Capital, Energy, and Labor Cross-Substitution Elasticities in a Developing Country: The Case of Greek Manufacturing

Abstract

The sizeable and abrupt increase of petroleum costs in late 1973 and early 1974 confronted economies of oil-importing countries with the serious problem of restructuring their productive technology to deal with new relative factor costs. Government policies of developing countries like Greece with high growth-rate requirements had to meet the challenge of overcoming the adjustment cost posed by the sudden doubling of petroleum prices, maintaining at the same time economic stability, while threatened by the inflationary influence of increased energy costs and the loss of scarce foreign exchange resources redirected to petroleum imports. Policy makers correctly identified the need for an accelerated shift in technology choice of new and existing industries necessary to achieve the new “optimal” mix of productive factors, namely, to substitute energy by other inputs. To that purpose, the following two broad policy instruments were utilized.¹ Firstly, the government chose to depart from its long-practiced policy of subsidies to manufacturing in the form of cheap energy. Detailed engineering studies investigated the true expected replacement cost of converted energy (electricity) and the scarcity value of domestic resources (lignite, hydro).

This paper is the product of work conducted partly while the author was with the Greek National Energy Council and partly during his recent association with the M.I.T. Energy Laboratory. Thanks go to Mr. David Wood for his useful comments and to Dr. N. Mylonas and Mrs. H. Peristeropoulou for their help in data collection.