Estimation of output capacity utilization rate of the manufacturing sector in Iran: A translog cost approach

Purpose: The main goal of this research is to evaluate the production capacity in Iran's manufacturing sector and analyze the amount of utilized capacity.
Methodology: One of the common methods for estimating the capacity used by industries is econometric modeling and translog cost function estimation. In this approach, the cost function of the manufacturing sector must be estimated first. Then, using that function, the amount of production corresponding to the minimum average cost (the cost of each production unit) is estimated. In the next step, the ratio of the actual production in the industries to the production corresponding to the minimum average cost is defined as the amount of the capacity used by the industries, which is called the Minimum Efficient Scale or MES based on the literature. This study benefits from the model proposed by Christensen and Green (1976). The time period of the study is 2002-2019, and the mentioned model is estimated for two-digit ISIC codes from 15 to 38; therefore, the research data have a panel structure.
Findings and Discussion: The results of Translog cost function estimation with the weighted least squares econometric method show that the utilization of the production capacity of the manufacturing sector has decreased since 2009. In the years 2015 and 2016, the capacity utilization was the least. This situation continued in 2018 and 2019. The capacity utilization rate in Iran's manufacturing sector during the period 2001-2019 was about 77% on average. Surveys at the level of industrial activities show that the production of medicine and pharmaceutical products, printing and reproduction industries, production of rubber and plastics, production of chemical substances, production of paper and paper products, leather industries, base metal production, and other non-metallic mineral industries are in a situation lower than their long-term capacity trend. In contrast to the industries of other articles not classified elsewhere, the textile industry, production of tobacco and tobacco products, production of various beverages, the clothing industry, and food industries have used nearly 80 percent or more of their capacity in the period under review. To compare the results of this study with those of similar local studies, there are general similarities with the current study in terms of methodology. It seems that similar studies have calculated the capacity gap of industries at a certain level of production using the calculation cost function, which corresponds to the level of Minimum Efficient Scale(MES) for the manufacturing sector. But this level of production has been assumed to be the same for all activities and in all years. Considering that the conditions of different industries are not the same from the technical and economic points of view, and that the prices of production factors are not the same among industries over time, The current study uses elasticity Scale 1 as the base point for calculating the capacity gap, rather than numbers for the optimal levels of production. For example, according to the results obtained at the level of activities with a two-digit ISIC code, the chemical industry and the production of petroleum products averagely used 73 and 79 percent of their optimal economic capacity during the period 2002-2019, respectively. The results of other studies such as Khodadad kashi (2007) in estimating the economies of scale in Iran at the level of 70% are more compatible with the results of the present study, which shows the significance of the results obtained.
Conclusions and Policy Implications: In general, it can be concluded that various economic, institutional and environmental problems in the field of production have caused a decrease in the capacity of industries in recent years. Most of these problems pertain to the instability in the price of raw materials and lack of proper access to raw materials or inputs. Production is concerned with such problems as providing liquidity and working capital, the burden imposed due to exchange rate fluctuations, instability in regulations, rules and executive procedures, increased production costs, and reduced purchasing power of consumers. According to the findings of this research, the most important policy to recommend is to emphasize the solving of the problems in the manufacturing sector, especially regarding the stability in the price of raw materials and ease of access to production inputs, which can be an effective step for further utilization of the manufacturing capacity in the country.