a re in value added. If the e s tim a te s of th e coefficient 8 a r e not significantly d iffere n t fro m 0 , the function re d u c e s to the C obb-D ouglas production function. T able 4 shows e s tim a te s of th e coefficients of the tr a n s - log production function, w ith th e ir sta n d a rd e r r o r s , fo r I 960 and 1 9 6 6 . 2 R is o v er . 99 in m o s t c a s e s , and it is significant a t 95 p e r cent confidence in te rv a l. O ver h alf of the e s tim a te s , a > /§ » 8 a r e in sig n ifican t at 95 p e r cent confidence in te rv a l. The in sig n ifican t e s tim a te s at 95 p e r cent lev el a r e shown w ith A m a rk s a t the u p p er rig h t-h a n d c o rn e r as b efo re. C oncerning the e stim a te s of 8 > in only th re e c a s e s , 8 is significantly d iffere n t fro m 0 , and they 50 D. W. J o rg e n so n , L. R. C h riste n se n , and L. J . Lau. "C onjugate D uality and the T ra n sc e n d e n ta l L o g a rith m ic Function. " (M im eographed), not dated, p. 22. T able 4 C ro s s-S e c tio n E s tim a te s of th e P a r a m e te r s of T ra n sc e n d e n ta l L o g arith m ic P ro d u ctio n Functions P a r a m e te r s In d u strie s I 960 1966 a /3 8 a £ 8 Food - 1 . 35262A -0. 15457A 0.12863* -0. 11545;A 0.69138 0. 02014-^ (0.67166) (0.30278) (0 . 04729) (0 . 16591) (0.09972) (0. 01230) B ev era g e -0. 09064^ 0.78660 0 . 01643A -0 .1 8 3 2 9 ^ 0.76897 0 .0 2 0 4 5 A (0. 11593) (0. 06504) (0. 01063) (0. 21197) (0.13588) (0. 01683) T extiles 0. 16748^ (0. 13680) 0.62662 (0. 14674) 0 . 01272A (0. 01383) 0 . 1 9 1 9 6 A (0. 08996) 0.74582 (0. 06125) 0 . 00414A (0. 00431) F o o tw ear & W earing A pparel 0. 08445^ (0 . 15689) 0.67747 (0 . 1 1 2 0 0 ) 0.01582 A (0 . 00789) 0.22062^ (0. 10570) 0 .77479 (0. 09474) 0.00108 A (0. 00646) Wood & C ork 0.74670 A 0 . 85711A -0 .0 4 2 4 5 A 0.18563 0. 68538 0.00820^ (0. 36276) (0.44578) (0. 05233) (0. 07494). (0. 10016) (0 . 00849) T abie 4 (Cont'd) P a r a m e te r s I 960 1966 In d u strie s A a $ S A a 0 A s F u rn itu re 0. 10997 A 0 . 39659 0. 03665A 0 . 07590A 0.67778 0. 01553 A (0. 22675) (0.07835) (0. 01617) (0. 09596) (0. 04876) (0. 00698) P a p e r 0. 05714 A 0 . 31441A 0 . 04367A 0.33470 A 0.79014 - 0 . 00690A (0.26284) (0.16472) (0 . 0 2 2 9 0 ) (0. 28063) (0. 15436) (0 . 02239) P rin tin g 0. 26725A 0.52385 0. 01781A 0 .2 7 8 4 8 A 0. 47325 0 .0 1 5 3 3 A (0. 20729) (0. 18976) (0 . 01802) (0. 16431) (0 . 08090) (0.01053) R ubber 0 . 05965A 0 .52619 0 . 02587A 0 . 07317A 0.63992 0.01695 A (0.19356) (0.21238) (0. 02207) (0.20066) (0 . 0 9 2 1 2 ) (0. 01053) C hem icals -1. 53374A 0 . 01520A 0 .1 3 1 6 0 A 0 .2 0 1 3 3 A 1.05398 - 0 .0 1 2 7 9 A (0. 85630) (0. 58351) (0. 07331) (0 . 14279) (0.08375) (0. 01051) P e tro le u m & 0.30714 A 0.71308 ------------ 0. 04923A 0.87105 0. 00272^ Coal (0. 13081) (0. 10737) (0. 15134) (0 . 10869) (0. 01446) T able 4 (Cont'd) P a r a m e te r s In d u stries I 960 1966 Clay, G lass, & Stone A A a /3 8 A A A a /3 8 0.38819 0 . 92445 - 0 .0 2 0 9 ^ (0.14139) (0.08753) (0.01317) 0. 18671 0.81634 -0.00155 ^ (0.07574) (0.05365) (0. 00704) B asic M etal 0.59576A 0. 77678 -0 .0 2 2 7 4 A (0.46796) (0.34644) (0.05020) 0. 15488A 0.84570 (0. 09613) (0.06759) M etal P ro d u cts 0. 30536A 0. 77858 - 0 .0 0 6 0 7 A (0. 26028) (0. 17955) (0. 02505) 0. 04637 A 0. 66443 0. 01484* (0. 05651) (0. 02728) (0.00306) M achinery 1. 02592 ----- 0.00302* (0.05037) (0.00096) 0 . 23076A 0.49581 0.01615^ (0. 16997) (0.13486) (0.01401) E le c tric a l M ach in ery 0. 30763A 0. 95691A - 0 . 01386A (0.59698) (0.51792) (0.07337) 0. 13811 0. 76598 0. 00469A (0.16082) (0.07259) (0.01155) T ra n s p o rt E quipm ent 0.78399 0 . 64804 - 0 . 02218A (0.29321) (0.17645) (0.02705) 0.27229 0.59483 0 .0 0 9 4 9 A (0.09207) (0.12958) (0.00905) 70 a r e shown w ith the m a rk * at the u p p er rig h t-h an d c o rn e r. The r e s t of the e stim a te s of 8 is in sig n ifican t a t 95 p e r cent level. The re s u lt se e m s to su p p o rt the u se of Cobb-D ouglas functions to som e extent. The f ir s t te s t of the validity of Cobb-D ouglas production functions by e stim a tin g th e e la stic ity using m a rg in a l pro d u ctiv ity of la b o r re la tio n sh ip , and the th ird te s t by e stim a tin g the m o re g e n e ra l tra n s c e n d e n ta l function, s e e m to su p p o rt our u se of the Cobb-D ouglas function. In the f ir s t te s t, only 9 e stim a te s of the e la stic ity of su b stitu tio n out of 50 w e re significantly d ifferen t fro m 1 a t the 95 p e r cent confidence in te rv a l, and in the th ird te s t, only 3 e s tim a te s of 8 am ong 32 w e re significantly d iffere n t fro m O a t the sa m e confidence in te rv a l. The f ir s t te s t is m o re stro n g in the s e n se th a t m o s t e s tim a te s of the coefficient b, the ela stic ity of su b stitu tio n a r e significant a t the 95 p e r cent confidence level. T e s t of the H ypothesis on E fficiency S tartin g w ith this sectio n and in the next th re e se c tio n s, we te s t o u r four h ypotheses on efficiency, r e tu r n s - to - s c a l e , capital in te n sity , and in te rm e d ia te -in p u t saving. F ir s t, in this sectio n , we : te s t the hypothesis on the ra te and d ire c tio n of the change in the j efficiency c h a r a c te r is tic of technology in th re e d iffere n t s e c to rs of j the econom y: the r a te of in c re a s e in efficiency p a r a m e te r , A, o v e r- j ; | tim e , would be g r e a te s t in im p o rt-s u b stitu tio n in d u s trie s , followed ! 71 by export in d u s trie s , and low est in h o m e-goods in d u s trie s . As we have m entioned e a rly in this ch a p te r, we w ill r e ly on s e v e ra l m e a s u r e s of the capital input to evade the dependence on any single * •* 51 m e a s u r e of it. C ap tial's S h are as the M e a su re of Capital In this f ir s t v a ria n t, we em ploy c a p ita l's s h a re as the m e a s u r e of cap ital input in estim atin g th r e e c r o s s - s e c tio n in d u stry production functions fo r 1958, I960, and 1966. E stim a tio n of th re e c r o s s - s e c tio n production functions is n e c e s s a r y to study the ra te and d ire c tio n of the change in the efficiency c h a r a c te r is tic of the technology, A, o v e r-tim e . The estim atin g production function is , log V = log A + a log L + 1 3 log K + log u The e s tim a te s of th e efficiency p a r a m e te r A fo r 1958, I960, and 1966, a r e p re s e n te d in the f ir s t colum n of T able 5, w ith o th er p a ra m e te r ex tim ates for fu tu re u se . The goodness of fit has been evaluated by the an aly sis of v a ria n c e , and the hypothesis of no c o rre la tio n has been re je c te d a t 99 p e r cent confidence in te rv a l in all the re g re s s io n s . To p e rfo rm the te stin g of the hypothesis on the r a te and I th e d ire c tio n of change in the efficiency p a r a m e te r A, we f ir s t divide th e value for by th a t for A ^ ^ g , and c alcu la te the p e rc e n ta g e 51 B esid es th e following m e a s u re s of cap ital, we have a lso • tr i e d w ith pow er equipm ent, but, due to la rg e m e a s u re m e n t e r r o r in o rig in al census data, the re s u lt w as sp u rio u s. 72 T able 5 C ro s s-S e c tio n E s tim a te s of the P a r a m e te r s of Cobb-D ouglas P ro d u ctio n F unctions, U sing C a p ita l's S h are P a r a m e te r s Y e a rs In d u strie s A A A a A £ & _ A 6 1958 3. 03 0.20255 (0. 08522) 0.80137 (0. 07044) 0.25275 Food I960 4. 61 0. 40188* (0. 25930) 0. 63298 (0. 12264) 0.63490* 1966 2. 63 0.15422 (0 . 0 2 2 2 2 ) 0.85316 (0. 01493) 0.18076 1958 4. 16 0.08989* (0. 06107) 0.84499 (0. 04063) 0.10637* B e v e ra g e I 960 2. 75 0.08408 (0 . 02818) 0.88282 (0. 02063) 0. 09524 1966 1 . 62 0. 07398 (0 . 01118) 0.93376 (0. 00917) 0.07922 1958 3. 54 0.38440 (0. 06738) 0.65933 (0 . 04419) 0.58301 T ex tiles 1960 2 . 92 0.27743 (0. 06581) 0.75183 (0. 05420) 0 .36900 1966 3. 66 0.25245 (0. 06384) 0 .76779 (0. 05652) 0.32880 F o o tw ear & 1958 4. 56 0.32243 (0.13872) 0.69702 (0 . 11861) 0.46258 W earing A p p arel I 960 3. 56 0 .22516* (0. 16780) 0.77686 (0 . 1 2 0 1 0 ) 0.28983* 1966 3. 55 0.23068 (0. 08155) 0. 78456 (0. 06997) 0.29402 *Shows in sig n ifican t e s tim a te s a t 95 p e r cent confidence in te rv a l. T able 5 (Cont'd) 73 P a r a m e te r s In d u stries Y e a rs A A A a A A a A 0 1958 4. 05 0.32294 (0. 03956) 0.70757 (0. 04700) 0.45640 Wood & C ork 1960 12. 4 0 .48569 (0. 16325) 0.51081 (0.124 93) 0.95082 1966 3 .8 4 0. 24724 (0.03915) 0.77428 (0.03932) 0.31931 1958 9. 80 0.57672 (0 . 1 2 0 6 0 ) 0. 45882 (0. 09702) 1.25696 F u rn itu re I 960 7. 06 0.57234 (0. 12497) 0.49167 (0 . 08349) 1.16407 1966 4. 82 0 .26369 (0. 05574) 0. 74614 (0.04626) 0.35340 1958 6 . 04 0 . 76119 (0. 28203) 0.36880 (0. 16095) 2.06396 P a p e r 1960 5. 92 0 . 46979 (0 . 17891) 0.57646 (0. 10891) 0.81495 1966 5. 46 0. 25532 (0. 10418) 0.74673 (0.05904) 0 .34191 1958 5. 55 0.58013 (0 . 0 6 1 0 2 ) 0.50564 (0. 05307) 1.14731 P rin tin g I 960 3. 38 0.40873 (0. 14973) 0.67291 (0. 11506) 0.60740 1966 8 . 84 0.49581 (0. 07324) 0.56018 (0. 05826) 0.88509 74 T able 5 (Cont'd) P a r a m e te r s A A A a A In d u stries Y e a rs A a £ £ 1958 4 .26 0.42468 (0. 12277) 0.62290 (0 . 08682) 0.68177 R ubber I 960 4. 92 0.25017 (0 . 10986) 0.73524 (0. 12053) 0.34025 1966 7. 19 0.35100 (0. 11507) 0.65825 (0 . 10282) 0.53323 1958 1 .8 8 0. 28753 (0. 05240) 0.78992 (0.03605) 0.36399 C hem icals I 960 3.51 -0 .10625* (0. 38174) 0.98765 (0. 26063) -0.10757* 1966 1. 76 0. 03503* (0. 04283) 0.95797 (0 . 0 2 9 0 6 ) 0.03656* 1958 5. 82 0.38444 (0. 09829) 0.62731 (0. 08731) 0.61283 P e tro le u m & Coal I 960 4. 06 0.30714 (0. 13081) 0.71308 (0. 10737) 0.43072 1966 3. 12 0.07720 (0. 02768) 0.89135 (0.01383) 0.8661 1958 2. 04 0.34503 (0. 08623) 0.75323 (0. 04840) 0.45806 Clay, G lass, & Stone I 960 4. 07 0. 18831 (0. 07130) 0.80000 (0. 04314) 0.23538 1966 4. 99 0.17128 (0. 02673) 0.80538 (0. 01855) 0.21266 B asic M etal 1960 6 . 87 0.38955 (0. 09955) 0. 62386 (0. 07147) 0.62441 1966 3.26 0.15488* (0.09613) 0.84570 (0 . 06759) 0.18313* 75 T able 5 (Cont'd) P a r a m e te r s In d u strie s Y e a rs A A A a A (3 A a A /3 M etal 1958 4. 32 0. 40453 (0 . 11081) 0. 64536 (0 . 08249) 0.62682 P ro d u c ts I 960 4. 62 0.24816 (0 . 1 0 2 2 2 ) 0.73902 (0. 06967) 0 . 33579. 1966 7. 15 0 . 28199 (0. 05629) 0.70017 (0.05128) 0.40274 1958 M ach in e ry 1966 7 .8 0 0.36249 (0. 12528) 9 .00 0.39216 (0. 09841) 0.62134 0.58340 (0. 11744) 0. 61892 0.63361 (0. 08407) E le c tric a l 1958 4. 13 M ach in e ry I 960 1. 96 1966 4. 33 0.30512 0.71879 0.42449 (0.06608) (0. 05961) 0.19643 0.86062 0.22824 (0.08101) (0.07491 ) 0.20164 0.79353 0.25410 (0.03368) (0. 02346) 1958 T ra n s p o rt E q uipm ent I960 1966 8 . 09 0.62320 (0. 08422) 5. 64 0. 56246 (0. 11143) 4. 94 0. 32295 (0. 07883) 0.44602 1.39724 (0.07353) 0.52726 1. 06676 (0.09492) 0. 71146 0.45392 (0.06674) 76 r a te of in c re a s e o r d e c re a s e in A betw een 1958 and 1966. T hese values a r e shown in T able 6 . It has negative signs in 9 in d u strie s out of 1 6 , and th is m e an s th at in 9 in d u strie s the efficiency lev el h as d e c re a s e d betw een 1958 and 1966. It a lso shows a wide deviation fro m a 145% in c re a s e in efficiency of clay, g la ss, and stone p ro d u c ts, to a 61% d e c re a s e in efficiency of b e v e ra g e in d u stry o v e r th e p erio d . This re s u lt se e m s to in d icate th a t the e s tim a te s of th e efficiency p a r a m e te r A a r e quite u n stab le and in c o n siste n t w ith econom ic th e o ry in the s e n se th a t it has m an y negative signs. The conclusion m a y be draw n, w ithout te stin g the sig n ifican ce of the e s tim a te s of the efficiency p a ra m e te r A, th a t it would be d e s ira b le to e x p e rim e n t w ith o th e r v a ria n ts fo r calculating n e u tra l technological change. P ooling of T im e -S e rie s of C ro ss-S e c tio n D ata, w ith Capital Stock as the M e a su re of the C apital Input In this second v a ria n t, we have in c re a s e d d e g re e s of fre e d o m by pooling ti m e - s e r ie s of two c r o s s - s e c tio n data fo r I 960 and 1 9 6 6 , w ith un ad ju sted capital stock as the m e a s u re of the cap ital input. The dum m y v a ria b le is in s e rte d into the Cobb-D ouglas production function to find out the ra te and d ire c tio n of the change in the efficiency p a r a m e te r A. The production function is in the i following fo rm : i 1 1 1 log V = log A + a log L > + jB log K + dX + log u J 77 T able 6 The R ate of In c re a s e in the E fficiency P a r a m e t e r , ■ ' A A ' At U sing C ro s s-S e c tio n E s tim a te s w ith C a p ita l's S h are E s tim a te s In d u s trie s LA A t Food B ev era g e F u rn itu re P rin tin g B a sic M etal M ach in ery (H) -13% - 61 % - 51% 59% 15% P a p e r C hem icals P e tro le u m & Coal Clay, G lass & Stone M etal P ro d u c ts E le c tric a l M ach in ery T ra n s p o rt E quipm ent (M) -9% - 6% -46% 145% 66 % 5% -39% T ex tiles F ootw ear Wood & C ork R ubber (X) 3% -22% -5% 69% 78 w h e re X is a dum m y v a ria b le w hich tak es the value of O fo r i960 and 1 fo r 1966. The function m a y w ell be d e s c rib e d in a sim p le g rap h , as in F ig u re 4. F ig u re 4 P ro d u ctio n F unctions w ith a D um m y V ariab le log V log V = log A + a lo g L + piogK + d (1966) A+d log V = LogA + alo g L + pLogK (I960) log L,. log K The d ia g ra m c le a rly shows the n e u tra l technological change betw een i I 960 and 1 9 6 6 , and it is e x p re s s e d by the dum m y v a ria b le coefficient d . The estim a tio n re s u lts of the function a r e shown in Table j 7. The goodness of fit has been evaluated by the an aly sis of j I v a ria n c e and the hypothesis of no c o rre la tio n w as re je c te d a t 99 j j p e r cent confidence le v el in all r e g r e s s io n s . i To p e rfo rm the te stin g , th e ra te of in c re a s e o r d e c re a s e j in the efficiency p a r a m e te r A betw een I960 and 1966 w as I calcu lated as ^ , and then m u ltip lied by 100 to get the p erce n tag e T able 7 T im e -S e rie s of C ro s s-S e c tio n E s tim a te s of th e P a r a m e te r s of C obb-D ouglas P ro d u ctio n F u n ctio n s, U sing C apital Stock P a r a m e te r s In d u stries A A a A £ A d R2 Food 0. 251 0.62655* (0.34518) 0.67086 (0.27394) 0. 36926* (0. 31708) 0. 9151 B ev era g e 5.41 0.43882* (0. 30083) 0 . 6 0 6 6 8 (0.25889) 0.64622* (0. 36971) 0 . 889 T ex tiles 6 . 60 0.74741 (0.25730) 0.33418* (0.22128) 0. 70270 (0. 27409) 0.9771 F o o tw ear, and W earing A pparel 6 . 19 0.86374 (0. 18973) 0 .30961* (0. 16492) 0.28114* (0. 21130) 0.9885 Wood and C ork 6 . 73 0.47156 (0. 12448) 0.54804 (0. 10730) 0.13785* (0 . 20080) 0. 9748 F u rn itu re 5. 10 0.91878 (0. 15675) 0.27973* (0 . 14619) 0. 59656 (0 . 21791) 0 . 9829 ^in d icates in sig n ifican t e s tim a te s a t a = 5% . T able 7 (Cont'd) P a r a m e te r s In d u stries A A a £ « A d R2 P a p e r 1. 64 0.94160 (0 . 2 0 6 0 0 ) 0 .39112 (0. 14527) 0. 62599 (0. 26805) 0.9741 P rin tin g 5.42 0.80803 (0. 14205) 0.32541 (0 . 1 0 9 2 0 ) 0.72938 (0. 18648) 0.9834 R ubber 6 . 70 0.44153* (0. 24489) 0 . 57829* (0.26636) -0 .1 8 1 5 2 * (0. 39015) 0.9471 C hem icals 1. 01 0.73436 (0.14362) 0.53255 (0. 10716) 0.49995 (0 . 2 2 2 2 1 ) 0.9690 P e tro le u m & Coal 0. 37 0. 03814* (0. 12572) 1.07078 (0. 08884) -0 .3 0 6 8 3 * (0. 15701) 0.9853 Clay, G lass & Stone 1.09 0.30855 (0. 10264) 0.81076 (0. 07520) -0.29721* (0 . 16519) 0 . 9821 B a sic M etal 1. 54 0.38761* (0.28042) 0.71381 (0. 22038) 0.27030* (0. 30116) 0.9755 T able 7 (Cont'd) P a r a m e te r s Industries A a /3 d R2 M etal P ro d u c ts 6 . 81 0.72048 (0. 10156) 0.37227 (0.08524) 0. 51389 (0.16815) 0.9831 M achinery 7. 58 0 .85319 (0.13105) 0.27867* (0.13068) 0 .59282 (0. 18294) 0.9900 E le c tric a l M ach in ery 6 . 80 0.77286 (0. 30978) 0.33748* (0. 24747) 0.86762* (0. 47533) 0 . 8916 T ra n s p o rt E quipm ent 27. 5 1. 14562 (0. 22321) 0.00082* (0. 19894) 0 .94739 (0. 27536) 0.9804 82 change. The re s u lt is shown in T able 8 . 9 out of 17 e s tim a te s of d, o r A A, a r e in sig n ifican t at the 5 p er cent le v e l, and un d er the a ssu m p tio n that e stim a te s of A a r e significantly d iffere n t fro m z e ro , this shows th at 9 e stim a te s of (^) o r ( ) a r e insignificant. Due to the ex isten ce of m any in sig n ifican t e s tim a te s of d, we a r e not able to te s t our hy p o th esis, and thus we r e s o r t to the next v a ria n t for the estim atio n of n e u tra l technological change. Pooling of T im e -S e rie s of C ro s s-S e c tio n D ata, w ith C ap ital's S h are as the M e a su re of the C apital Input In this p a rt we u se the sa m e a p p ro ac h as in the previous p a rt, except we u s e c a p ita l's s h a re in value added as the m e a s u re of the capital input. The re s u lts a re shown in T able 9. The goodness of fit has been te ste d by the an aly sis of v a ria n c e , and the hypothesis of no c o rre la tio n w as re je c te d at 99 p e r cent confidence level in all c a s e s . All e stim a te s for a and |3 a r e significant at the 95 p e r cent confidence level and only 5 out of 16 e stim a te s for d a r e in sig n ific a n t, co m p ared to 9 insignificant e s tim a te s for d in the p rev io u s v a r ia n t. If we a s su m e th at all e stim a te s for A a r e significantly d iffere n t fro m z e ro at the 95 p e r cent confidence lev el, the significance of (-^) is evaluated by th a t of d , and this m e an s 5 e s tim a te s of ( — ) a r e A insignificant. The p e rce n tag e ra te of in c re a s e is calculated as in the previous p a rt, and it is shown in Table 10, No e s tim a te has negative sig n s, and it also has rela tiv e ly sm a ll v aria tio n . The 83 T able 8 The R ate of In c re a s e in the E fficiency P a r a m e te r , ' a a ; ( - 3 - ) At U sing T im e -S e rie s of C ro s s-S e c tio n E s tim a te s with C aptial Stock E s tim a te In d u strie s T T Food B e v e ra g e F u rn itu re P rin tin g B asic M etal M ach in e ry (H) 147%* 11. 9%* 11.7% 13.5% 17. 6% 7.8% P a p e r C h em icals P e tro le u m & Coal Clay, G lass & Stone M etal P ro d u c ts E le c tr ic a l M ach in e ry T ra n s p o rt E quipm ent (M) 38. 2% 49. 5% - 82 . 9%* -27. 3%* 7. 5%* 12. 8%* 3.44% T extiles F o o tw ear Wood & C ork R ubber (X) 10. 6% 4. 54%* 2. 04%* -2. 7% * * The a s te r is k m a rk s in d icate the ones w hich have in sig n ifican t e s tim a te s of d o r A A a t a = 5%. T able 9 T im e -S e rie s of C ro ss-S e c tio n E s tim a te s of the P a r a m e te r s of C obb-D ouglas P ro d u ctio n F u n ctio n s, U sing C ap ital's S h are P a r a m e te r s In d u stries A A a A £ a A d A A Food 2. 65 0.16788 (0. 03685) 0 .83729 (0. 02749) 0.09048* (0 . 05079) 0. 0341* B ev era g e 2 . 90 0.07894 (0. 03151) 0.88323 (0. 02304) 0. 06741* (0. 04671) 0. 0232* T extiles 3. 66 0. 34052 (0. 03572) 0.68890 (0 . 02749) 0.29158 (0. 05274) 0.0796 F o o tw ear & W earing A pparel 3. 94 0. 27367 (0. 07447) 0.74365 (0 . 06379) 0.06553* (0 . 0 6 6 1 0 ) 0 . 0 - 166* Wood and C ork 3. 74 0.29178 (0. 02719) 0.73548 (0. 02927) 0.19278 (0. 05580) 0. 0515 F u rn itu re 7 .4 7 0.47766 (0. 07784) 0.55601 (0.06376) 0.25706 (0. 09914) 0. 0344 ^Indicates in sig n itic a n t e s tim a te s a t the a le v el of 5%. c f A The significance te s t fo r ( ^ ) has b een done by te stin g th e sig n ifican ce for d atoc = 5%, u n d er th e a ssu m p tio n th a t A 's a r e significantly d iffere n t fro m z e ro at a = 5%. T a b le 9 (Cont'd) I — . . . - ..........................................................................- P a r a m e te r s In d u strie s A A A a A £ A d A d X P a p e r 4. 93 0.56278 (0. 17505) 0. 52938 (0. 09954) 0.62846 (0.23888) 0.1274 P rin tin g 5. 66 0. 54772 (0. 04523) 0. 52543 (0. 03745) 0.49303 (0.06889) 0. 0871 R ubber 4. 81 0 . 35959 (0 . 07179) 0.65561 (0. 06129) 0.37521 (0 . 10216) 0.0780 C hem icals 1. 79 0.14292 (0. 04416) 0.88752 (0. 03021) 0.08748* (0.05808) 0.0488* P e tro le u m & Coal 3. 13 0.15260 (0.04838) 0.84638 (0 . 03199) 0. 01510* (0. 07622) 0. 0048* Clay, G lass & Stone 3. 25 0.23927 (0. 04651) 0.78098 (0. 02959) 0. 22730 (0. 07508) 0 .0699 B a sic M etal ------- ------- ------- ------- T ab le 9 (Cont'd) P a r a m e te r s In d u strie s A a £ a 1 M etal P ro d u cts 5. 17 0.32492 0.67881 0.27683 0.0535 (0.06205) (0.05223) (0. 08950) M achinery 6 .8 7 0.36608 0.63251 0.29132 0.0424 (0.07293) (0.06457) (0.08309) E le c tric a l M ach in ery 3.4 9 0.22298 0.78190 0.20789 0.0595 (0. 02828) (0. 02095) (0.03637) T ra n s p o rt E quipm ent 6 .0 4 0.50313 0.55597 0.38008 0.0629 (0.06538) (0. 05600) (0.09507) 87 T able 10 The R ate of In c re a s e in the E fficiency P a r a m e te r , At U sing T im e -S e rie s of C ro ss Section E s tim a te s w ith C ap ital's S h are E stim a te s In d u strie s ( AA \ (T ) L A t Food B ev erag e F u rn itu re P rin tin g B asic M etal M achinery (H) 3.41% * 2. 32% * 3. 44% 8 . 71% 4. 24% P a p e r C hem icals P e tro le u m & Coal Clay, G lass & Stone M etal P ro d u cts E le c tric a l M achinery T ra n s p o rt E quipm ent (M) 12.74% 4.88% * 0.48% * 6 . 99% 5. 35% 5. 95% 6.29% T extiles F ootw ear Wood and C ork R ubber (X) 7. 96% 1. 66%* 5. 15% 7. 80% ^Indicates insignificant e s tim a te s at a =5%. See the p rev io u s foot note fo r the m ethod of significance te st. 88 a rith m e tic m e a n s of the ra te of in c re a s e in efficiency, for all e s tim a te s including in sig n ifican t one, a r e 4. 42 p er centffor h o m e- goods, 6 . 09 p e r cent for im p o rt-s u b stitu tio n , and 5, 64 p e r cent for ex p o rt in d u s trie s . The co rre sp o n d in g sta n d a rd deviations a r e 2 .4 9 p e r cent fo r h o m e -g o o d s, 3. 61 p e r cent fo r im p o rt-s u b stitu tio n , and 2. 95 p e r cent for export in d u s trie s . Since the sta n d a rd deviations fo r th re e s e c to rs a r e of re la tiv e ly equal siz e w ith re s p e c t to re s p e c tiv e a rith m e tic m e a n s, we m a y conclude th a t o u r hypothesis should be accep ted . H ow ever, if we exclude in sig n ifican t e s tim a te s , the a rith m e tic m e a n s a r e 5.46 p e r cent for h o m e-g o o d s, 7.4 6 p e r cent fo r im p o rt-s u b stitu tio n , and 6 . 97 p e r cent for export industries, and the co rresp o n d in g sta n d a rd deviations a r e , resp e c tiv e ly , 2. 84 p e r cent, 3.01 p e r cent, and 1.58 p e r cent. T h is 's m a ll sta n d a rd deviation for ex p o rt in d u s trie s su g g est th at th e re would be le ss d iffe re n c e s in the ra te of in c re a s e in efficiency w ithin the export s e c to r co m p ared to the o th e r two s e c to rs . We have not perform ed, h e re , and in the following se c tio n s, the fo rm a l te s t for d ifferen ce betw een m e a n s due to s m a ll sa m p le size in each in d u stry group. We now check w h eth er th e re is co n sisten cy betw een the re s u lts of T able 8 and th o se of Table 10. At f ir s t glace, two re s u lts se e m to be co n tra d icto ry . H ow ever, if we co m p a re only the significant e s tim a te s in both T ab les, the re s u lts a r e g en era lly c o n siste n t, and th is gives fu rth e r su p p o rt to the e stim a te s of Table 10. 89 Jo h a n se n 1 sM e a su re of N eu tral T echnological Change Since the m a in p ro b lem se e m s to a r is e fro m the deficiency of capital input data, we apply Jo h a n se n 's m e a s u re for n eu tra l 52 technological change, w h e re we do not need capital data. A ssum ing a constant r e tu r n s - to - s c a le Cobb-D ouglas production function, the a v e ra g e product of la b o r is: £ . AK1 3 L1-'3 V K./3 o r L = A (T T ) If p ro d u c e rs m in im ize cost for a given level of output, and re la tiv e 53 s h a re s a r e constant, < ! > 0 = A 0 /3 We apply his m odel for the two p e rio d s, 1958 and 1966. The change in efficiency p a ra m e te r A o ver the period can be d ire c tly calculated fro m the equation, log A = log 1966 1958 - /3 log W 1966 1958 52, 'L e if Jo h an sen , "A M ethod of S eparating the E ffects of Capital A ccum ulation and Shifts in P ro d u ctio n Functions Upon G row th in L ab o r P ro d u ctiv ity , " E conom ic J o u rn a l, LXXI (D ecem ber 1961), 775-782. 53 This assu m p tio n of the constant facto r sh a re s a r e not m e t in K orea o ver the period under study. It se e m s to have changed "significantly" in som e in d u strie s. ______ _________________________ 90 i P is calculated as the a v e ra g e of the two m e an s of capital s h a re s in two p erio d s, 1958 and 1966. The re su lts of the com putation a r e shown in Table 11. Since they a r e not sto c h a stic n u m b e rs w ith probability d istrib u tio n s, we do not need a significance te st. The m a th e m a tic a l m e an s of the ra te of in c re a s e in the index of efficiency a r e 2. 11 for hom e-goods in d u s trie s , 2 .4 7 for im p o rt - substitution in d u strie s , and 1.83 for export in d u strie s . The sta n d a rd deviations a r e 0.259 for h o m e-g o o d s, 1.044 for im p o rt- substitution, and 0.293 for export in d u s trie s . Even when we exclude the exceptionally high ra te for p e tro le u m and coal in d u stry , the im p o rt-su b stitu tio n in d u stry h as, still, the h ig h est sta n d a rd deviation of 0. 608. Thus, it does not se e m to be feasib le to co m p a re the ra te for e m p o rt-su b stitu tio n in d u strie s w ith th a t for o th er two s e c to rs . The co m p ariso n betw een hom e-goods and export in d u s trie s is p o ssib le, and the evidence se e m s to su g g est th e opposite o rd e rin g , H ow ever, in this p a rtic u la r m e a s u re fo r n e u tra l technological change by Jo h a n s e n 's fo rm u la, the low ra te of in c re a s e in the index of efficiency in export in d u strie s seem s to be explained by the high ra te of in c re a s e in w ages in th e se la b o r-in te n s iv e in d u strie s co m p ared to hom e-goods in d u s trie s . The re su lts of T ables 8 , 10, and 11 a r e | g en era lly co n sisten t to each o th e r, when we co m p are only the j significant e stim a te s of T able 8 and 10 with the re s u lts of T able 11. 91 T able 11 The R ate of In c re a s e in the Index of E fficiency, (-JT> A t U sing J o h a n se n 's N e u tra l T echnological Change M e a s u re E s tim a te In d u strie s 7 * 7 At Food B ev era g e F u rn itu re P rin tin g M achinery B a sic M etal (H) 1. 94 2. 46 1. 87 2. 32 1. 84 2 . 21 P a p e r C h em icals P e tro le u m & Coal Clay, G lass & Stone M etal P ro d u c ts E le c tric a l M achinery T ra n s p o rt E quipm ent (M) 2 . 81 1. 83 4. 63 1. 81 1. 86 1. 76 2 . 61 T extiles F o o tw ear Wood and C ork R ubber (X) 1.75 1. 77 2. 56 1. 25 i T e st of th e H ypothesis on R e tu rn s-to -S c a le In this sectio n , we te s t the hypothesis on the ra te and d ire c tio n of the change in the r e tu r n s - to - s c a le p a ra m e te r: the ra te of in c re a s e in the r e tu r n s - to - s c a le c h a ra c te ris tic would be h ig h est in export in d u s trie s , followed by im p o rt-su b stitu tio n in d u s trie s , and lo w est in hom e-goods in d u strie s. The r e tu r n s - to - s c a le p a ra m e te r, ( 0! + /? ), is obtained by estim atin g two c r o s s - s e c tio n production functions for I 960 and 1 9 6 6 , w h ere the capital input is m e a s u re d by capital stock. The estim atin g function is , log V = log A + C L log L + (3 log K + log u The re s u lts a r e shown in Table 12. The goodness of fit has been evaluated by the a n a ly sis of v a ria n c e , and , in only two r e g re s s io n s , w e re we able to a cc ep t the hypothesis of no c o rre la tio n at the 1 p e r cent F level. The significance of ( a + 0 ) has been A A decided acc o rd in g to the decision rule that both of a and f3 should be significant at 95% confidence level. M ost of the e s tim a te s A A / A A of ( a + /3 ) failed the te st. The significance te s t of (a has been p e rfo rm e d by studying w h eth er both n u m e ra to r and deno m in a to r a r e significantly d ifferent fro m z e ro at 95% level. Only m a c h in e ry in d u stry survived this te st. To p e rfo rm the testin g of the hypothesis on r e tu r n s - to - sc a le although sta tis tic a lly insignificant, we calculate the p e rce n tag e T able 12 C ro ss-S e c tio n E s tim a te s of the P a r a m e te r s of Cobb-D ouglas P ro d u ctio n F u n ctio n s, U sing C apital Stock P a r a m e te r s In d u stries Y e a rs A a p * + 1 ( “ +/3)1966 2 ( * l< 0! +/J > 1960 J Food 1960 1.09 1.2106 0. 32425* 1.53485* 0.9195 (0.42238) (0.27876) 1966 0.001 -0 .5 3 4 9 5 * 1.76614 1.23119* ° - 80215* 0.8576 (0.67852) (0.66489) B ev erag e 1960 0.178 -0 .0 6 2 0 1 * 1.15805* 1.09604* 0.893 (0.56524) (0.51519) 0.82794* 1966 75 .1 0.46136* 0.44610* 0.90746* 0 .6 6 1 4 A (0.39873) (0.31498) T extiles 1960 1.66 0.11347* 0.88486* 0.99933* 0.97 (0.51528) (0.43363) 1.10609* 1966 52.8 1.06958 0.03677* 1.10535* 0.9856 (0.23965) (0.20998) | ^ indicates the coefficients in sig n ifican t at o c = 5%. A indicates in sig n ifican t c o rre la tio n at F = 1%. T able 12 (Cont'd) P a r a m e te r s Industries T e a r s A £ (a + 0) (fr+A) 9 R P ; 1960 F o o tw ear & W earing A pparel 1960 1 7 . 7 0. 9 0 9 2 9 * 0 . 3 2 7 9 4 * 1 . 2 3 7 2 3 * 0 . 9 8 9 6 ( 0 .6 8 4 2 6 ) ( 0 . 5 6 8 3 3 ) 0 . 9 0 5 7 2 * 1966 2 0 . 5 0 . 9 1 7 5 0 . 2 0 3 0 9 * 1. 1 2 r 5 9 * 0 . 9 8 5 8 ( 0 . 1 9 1 2 8 ) ( 0 . 1 7 3 7 4 ) Wood & C ork 1960 1 0 . 4 0 . 1 3 4 1 4 * 0 . 7 5 6 0 5 0 . 8 9 0 1 9 * 0 . 9 7 9 ( 0 .2 7 6 2 8 ) ( 0 . 2 0 8 4 7 ) 1 . 1 9 1 5 6 * 1966 1 0 . 8 0 . 6 0 9 0 3 0 . 4 5 1 6 9 * 1 . 0 6 0 7 2 * 0 . 9 7 1 1 ( 0 .1 9 4 0 7 ) ( 0 .2 1 9 2 1 ) F u rn itu re 1960 3 0 . 6 0 . 9 7 7 6 0 . 2 4 0 9 2 * 1 . 2 1 8 5 2 * 0 . 9 7 6 3 ( 0 .3 7 1 9 1 ) ( 0 . 2 8 7 3 1 ) 0 . 9 7 3 0 4 * 1966 1 1 . 7 0 . 9 3 5 1 7 0 . 2 5 0 5 0 * 1 . 1 8 5 6 7 * 0 . 9 7 4 1 ( 0 . 2 7 1 3 5 ) ( 0 . 3 1 8 3 5 ) P a p e r I9 6 0 1 6 . 8 1 . 0 2 8 1 5 0 . 2 7 5 5 8 * 1 . 3 0 3 7 3 * 0 . 9 7 8 5 ( 0 . 2 0 4 3 3 ) (0. 14321) 1 . 0 1 2 7 4 * 1966 1 . 2 2 0 . 7 5 3 4 7 * 0 . 5 6 6 8 8 * 1 . 3 2 0 3 5 * 0 . 9 6 3 1 ( 0 . 3 9 6 5 8 ) ( 0 . 2 8 1 0 4 ) T able 12 (Cont'd) P a r a m e te r s In d u strie s ? - ^ - (“ +£ ) l 966 „ 2 A £ a + /? «*+£7i " 9 ' 6 ' 0 R P rin tin g I960 27 .0 0.76475* 0.34282* 1.10757* 0.978 (0.30523) (0.20532) !. 0 3 4 9 3* 1966 8 .9 0.7899 0.35636* 1.14626* 0.9799 (0. 18958) (0. 16853) R ubber 1960 2 2 .9 0.3466* 0.60164* 0.94824* 0.913 (0/45058) (0.51226) 1.15631* 1966 8 . 8 0.69854 0.39792* 1.09646* 0.983 (0.23394) (0.24265) Chem icals 1960 22 .9 1.07762 0.2109 1.28852 0.9575 (0.14829) (0 . 0 8 2 6 6 ) 0.93522* 1966 0 .6 2 4 0.43513* 0.76993 1.20506* 0.9612 (0.21422) (0.1612) P e tro le u m & Coal 1960 9 .8 4 0.50699* 0.56987* 1.07686* 0.9759 (0.35043) (0.30403) i. 10468* 1966 0.146 0.10799* 1.08160 1.18959* 0.9839 (0.14776) (0.09167) v O T able 12 (Cont'd) P a r a m e te r s In d u strie s a a a a a ^a+ ^ 1 9 6 6 2 Y e a rs A a ^ a + £ * ' P ' I 960 Clay, G lass & Stone I960 2.2 6 0. 11954* 0.8838 1.00334* 0.9727 (0.21634) (0.14021) 1.1873* 1966 0.467 0.37954 0.81175 1.19129 ’ 0.9906 (0. 08504) (0. 07099) B a sic M etal 1960 4 .5 9 0.07058* 0.82383* 0.89441* 0.9409 (0.4246) (0.31525) 1.28432* 1966 0.356 0.18797* 0.96074 1.14871* 0.9859 (0. 35776) (0. 29620) M etal P ro d u c ts I960 25.5 0.90506 0.28833* 1.19339* 0.9706 (0.18725) (0.12398) 0.88930* 1966 5 .6 7 0.52169 0.53959 1.06128 0.9924 (0. 15635) (0. 15994) T able 12 (Cont'd) P a r a m e te r s Industries A A A A A ^"*"^1966 2 Y e a rs A a £ a + /3 ------- R 1 + p ; 1960 M ach in ery 1960 12.9 0.69473 0.43945 1.13418 0.9943 (0.13399) (0.12783) 0.97214 1966 84 .2 1.10258 ---------------------------- 1. 10258 0.9 8 E le c tric a l M achinery I960 2. 0 0. 09492=5= 0. 88198 0. 97690* 0.9522 (0,28233) (0.25161) 1966 - - - --------------------------- ---------- - -------------------------- --------------------------- T ra n s p o rt E quipm ent 1960 99.0 1.56647 -0 .3 4 7 3 4 * 1.21913* 0.9 6 (0. 33457) (0. 26744) 1966 -- ---- --- - - - - - - - - ---------------------------- --------------------------- --------------------------- - - - 98 change of the in c re a s e in the r e tu r n s - to - s c a le p a ra m e te r, (a+ /3 ), betw een I960 and 1966, and th e se values a r e shown in Table 13. The a rith m e tic m e a n s of the p erce n tag e ra te of in c re a s e in the r e tu r n s - to - s c a le p a ra m e te r a r e -0 .8 4 p er cent fo r hom e-goods in d u s trie s , 2. 58 p e r cent fo r im p o rt-su b stitu tio n in d u s trie s , and 9.00 p er cent for ex p o rt in d u s trie s . The sta n d a rd deviations a r e 17. 3 p e r cent for h o m e -g o o d s, 12. 2 p e r cent for im p o rt- substitution, and 12.7 p e r cent for export in d u s trie s . This re la tiv e ly sm a ll d ifferen ces in sta n d a rd deviations am ong th re e s e c to rs give som e confidence on our m a th e m a tic a l m e an s although sta n d a rd deviations a r e m any tim e s of re sp e c tiv e m e a n s. We conclude this section by saying that, w hile e s tim a te s of the p erce n tag e ra te of in c re a s e in r e tu r n s - to - s c a le p a r a m e te r a r e s ta tistic a lly insignificant, the e m p iric a l evidence se e m s to indicate the sa m e o rd e rin g , and thus we a r e not able to re je c t o u r h ypothesis. In this sectio n we try to te s t the hypothesis on the ra te of in c re a s e of the c a p ita l-in te n sity p a ra m e te r: the ra te of la b o r-sa v in g technological change would be expected to be h ig h est in im p o rt - substitu tio n in d u s trie s , followed by e x p o rt-in d u s trie s , and low est in hom e-goods in d u strie s . We em ploy two s o rts of m e a s u re s to im p le m e n t the testin g . T e st of the H ypothesis on the C apital Intensity P a r a m e te r 99 T able 13 The R ate of In c re a s e in the R e tu rn s -to -S c a le P a r a m e te r &(g. + 6) (o + f) A t E s tim a te In d u strie s A (a + B ) (a +fT) /At Food B ev era g e F u rn itu re P rin tin g B a s ic M etal M achinery (H) -19. 8%'" -17. 2%* -2. 7%* 3. 49%" 28.4% ' 2 . 79% P a p e r C h em icals P e tro le u m & Coal Clay, G lass & Stone M etal P ro d u c ts E le c tric a l M ach in ery T ra n s p o rt E quipm ent (M) 1. 27%* - 6 . 48%* 10. 5%* 18. 7%* •11. 1%* T ex tiles F o o tw ear Wood and C ork R ubber (X) 10. 6% -9. 4%* 19. 2%* 15. 6%* !* in d icate s in sig n ifican t e stim a te s a t the 95 p e r cent confidence level. 100 C ap ital's Share as the M e a su re of the C apital Input F ir s t, w e e s tim a te two c r o s s -s e c tio n Cobb-D ouglas production functions w ith two fa c to rs, fo r 1958 and 1966, w h ere capital input is m e a s u re d as c a p ita l's s h a re in value added. The re s u lts have a lre a d y been p re se n te d in Table 5 in rela tio n to the te stin g on the efficiency p a ra m e te r. The significance te s t for GX G L (--------- ) has been p e rfo rm e d by the c rite rio n that in o rd e r for (— 5— ) $ P to be significant, both n u m e ra to r and denom inator should be significantly d iffere n t fro m z e ro . Only th re e out of 17 e stim a te s failed the te st. F o r te stin g of the hypothesis on cap ita l-in te n sity p a ra m e te r A A we divide (-*—) j 9 by (— —^1958’ anC* ca^cu- * - ate ^ e p erce n tag e ^ ^ . P ra te of in c re a s e o r d e c re a s e in the capital in ten sity p a ra m e te r. The te s t of significance for ( £ *1966 / ( £ J1958 I S p e rfo rm e d by the sa m e ru le that in o rd e r for the s ta tis tic to be A A CX CX significant, both ( — * ^1966 ant^ ^ —*--- ^1958 s bould be significant. T hus, also in th re e c a s e s , the e stim a te s a r e in sig n i ficant. The re su lts a r e shown in Table 14. The a rith m e tic m ean s a r e -35. 21 p er cent fo r hom e-goods in d u stry , -65. 22 p er cent for im p o rt-s u b stitu tio n in d u stry , and -3 3 .2 7 p er cent fo r export in d u stry , including in sig n ifican t e s tim a te s . The co rresp o n d in g sta n d a rd deviations a r e 31. 18 p er cent for hom e-goods in d u s tris, 22. 36 p e r cent for im p o rt-su b stitu tio n in d u s trie s , and 8 . 83 p e r cent for export in d u s trie s . While th e re is a sm all d ifferen ce betw een 101 Table 14 The R ate of Change in the C ap ital-In ten sity P a r a m e te r U sing C a p ita l's S hare E stim a te In d u stry -28. 5% Food -25. 6% B ev era g e -71. 9% F u rn itu re (H) - 22 . 9% P rin tin g B a sic M etal 8 . 6% M achinery -83. 5% P a p e r -90. 0% C h em icals -85.9% P e tro le u m & Coal (M) -53. 6% Clay, G lass & Stone - 3 5 . 8% M etal P ro d u cts -40.2% E le c tric a l M achinery -67.6% T ra n s p o rt E quipm ent -43.7% -36. 5% T extiles F ootw ear (X) -31. 1% Wood and Cork R ubber ^ indicates in sig n ifican t e stim a te s at 95 p e r cent confidence level. m e a n s of hom e-goods and export in d u s trie s , the stan d ard deviation for hom e-goods in d u stry is m uch la r g e r than th a t of export industry. The e m p iric a l evidence se e m s to su g g est the accep tan ce of our hy p o th esis, although the r a te of in c re a s e in la b o r-s a v in g technolo- 0! gical change o r d e c re a s e in the ra tio , (------- ), is h ig h e r for hom e- goods in d u strie s than th a t for ex p o rt in d u s trie s , due to m uch g re a te r sta n d a rd deviation fo r h o m e-goods in d u s trie s , about th re e tim es as m uch as export in d u s trie s , im plying th at th e re is a w ide d isp e rsio n around the m e an s ta tis tic s in hom e-goods in d u s trie s co m p ared to export in d u s trie s . F a c to r S h are A pproach In this second v a ria n t, we e stim a te the p a r a m e te r s of Cobb-D ouglas production functions by using the m ethod of facto r s h a re s as w as p rev io u sly outlined in this ch ap ter. Since we deal w ith the "a g g re g a te " in d u stry production function, a and p in the tw o-factor m o d el w ill be e s tim a te d as follows, in the ith in d u stry in the t t h p erio d . 103 In the th re e -fa c to r m odel, a., = W.. it it Y.. it M.. it 'it Y.. it P., = l - a., - it it it The re s u lts fo r tw o-and th re e -fa c to r m o d els a r e shown in T able 15. F ro m this table we co n stru ct Table 16, to te s t our hypothesis on the cap ita l-in te n sity p a r a m e te r . We do not need a significance te s t for e stim a te s b eca u se they a r e not p ro b a b ilistic n u m b e rs. Since the re s u lts fo r tw o -fa c to r and th re e -fa c to r m o d els a r e a lm o st iden tical, we u se th re e -fa c to r m odels The a rith m e tic m e a n s of the p erce n tag e ra te of in c re a s e in la b o r-sa v in g change a r e -44. 1 p e r cent for hom e-goods in d u stry , -4 3 .8 p e r cent for im p o rt-su b stitu tio n in d u stry , and -2 0 .0 p er cent for export in d u stry . The co rresp o n d in g stan d ard deviations a r e 10.44 p e r cent for hom e-goods in d u strie s, 20. 35 p er cent for im p o rt-su b stitu tio n in d u s trie s , and 4 2 .4 p e r cent for export in d u strie s . The high stan d ard deviation and low m ean for export in d u strie s a r e cau sed by the ru b b e r in d u stry w hich has a positive sign. If we exclude this in d u stry export in d u s trie s have m e an of -40. 2 p er cent and sta n d a rd deviation of 16. 2 p e r cent. The re s u lt se e m s to be inconclusive sin ce th e re is no significant d ifferen ce T able 15 C ro ss-S e c tio n E s tim a te s of the P a r a m e te r s of C obb-D ouglas P ro d u c tio n F u n ctio n s, by F a c to r-S h a re M ethod P a r a m e te r s Ind u stry T w o -F a c to r M odel 0 T h r e e - F a c to r M odel A A A a /3 y Food 1958 1960 1963 1966 0.3 1 0 4 0.6896 0.2442 0.7558 0.2090 0.7910 0.2066 0.7 9 3 4 0.0822 0.1830 0.7348 0.0651 0.2017 0.7332 0.0603 0.2287 0.7110 0.0702 0.2561 0.6737 B ev era g e 1958 I 960 1963 1966 0.2101 0.7899 0.1675 0.8325 0.1258 0.8742 0 . 1 0 0 0 0.9000 0 .0 8 5 4 0.3213 0.5933 0.0725 0.3607 0.5668 0.0 6 1 4 0.4267 0.5119 0.0492 0.4437 0.5071 T extiles 1958 I 960 1963 1966 0.3766 0.6234 0.3308 0.6692 0.3481 0.6519 0.3140 0.6860 0.1219 0.2019 0.6762 0.1170 0.2367 0.6463 0.1129 0.2115 9.6756 0 .1034 0.2262 0.6704 Table 15 (Cont'd) P a r a m e te r s In d u stry Y ear T w o -F a c to r M odel A A a jS T h r e e - F a c to r Model A A A a 0 y F o o tw ear 1958 1960 1963 1966 0.4326 0.5674 0.3415 0.6585 0.3745 0.6255 0.3151 0.6849 0.1516 0.1989 0.6495 0.1225 0.2365 0.6410 0.1406 0.2349 0.6245 0.1138 0.2 4 7 4 0.6388 Wood & Cork 1958 1960 1963 1966 0.4 3 9 4 0.5606 0.2584 0.7416 0.2 5 8 4 0.7416 0.2536 0.7464 0.1126 0.1438 0.7436 0.0846 0.2430 0.6724 0.0746 0.2141 0.7113 0 .0 6 3 4 0.1870 0.7496 F u rn itu re 1958 1960 1963 1966 0.3356 0.6644 0.4531 0.5469 0.4108 0.5892 0.3880 0.6120 0.2347 0.2088 0.5565 0 .1 9 4 4 0.2347 0.5709 0.1 5 5 4 0.2229 0.6217 0.1637 0.2 5 8 4 0.5779 P a p e r 1958 1960 1963 1966 0.3560 0.6440 0.2751 0.7249 0.2059 0.7941 0.1828 0.8172 0. 1235 0.2235 0.6530 0.1176 0.3103 0.5721 0.0767 0.2963 0.6270 0.0699 0.3130 0.6171 T able 15 (Cont'd) P a r a m e te r s Ind u stry Y e a r T w o -F a c to r M odel A dt 0 T h re e - A a F a c to r M odel A A 0 r 1958 0.5376 0.4624 0.2471 0.2126 0.5403 P rin tin g 1960 0. 4784 0 .5216 0.2253 0.2458 0.5289 1963 0.3665 0.6335 0.1712 0 . 2 9 6 1 0.5327 1966 0.3742 0.6258 0.1738 0 . 2 9 0 8 0. 5354 1958 0.3597 0.6403 0. 1148 0.2045 0.6807 R ubber 1960 0.2570 0.7430 0.0919 0 .2659 0.6422 1963 0.4036 0.5964 0.1138 0.1683 0.7179 1966 0.4411 0.5589 0.1117 0.1417 0.7466 1958 0.2770 0.7230 0.0957 0.2500 0.6543 1960 0.3664 0.6336 0. 1142 0.1975 0.6883 C h em icals 1963 0.2136 0.7864 0.0886 0 .2969 0. 6145 1966 0.2163 0.7837 0.0951 0.3185 0 .5864 1958 0.4763 0.5237 0 . 1 1 2 0 0.1233 0. 7647 P e tro le u m & 1960 0.3503 0.6497 0.0995 0. 1847 0.7158 Coal 1963 0.3 4 3 4 0.6566 0.0753 0. 1440 0.7807 1966 0. 1514 0.8486 0.0415 0 .2329 0.7256 Table 15 (Cont'd) P a r a m e te r s Ind u stry Y ear T w o -F a c to r M odel A A a 0 T h re e - A a F a c to r M odel * A y 1958 0.3226 0. 6*774 0 . 1 6 1 1 0.3382 0.5007 Clay, G lass I 960 0.2617 0.7383 0 . 1491 0.4206 0.4303 & Stone 1963 0.2903 0.7097 0.1427 0 .3491 0.5082 1966 0.2570 0. 7430 0 . 1 1 9 8 0.3464 0.5338 1958 0.4073 0. 5827 0.1371 0.1997 0.6632 B a sic M etal 1960 0.4372 0.5628 0.1294 0.1668 0.7038 1963 0.3115 0.6885 0.0713 0.1577 0.7710 1966 0.2634 0.7366 0.0739 0.2070 0.7191 1958 0.4509 0 .5491 0.1453 0.1770 0.6777 I 960 0.3334 0 .6 6 6 6 0.1320 0.2640 0.6040 P ro d u c ts 1963 0.3507 0.6493 0.1218 0.2257 0.6525 1966 0.3520 0.6480 0.1339 0.2467 0.6194 1958 0.4381 0 .5619 0.2037 0.2614 0 .5349 M achinery I 960 0.3897 0.6103 0 . 1 9 0 6 0.2987 0. 5107 0. 6125 1963 0.4 3 2 4 0.5676 0.1778 0.2097 1966 0.3466 0.6534 0.1564 0.2763 0.5673 T able 15 (Cont'd) P a r a m e te r s Ind u stry Y e a r T w o -F a c to r M odel a 0 T h r e e - F a c to r M odel A A a 0 r E le c tric a l M achinery 1958 I 960 1963 1966 0.3 1 0 4 0.6896 0.3945 0.6055 0.2819 0.7181 0.2212 0.7788 0.1329 0.2955 0.5716 0.1460 0.2241 0.6299 0.1003 0.2557 0.6440 0.0958 0.3376 0.5666 T ra n s p o rt E quipm ent 1958 1960 1963 1966 0.5108 0.4892 0.4113 0.5887 0.5 3 8 4 0.4616 0.3026 0.6974 0.2408 0.2308 0.5284 0.2145 0.3070 0.4785 0.1828 0.1 4 0 4 0.6768 0.1229 0.2203 0.6568 TOTAL M anufacturing 1958 1960 1963 1966 0.3659 0.6341 0.3093 0.6907 0.2 6 2 4 0.7376 0.2421 0.7579 0.1266 0.2196 0.6538 0.1140 0.2547 0.6313 0.0967 0.2721 0.6312 0.0906 0.2836 0.6258 109 T able 16 R ate of Change in the C ap ital-In ten sity P a r a m e te r , ’a(|j / ■ I- / At (f) / U sing F a c to r-S h a re M ethod E stim a te T w o -F a c to r .'h re e -F a c to r M odel In d u stries A<|> / ( f ) / A t ] M odel A ( f ) / ( | ) / A t ] Food -42. 1% -38.9% B ev era g e (H) -58. 2% -58. 3% F u rn itu re 25. 4% -43. 6 % P rin tin g -48. 5% -48. 5% B asic M etals -50.8% -48.0% M achinery -31. 9% -27. 3% P a p e r -59. 5% -59.5% C hem icals (M) -27. 9% - 2 2 . 0% P e tro le u m & Coal -80. 3% -80. 4% Clay, G lass & Stone -27. 3% -27.4% M etal P ro d u c ts -33. 8% -33.8% E le c tric a l M achinery -36. 9% -36. 9% T ra n s p o rt E quipm ent -58.4% -46.5 % T extiles -24. 2% -24. 2% F o o tw ear (X) -39. 6% -39.6% Wood and Cork -56.6% -56. 7% R ubber 40. 5% 40.4% 110 betw een m e a n s w hile the sta n d a rd deviations a r e not m u ch differen t than each o th e r except for ho m e-g o o d s in d u s trie s . T e st of the H ypothesis on In te rm e d ia te -In p u t Saving A ccording to o u r h y p o th esis, w e expect the ra te of the in te rm e d ia te -in p u t saving would be h ig h e st in hom e-goods in d u s trie s , followed by im p o rt-s u b stitu tio n in d u s trie s , and low est in ex p o rt in d u s trie s . To te s t the h y p o th e sis, we c o n stru c t T able 17 fro m Table 15, th r e e - f a c to r m odel. It m a y be te ste d e ith e r by c o n sid erin g y only, o r by co n sid erin g .y a n d ( 0’ . + 0 ) s im u l taneously. F o r the sa m e re a s o n cited in the previous section, we do not need sig n ifican ce te s ts for th e se e s tim a te s . Two s ta tis tic s s e e m to b e co n siste n t w ith each o th e r in re la tiv e te r m s . ho m e-g o o d s in d u stry , 0 .0 7 p e r cent for im p o rt-su b stitu tio n in d u stry , and 1. 97 p er cent fo r ex p o rt in d u stry . The sta n d a rd deviations a re 8 . 88 p e r cent fo r h o m e -g o o d s in d u s trie s , 1 1 . 96 p e r cent for im p o rt- substitution in d u s trie s , and 5. 20 p e r cent fo r ex p o rt in d u s trie s . Due to la rg e sta n d a rd deviations re la tiv e to re s p e c tiv e m e a n s, the e m p iric a l re s u lt is difficult fo r in te rp re ta tio n , but the o rd e rin g se e m s to fav o r the a c c ep tan c e of o u r hypothesis. We w e re not able to d ire c tly te s t the h y p o th e sis, h o w ev er, due to the la ck of d istin ctio n betw een the u se of im p o rte d and th a t of d o m estic m a te r ia ls in the census data. The a ssu m p tio n we have m ad e h e re The a rith m e tic m e a n s of a r e -0 .9 1 p er cent for I l l Table 17 The R ate of Change in the In te rm e d ia te -In p u t A A - f ' 4t Saving P a r a m e te r , U sing F a c to r-S h a re M ethod E s tim a te In d u strie s i i + < > - <ts < 2 ^ <3 I I j b x Food - 8 . 3% 34. 1% B ev era g e (H) -14. 5% 41. 8% F u rn itu re 3. 8% - 8 . 35% P rin tin g - 0 . 9% 35. 4% B a sic M etals 8.4% -23. 0% M achinery 6 . 0% - 12 . 2% P a p e r -5. 5% 16. 7% C h em icals -10. 3% 33. 5% P e tro le u m & Coal -5. 1% 13. 2% Clay, G lass & Stone 6 . 6% -12.4% M etal P ro d u c ts - 8 . 6% 2 9 . 2% E le c tric a l M achinery - 0 . 8% 2 . 0% T ra n s p o rt E quipm ent 24. 2% -41.4% T ex tiles - 0 . 86% 2. 67% F o o tw ear -1. 65% 4 . 78% Wood and Cork 0 . 8% -3. 14% R ubber 9. 6% -27. 6% is th a t im p o rte d m a te r ia l in export in d u stry c o m p rise s a la rg e p o rtio n of the to tal m a te r ia l c o sts , and this s e e m s to be a re a lis tic assu m p tio n . C H A PTE R V SUMMARY AND CONCLUSION In this ch a p te r we review som e im p o rta n t a sp e c ts of the la s t four c h a p te rs , exam ine the policy im p licatio n s b a se d on o u r hypotheses and the e m p iric a l te s ts of the hy p o th eses, and m a k e suggestions fo r fu rth e r w ork. S u m m ary of the D isse rta tio n In the f ir s t ch ap ter we em p h asized the im p o rta n c e of in teg ratin g tra d e and developm ent th e o rie s for to d a y 's developing c o u n trie s. The com bination of tra d e and developm ent th e o rie s has been acc o m p lish e d by re la tin g tra d e p o licies in developing countries to th e ir effects on th e ra te and d ire c tio n of technological change. T ra d e policy as such has not been in c o rp o ra te d in the H e c k sc h e r-O h lin v e rs io n of c la ss ic a l in te rn a tio n a l tra d e th e o ry , but the d isto rtio n s in r e s o u r c e allocation caused by tra d e policy a r e so g re a t in to d a y 's developing co u n tries th at any tra d e th e o ry w hich does not include the policy a s p e c ts is likely to m is s an im p o rta n t opportunity to augm ent econom ic w e lfa re . On the o th er hand, technological change is re g a rd e d as the m a in so u rc e of econom ic grow th as c o n tra st to the in c re a s e in tra d itio n a l inputs, i. e. , la b o r and cap ital, in both developed 113 114 co u n tries (about w hich m o s t of the e m p iric a l evidence has been gathered) and also in s e v e ra l developing c o u n tries. F o r out p u rp o se it is n e c e s s a ry to study the causal re la tio n sh ip betw een tra d e policy and technological change, and as an an aly tical device a production function fra m e w o rk has been em ployed. In the second ch ap ter we su rveyed the institutional a r r a n g e m e n ts for tra d e po licies in th re e se le c te d developing co u n tries: India, P a k ista n , and K o rea. Although K o rea was found to be m o re "open" than the o th er c o u n trie s, a ll th re e co u n tries had s im ila r tra d e p o licies. Im p o rt licen sin g and exchange control devices seem ed to be the m o s t influential policy sch em e s in th e se th re e co u n tries w h ere fo reig n exchange w as v e ry m uch undervalued. The effects of tra d e p olicies on th e ir econom ies w e re also found to be s im ila r. This w as esp ecially tru e fo r capital in ten sity , excess capacity, and im p o rte d raw m a te ria ls . In the th ird ch ap ter we f ir s t developed a th e o re tic a l b a se for the an aly sis of tra d e p olicies in K orea and the effects of tra d e policies on technological change w ithin the production function fram e w o rk . The Cobb-D ouglas production function w as chosen for the a n a ly sis, and its five c h a ra c te ris tic s --e ffic ie n c y , r e tu r n s - to - s c a le , capital in ten sity , ela stic ity of su b stitu tio n , and in te r m e d ia te - in p u t- r a tio - - w e re defined as the a b s tr a c t technology of the production function. T echnological change w as then defined in te rm s of changes in any one of th e se c h a ra c te ris tic s . With this th e o re tic a l fram e w o rk , four specific hypotheses w e re fo rm u lated fo r the ra te and the d irec tio n of change in th e se c h a ra c te ris tic s . This w as done on the b a s is of 115 o u r su rv e y of in stitu tio n al a rra n g e m e n ts for tra d e policy and its effect on the K o rean econom y in C h ap ter Two. We te s te d in C hapter F o u r the four hypotheses on the data obtained fro m K o rea. B efo re the e m p iric a l te stin g , how ever, the tw o-digit m a n u fa ctu rin g in d u strie s w e re c la ssifie d into h o m e- goods, im p o rt-s u b stitu tio n , and export in d u s trie s , depending on th e ir dynam ic c h a r a c te r is tic s over the p erio d u n d er study. Then, the data w as explained and so m e s ta tis tic a l p ro b lem s in estim atin g production functions w e re exam ined. We e sse n tia lly s ta rte d by te stin g the assu m p tio n s of the C obb-D ouglas production function by e stim a tin g e la stic itie s of su b stitu tio n and the p a ra m e te rs of the tra n s c e n d e n ta l lo g a rith m ic production function. A fter being convinced of the valid ity of th e Cobb-D ouglas fo rm , we pro ceed ed to te s t the four h y p o th eses. The f ir s t hypothesis w as th at the ra te of in c re a s e in the efficiency p a r a m e te r would be g re a te s t in im p o rt-su b stitu tio n in d u s trie s , followed by ex p o rt in d u s trie s , and lo w est in hom e-goods in d u strie s. Since th e t e s t of this hypothesis is v e ry sen sitiv e to the m e a s u r e of capital input we em ployed fo u r d ifferen t types of m e a s u r e of capital input to avoid dependence on any single m e a s u re . F ir s t, we e stim a te d th re e c r o s s - s e c tio n production functions using c a p ita l's s h a re in value added as a m e a s u r e of capital input. The co rresp o n d in g e s tim a te s of the ra te of in c re a s e in efficiency had negative signs in nine out of six te en in d u s trie s ; we re je c te d this m e a s u re as it w as in c o n siste n t with econom ic theory. Second, we 116 in c re a s e d d eg ree s of freed o m by pooling t i m e - s e r ie s of two c r o s s - s e c tio n data using capital stock as a m e a s u r e of capital input. We again re je c te d this m e a s u r e as the co rresp o n d in g e s tim a te s of the ra te of in c re a s e in efficiency w e re insignificant ‘ in nine out of seventeen in d u strie s . T hird, we estim a te d the sam e type of production function as we did in the second v a ria n t but using c a p ita l's s h a re as the m e a s u re of capital input. H e re the re su ltin g e stim a te s w e re insignificant in only five out of sixteen in d u s trie s . We th e re fo re calculated a rith m e tic m e a n s and stan d ard deviations for th re e groups of in d u strie s to p e rfo rm the testin g . Including the five insignificant e stim a te s they w e re 6 . 09 — 3. 61 p e r cent for im p o rt-su b stitu tio n in d u s trie s , 5. 64 + 2. 95 p e r cent for export in d u s trie s , and 4.4 2 + 2 .4 9 p e r cent for hom e-goods in d u s trie s . H ow ever, if we exclude th o se in sig n ifican t e s tim a te s, a rith m e tic m ean s and stan d ard deviations w e re 7. 46 + 3. 01 p e r cent fo r im p o rt-s u b stitu tio n in d u s trie s , 6 . 97 + 1.58 p e r cent for export in d u s trie s , and 5.46 t 2. 84 p er cent fo r hom e-goods in d u strie s . T h ese two sets of e stim a te s su g g ested m a in ten a n ce of o u r hypothesis I on efficiency. | The above th re e m e a s u r e s a ll re q u ire d the u se of capital ; • i input data. We now em ployed Jo h a n s e n 's m e a s u re fo r n e u tra l j technological change w h ere we did not have to u se capital input data. The a rith m e tic m ean s of the ra te of in c re a s e in the efficiency index and the following stan d ard deviations w e re 2 .4 7 ± 1.04 for ! im p o rt-su b stitu tio n in d u s trie s , 1.83 + 0 .2 9 for ex p o rt in d u strie s j 117 and 2. 11 t 0. 26 fo r hom e-goods in d u strie s . The o rd e rin g betw een h o m e-goods and export in d u s trie s co n tra d icted o u r h ypothesis. H ow ever, as we arg u ed in C hapter F o u r, this low ra te of in c re a s e in the index of efficiency in export in d u strie s se e m e d to be explained by the high ra te of w age in c re a s e s in the in d u s trie s . The evidence w as inconclusive by Jo h a n s e n 's m e a s u r e , and it w as not stro n g enough to re je c t o u r hy p o th esis. Due to sh o rtco m in g s of the f ir s t two v a ria n ts we m ain ly u sed the th ird and fo u rth v a ria n ts to te s t the h y p o th esis. The th ird v a ria n t suggested a cc ep tan c e of the null hypothesis w hile J o h a n se n 's m e a s u re w as not stro n g enough in re je c tin g o u r hypothesis. T hus, we conclude th at we can not re je c t our hypothesis on the ra te of change in efficiency. F o r the te stin g of the second h y p o th esis, th at the r a te of in c re a s e in the r e tu r n s - to - s c a le p a r a m e te r would be h ig h est in export in d u s trie s , followed by im p o rt-s u b stitu tio n in d u s trie s , and lo w est in hom e-goods in d u s trie s , we e stim a te d two c r o s s - s e c tio n production functions using capital stock as the m e a s u r e of capital input. The following e s tim a te s of the p e rc e n ta g e ra te of in c re a s e in the p a ra m e te r w e re g en era lly insignificant. The m e an s and sta n d a rd deviations w e re 9. 00 t 12. 7 p e r cent for ex p o rt in d u s trie s , 2. 58 t 12. 2 p e r cent for im p o rt-su b stitu tio n in d u s trie s , and -0. 84 t 17. 3 p er cent for ho m e-g o o d s. Although the e stim a te s w e re s ta tis tic a lly in sig n ifican t and sta n d a rd deviations w e re m uch l a r g e r than re s p e c tiv e m e a n s, the evidence shows the sam e o rd e rin g as our h ypothesis. This is given m o re confidence by the 118 fact th a t th e re a r e re la tiv e ly sm a ll d iffere n ces am ong sta n d a rd deviations of the th re e groups. In view of this evidence, we m a in ta in o u r h y p o th e sis, ra th e r than re je c t it, sin ce, counter evidence is not stro n g enough to re je c t the null h ypothesis. F o r the te stin g of the th ird hypothesis th a t th e ra te of la b o r-s a v in g technological change would be expected to be highest in im p o rt-s u b stitu tio n in d u s trie s , followed by ex p o rt in d u s trie s , and low est in ho m e-g o o d s in d u s trie s , w e em ployed two kinds of te s ts . F ir s t, we e s tim a te d two c r o s s - s e c tio n C obb-D ouglas production functions using c a p ita l's s h a re as a m e a s u r e of capital input. The e s tim a te s of m e an s of the r a te of in c re a s e in la b o r-sa v in g change and following sta n d a rd deviations w e re -65. 22 t 22. 36 p e r cent for im p o rt-su b stitu tio n in d u s trie s , -3 3 .2 7 t 8 .8 3 p e r cent for export in d u strie s and -3 5 .2 1 + 31. 18 p er cent fo r hom e-goods in d u s trie s . The evidence su g g ests the a c c e p ta n c e of our hy p o th esis, although the m e a n fo r hom e-goods in d u strie s is slightly h ig h e r than th a t for ex p o rt in d u s trie s , due to m uch h ig h e r stan d ard deviation fo r hom e-g o o d s in d u s trie s than that for export in d u s trie s . Second, we em ployed the f a c to r - s h a r e m ethod in estim atin g p a r a m e te r s of Cobb-D ouglas production functions. The following m e a n s and sta n d a rd deviations w e re -4 3 .8 4 20. 35 p e r cent for im p o rt-s u b s titu tio n in d u s trie s , -4 0 .0 2 + 16.2 p e r cent fo r ex p o rt in d u s trie s , and -44. 1 + 10.44 p e r cent for h o m e-goods in d u s trie s . The re s u lt se e m s to be inco n clu siv e, sin ce, th e re is no sig n ifican t ' 1 d iffere n ce betw een m e a n s, and the sta n d a rd deviations a r e not j 119 m u ch d ifferen t fro m each o th e r, except for hom e-goods in d u strie s. W hile the second evidence is inconclusive, the f ir s t one su g g ests the accep tan ce of our h ypothesis. F o r the te stin g of the fourth hypothesis th at the ra te of ] in c re a s e in in te rm e d ia te -in p u t saving would be h ig h est in hom e-goods; in d u s trie s , followed by im p o rt-su b stitu tio n in d u s trie s , and low est in export in d u s trie s , we u sed the f a c to r - s h a r e m ethod w ith th re e fa c to rs of production. The m e an s of the e s tim a te s for the ra te of in c re a s e in the ratio of in te rm e d ia te input to g ro ss output and c o rresp o n d in g sta n d a rd deviations w e re -0. 91 i 8 . 88 p er cent for hom e-goods in d u s trie s , 0.07 t 11. 96 p e r cent for im p o rt-s u b s ti- ; tution in d u strie s , and 1. 97 t 5. 20 p er cent for export in d u strie s. The e m p iric a l evidence shows that the ra tio of in te rm e d ia te input to g ro s s output is a lm o st constant in all th re e groups, and thus ! the ra te of in te rm e d ia te -in p u t saving is insignificant. H ow ever, j the o rd e rin g of in d u strie s seem s to be in a g re e m e n t with o u r ! hypothesis. P olicy Im plications i Since the e m p iric a l evidence does not re je c t the four hy p o th eses, we can exam ine s e v e ra l policy im p licatio n s of our I I study. On efficiency grounds, hom e-goods in d u strie s have shown j the slow est r is e in the efficiency p a ra m e te r as we hypothesized and this can be m itig a ted through the en la rg e m e n t of dem and by i - . V . O i f * * - . 120 exploring fo reig n m a rk e ts and p ro g re s s iv e ly low ering the ra te of effective p ro tec tio n for hom e-goods in d u s trie s , th e re b y in c re a s in g com petitive p r e s s u r e . In o rd e r to co m p en sate for the p re s e n t o v erv alu atio n in export in d u s trie s , the fo reig n exchange ra te should be in c re a sin g ly u sed as the guide for r e s o u r c e allo catio n ra th e r than v ario u s export pro m o tio n s c h e m e s w hich provided loopholes fo r in efficien cies. On r e tu r n s - to - s c a le , w e have se e n th at the d e g re e of r e tu r n s - to -s c a le depends on the level of capacity utilizatio n . It is d e s ira b le to in c re a s e capacity utilizatio n in h o m e-goods in d u strie s by o v erco m in g the lim ited siz e of the d o m e stic m a rk e t through ex p o rts. In im p o rt-su b stitu tio n in d u s trie s , undervaluation of foreign exchange s e e m s to have encouraged the cap ital im p o rts in this s e c to r, and this is to be c o rre c te d by adopting re a lis tic exchange ra te s . In capital in ten sity , u n dervaluation of fo reig n exchange | h a s, to som e esten t, helped speed up the grow ing use of capital. i W hile g o v ern m e n t's vigorous su p p o rt for im p o rt-s u b stitu tio n is m a in ly re sp o n sib le for this. .Although this m ig h t be inevitable w ithin the p re s e n tly av ailab le m ix es of technology, in c re a sin g I em p h asis should be placed on the developm ent of la b o r-u sin g i technology (ra th e r than by sim ply following the path of cap ita l-u sin g technological change) by enlarging the a lte rn a tiv e s for the choice of technology. This would be m o re n a tu ra l sin ce la b o r is m o re abundant in K orea. In in te rm e d ia te -in p u t saving, although o u r evidence w as w eak, it su g g est th a t the p re s e n t export prom otion sch em e s have encouraged the u se of im p o rted raw m a te r ia ls re la tiv e to d o m e s tic a lly produced inputs. This is expected to have dam pened the linkage effects betw een ex p o rt in d u s trie s and the r e s t of the in d u s trie s . E n co u ra g em en t of the u se of d o m e stic raw m a te ria ls r a th e r than in c re a s in g dependence on im p o rte d raw m a te ria ls (thus low ering the d o m e stic value added of exports) should be v ig o ro u sly followed by gov ern m en t policy in o rd e r to c o r r e c t the o v er dependence on im p o rte d m a te r ia ls . A g en era l gu id e-lin e s e e m s to be th a t the p ric e m e c h a n ism should be in c re a s in g ly u tilized , th e rb y avoiding continued dependence of tra d e policy on m any d ire c t c o n tro ls, to reduce the d isto rtio n of re s o u rc e allocation. Suggestions fo r F u r th e r W ork In the f ir s t c h ap ter we p re s e n te d a c a se for the u sefu ln ess of the production function fra m e w o rk in the a n a ly sis of cau sality betw een tra d e p o licies and th e ir effects on technological change in developing c o u n trie s. As we have seen in the second ch ap ter, th e tra d e policies of developing co u n tries and th e ir effects on i I tech n o lo g ic al change se e m to be s im ila r. T hus, our e m p iric a l I ca se study of K o rea m ay w ell be applied to o th e r developing j econom ies to obtain additional e m p iric a l evidence fo r our hypothesesl In applying the production function fra m e w o rk to the a n a ly sis of tra d e policy and its effect on technological change, it is m o re d e s ira b le to im p ro v e data than to develop a new type of production function w hich is m a th em a tic ally m o re so p h isticated and refined. 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Creator Jeong, Changyoung (author)

Core Title Production Functions In Korean Manufacturing: An Analysis Of Trade Policyand Its Effect On Technological Change

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Nugent, Jeffrey B. (committee chair), Kim, Young B. (committee member), Tintner, Gerhard (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-550634

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Legacy Identifier 7206068

Dmrecord 550634

Document Type Dissertation

Rights Jeong, Changyoung

Type texts

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