An Empirical Study of Factor Substitution in Bangladesh Agriculture

Abstract

This study is concerned with factor substitution, technical change and productivity change in Bangladesh agriculture. The trans log cost function is used to study both substitutability and complementarity relationships between inputs. In analyzing the changes in productivity, the Divisia indexing method which has a flexible weighting scheme is used. Using both horn thetic and no homothetic structure, the Allen partial elasticities of substitution (AES) estimated to examine the nature of factor substitution among the four inputs of land, labor, fertilizer, and irrigation covering the period from 1973 to 1995. The responsiveness of input demand to input prices is explored by estimating own price and cross price elasticities of demand. The empirical estimates indicate the existence of both substitutability and complementarity among inputs. The nonhomophobic structure with technical change clearly characterized the Bangladesh agricultural sector. A very high degree of substitutability between fertilizer and irrigation was found in both the homothetic and no homothetic structures. The empirical estimates showed evidence of land and labor-saving technical changes and presence of fertilizer and irrigation using technical changes during the study period. Using the Tomqvist approximation to the Divisia index, total factor productivity was estimated. Total factor productivity (TFP) in Bangladesh agriculture increased at an annual growth rate of 1.69 percent during the period from 1973 to 1995. During the same period, the terms of trade (ratio of output and input prices) deteriorated at an annual rate of 1. 19 percent. By considering the farmers' terms of trade and returns to costs (ratio of value of output and value of input), the distribution of productivity gain was also studied. The growth rate of returns to costs was 0.50 percent which implied that farmers' economic condition slightly improved over the period from 1973 to 1995.