Challenges in the Portuguese textile and clothing industry: a fight for survival

ABSTRACT

The Portuguese textile and clothing industry thrived after 1960, when Portugal joined the European Free Trade Association, and it has been an important industry in Portugal in terms of value added, employment, and exports. Nevertheless, the industry has experienced significant challenges with the final integration of the apparel and textile industry into GATT on 1 January 2005, as well as the admission of relatively low-wage Bulgaria and Romania into the European Union in 2007. This paper describes recent trends in the industry between 1995 and 2016, including a substantial decrease in output after 2005 and recovery in recent years. In addition, a translog cost function is used to examine the existence of economies of scale, the relationships among inputs, and the effects of the 2005 GATT entry on the industry’s costs. The findings include strong evidence of economies of scale, consistent with the many small and mid-sized enterprises in the Portuguese textile and clothing industry. The results are also consistent with capital and labour being complementary inputs, while other input pairs are substitutes. The entry into GATT may have had a negative impact on cost, though the evidence for that effect is weak.

KEYWORDS:

• Portugal
• textile industry
• globalization

JEL CLASSIFICATION:

• D24
• F14
• L67

Acknowledement

We gratefully acknowledge the helpful suggestions and comments of an anonymous referee.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See Thiel, Pires, and Dudleston (2000, 113–116) for a brief history of the Portuguese textile and clothing sector.

² The leather industry is also included in the data for the textile and clothing industry. However, the footwear industry is a very small part of the textile, clothing, and footwear (TCF) industry in Portugal. The total industry data include industry, energy, water supply, and sewerage activities. Hanzl-Weiß (2004, 929) states that the footwear industry has a share of 16% of this industry for the countries joining the EU and that this share is similar in the EU as a whole.

³ The rebound in the textile and apparel industries is also reflected in popular press articles such as ‘Portuguese Fashion and Textile Industry Sees Significant Recovery,’ Fashionating World, 19 May 2017, https://www.fashionatingworld.com; ‘The Portuguese Textile Industry Reaches Full Production,’ ACTE, 17 February 2015, http://acte.net; and Khalip,‘Analysis – Portugal Textile Firms Weave Way Out of Crisis,’ Reuters, 8 February 2012, http://uk.reuters.com.

⁴ The change in the third industry sub-category from footwear in Table 2 to leather products in Tables 4 and 5 reflects the presentation of the data in the national statistics database.

⁵ See Jorgenson (2000, Chapter 4), Greene (2000, 640–644), Berndt and Christensen (1973); Christensen, Jorgenson, and Lau (1973); and Guilkey, Lovell, and Sickles (1983, 615) for more detailed discussions of translog functions. Also, see Binswanger (1974, 380); and Kohli (1991, 103–106) for a discussion of the technological change variable.

⁶ The principal advantages of using a translog cost function rather than a translog production function are the following ones: (1) the partial derivatives of a cost function with respect to input prices yield the corresponding input demand functions (Shephard’s Lemma), (2) the partial derivative of the cost function in logarithmic form with respect to factor prices yields the input cost shares, and (3) the partial derivative of the cost function in logarithmic form with respect to output yields the cost elasticity with respect to level of output (Binswanger 1974, 377; Jorgenson 2000, Chapter 1).

⁷ If the data are normalized so that total cost, the output quantities, and the input prices are equal to one in the base period and if the translog cost function is exact, the logarithm of α₀ is equal to zero. Although a normalization procedure was followed and 1995 was used as the base, the estimated translog cost function was not assumed to be exact. Thus, α₀ may not be equal to zero. Separate stochastic error terms, to reflect errors in optimizing behaviour, are implicitly added to the estimated cost and share equations. The iterative Zellner-efficient method (IZEF, Zellner 1963) is used to obtain the parameter estimates.

⁸ As a result of the linearly homogeneous in prices assumption,

$\begin{array}{rl}& {\beta }_{\mathrm{M}}=(1-{\beta }_{\mathrm{K}}-{\beta }_{\mathrm{L}}),\\ & {\gamma }_{\mathrm{M}\mathrm{M}}=[(1/2){\gamma }_{\mathrm{K}\mathrm{K}}+(1/2){\gamma }_{\mathrm{L}\mathrm{L}}+{\gamma }_{\mathrm{K}\mathrm{L}}],\\ & {\gamma }_{\mathrm{K}\mathrm{M}}=-({\gamma }_{\mathrm{K}\mathrm{K}}+{\gamma }_{\mathrm{K}\mathrm{L}}),\\ & {\gamma }_{\mathrm{L}\mathrm{M}}=-({\gamma }_{\mathrm{K}\mathrm{L}}+{\gamma }_{\mathrm{L}\mathrm{L}}),\\ & {\rho }_{\mathrm{Y}\mathrm{M}}=-({\rho }_{\mathrm{Y}\mathrm{K}}+{\rho }_{\mathrm{Y}\mathrm{L}}),\mathrm{a}\mathrm{n}\mathrm{d}\\ & {\gamma }_{\mathrm{M}\mathrm{T}}=-({\gamma }_{\mathrm{K}\mathrm{T}}+{\gamma }_{\mathrm{L}\mathrm{T}}).\end{array}$

⁹ See Durbin (1957), Malinvaud (1970, 509), and Berndt and Christensen (1973, 95) for a discussion of the Durbin–Watson statistic in the context of simultaneous equations. See Godfrey (1988, 112–117) and Greene (2000, 540–541) for a discussion of a Lagrange multiplier test in this context.

¹⁰ Estimates of the direct price elasticity of demand for input i can be calculated using the estimated input shares and parameters of the cost function as

${\mathrm{E}}_{\mathrm{i}}=\frac{{\mathrm{Y}}_{\mathrm{i}\mathrm{i}}{+\mathrm{S}}_{\mathrm{i}}^2-{\mathrm{S}}_{\mathrm{i}}}{{\mathrm{S}}_{\mathrm{i}}}$

Estimates of the cross price elasticities of demand $({\mathrm{E}}_{\mathrm{i}\mathrm{j}}=\mathrm{\partial }\mathrm{l}\mathrm{n}{\mathrm{X}}_{\mathrm{i}}/\mathrm{\partial }\mathrm{l}\mathrm{n}{\mathrm{W}}_{\mathrm{j}})$ can be calculated as:

${\mathrm{E}}_{\mathrm{i}\mathrm{j}}={\mathrm{S}}_{\mathrm{j}}+\frac{{\mathrm{Y}}_{\mathrm{i}\mathrm{j}}}{{\mathrm{S}}_{\mathrm{i}}}$

¹¹ See (Eakin, McMillen, and Buono 1990; Kerkvliet and McMullen 1997) for a description of the bootstrap procedure to establish the significance of these estimates.

¹² In a recent paper involving the Australian clothing industry, Truett and Truett (2017) also found results suggesting that capital and foreign intermediate goods and domestic intermediate goods were complements. However, none of the mean cross price elasticities were statistically significantly less than zero.

¹³ See, for example (ACTE 2015; Binlot 2015; Khalip 2012; Fashionating World, 2017; Hanzl-Weiß 2004;Serra, Pointon, and Abdou 2012).

Additional information

Funding

The authors received no external funding for this research.