Factor substitution in rice production function: the case of Vietnam

Abstract

Vietnamese rice production has achieved remarkable success over the last couple of decades. This is due to land and market reforms, known as ‘Doi Moi’. There were noticeable changes in policies, such as land and production systems, which were transformed from a collective to an individual contract system in the 1980s. Vietnam made progress in rice production through the legalisation of the privatisation of farm properties and a huge investment in irrigation systems. The country not only ensured its domestic demand, but also started exporting rice and gradually became the second largest exporter in the world. An estimate of the Constant Elasticity of Substitution function (CES) for Vietnam’s rice production is essential for the government to design effective policy on agricultural production. This study makes the first attempt to estimate the nested CES model for Vietnamese rice production in 2012. The paper finds that the elasticity of substitution of Vietnam's nested CES model lies between 0.44 and 0.46. The results indicate the weak substitutability between land and the capital-labour composite in the nested CES model. This also suggests that it is impossible to take labour as the substitutable factor for land and capital.