MEASURING THE TECHNICAL EFFICIENCY OF CEMENT INDUSTRY IN PAKISTAN

Using stochastic frontier analysis, the paper measures the technical efficiency of cement industry of Pakistan. For this purpose, technical efficiency is calculated for 16 cement industries using panel data for the period 2000-2016. Two models are estimated to measure the technical efficiency of cement industry, i.e., the industrial model and the macro-model. In the former model, only industry related variables are used, while in the latter model macroeconomic variables are also used as input variables besides industrial variables. The results indicate that all industrial variables, i.e., capital, labor, raw material, repair and maintenance, energy inputs and advertisement have positive effect on production of cement industry measured by net sales. In macro-model, gross domestic product (GDP) growth and exchange rate have significant positive effect on production. It is found that one percent increase in economic growth will increase cement production by 0.061%. Similarly, one percent devaluation in exchange rate will bring 0.855% increase in cement production. The results show that there is 48.4% efficiency in cement industry of Pakistan, which indicates that cement industry in Pakistan is inefficient by 51.6%. It implies that there is a need to improve the efficiency of cement industry. Further, macroeconomic variables should be incorporated while examining the efficiency of cement industry in Pakistan.