Modeling the Evolution of the Romanian Textile Industry: Empirical Evidence of Lead-lag and Causal Relationships

The objective of this paper is to investigate and explain the evolution of the Romanian textile industry over the last decade. Potential explanatory factors, both systematic and industry-specific, for the dramatic industry decay are identified e. g. the disappearance of the primary industry, the continuous increase in the minimum wage in Romania, an acute labour shortage, the liberalisation and full integration of the textile industry into GATT in 2005 and the recent global economic crisis. Furthermore we present empirical evidence of the linkages and causality between the overall economic growth of Romania, the evolution of the country's textile industry and the rate of growth of the minimum wage in the economy during June 2000 and January 2011. We found that the lagged minimum wage growth and lagged textile industry sales growth together explain 80% of the future rate of growth in the country's gross domestic product (GDP). All econometric tests conducted using our dataset agree that past and contemporaneous increases in minimum wages have had a significant negative impact on the textile industry. Finally, Granger causality tests reveal that the rate of growth in the GDP is driven by sales in the textile industry, and at the same time textile industry sales also drives macroeconomic growth. This bilateral causality is significant at 5% in both cases, being stronger from the industry-level to the economy-level.