FELGUEIRAS, Portugal—When Portugal accepted an international bailout three years ago, its rescue lenders pushed an orthodox strategy for digging out of recession. Cut wages and prices, they instructed, and exports will become more competitive.

Shoemakers here in the country's footwear capital did just the opposite—and they are thriving.

They have boosted wages to keep their workers motivated. They have invested in technology and brand promotion. And they have pushed the prices of their shoes past France's to become the most expensive in the world after Italy's.

The bet on quality is paying off with an export boom that is helping Portugal's recovery. Less clear is whether the highly specialized industry's success can be replicated widely enough to lift Southern Europe's distressed economies and upend the cost-cutting prescription of the European Union and International Monetary Fund.

Economists say modernizing enough industries to save Southern Europe from long-term stagnation—and low salaries—would be difficult. Many companies are highly indebted after years of cheap credit and can hardly afford new investments. They face high interest rates for new credit, high energy prices and a shortage of skilled workers.