An estimation of a production function for the South African clothing industry

M.Comm.The aim of this study is to estimate a production function for the South African clothing industry. A detailed investigation of the industry was undertaken with a view to establishing the current productive capability of the industry, the potential for increasing the productive capacity of the industry as well as the problems facing the industry in light of the readmittance of South Africa to the world community. The chief finding of the study is that the productive capability of the South African clothing industry is not optimised. Whilst the estimation results of this study correlate to actual levels of output recorded for the period 1970 to 1992, such levels of output represent only a part of the productive potential of the industry . So the question arises as to what is the optimised level of output in the clothing industry ? The results proved to be rather surprising with the quantative analysis suggesting that, despite being the most labour intensive industry in South Africa, in order to optimise levels of output, even more labour should be used in production processes. Despite empirical evidence to the contrary, the implication of this finding suggests that the labour factor input is extremely productive. In contrast, the optimisation exercise clearly points to a need to reduce the factor input capital, as capital is estimated to be an extremely unproductive resource. The question arises as to what are the reasons for these "strange" findings ? The reasons for these findings stem from the fact that the output elasticities of the factor inputs do not conform to the properties of the Cobb-Douglas function. That is, in order to conform to the properties of the Cobb-Douglas function neither of the output elasticities of the factor inputs Should exceed 1 or be less than 0. Both output elasticities for the factor inputs, Capital and Labour, fail this requirement. The output elasticity of the capital factor input is negative (-0.2485) indicating that a 10% increase in the usage of the capital input will result in a 2.5% decrease in the level of output. The output elasticity of the labour factor input is greater than 1 (1.4056) indicating that a 10% increase in the usage of the labour factor input will result in a 14% increase in output levels. Under such a scenario and given that fact that the efficiency criterion, although not statistically significant, points to the capital factor input being overutilised and the labour factor input being underutilised, it is not surprising that in order to optimise output the production process should become more labour intensive. Despite being "strange" there is an economic rationale for these results. Our historical legacy of the apartheid years with the associated period of isolation provides the rationale for the estimated findings indicated above. That is, during the period of isolation, the clothing industry, which is characterised by a by a large number of small and medium sized enterprises, found it extremely difficult to acquire the necessary capital machinery and machinery parts for productive purposes. Not only was such machinery (and parts) not readily available but the costs involved ( due partly as a result of a depreciating Rand) were prohibitive. Under such circumstances, it was no surprise that further investment in capital machinery was limited, resulting in an increasingly outdated (and often badly repaired) productive infrastructure. Furthermore, due to the problems highlighted above, entrepreneurs, instead of replacing machinery that had fell into a state of disrepair, looked to increase the labour input. That is, the productive process in the clothing industry shifted from being a fairly capital intensive method of production to an extremely labour intensive method of production