Industrial Development
Senior 6 · Economics
Industrial Development
Lesson 2 of 4
25 min
In 2025, 676,340 Rwandans of working age were unemployed, an unemployment rate of 12.4% (NISR, Labour Force Survey Annual Report 2025). Suppose an investor in Kigali wants to make 1,000 pairs of shoes a day. She can buy an automated line that needs 6 workers, or simpler machines that need 40. For her the question is: which is cheaper? For the country there is a second question: which creates more jobs, and which uses less of its scarce capital and foreign exchange?
Think: can the cheapest choice for the firm and the best choice for the country be different? What could make them the same?
Definition
Technique of production: a particular combination of inputs (labour, capital, materials) used to make a product.
Capital-intensive technique: uses a high ratio of capital to labour, , with many machines per worker. Labour-intensive technique: uses a low ratio of capital to labour, with many workers per machine.
Worked example
Worked example 1: the least-cost technique (illustrative figures)
To make 1,000 units a day, technique A uses 40 workers and 2 machines; technique B uses 6 workers and 10 machines. A worker costs Frw 4,000 a day; a machine costs Frw 20,000 a day (interest, depreciation and running costs).
A, the labour-intensive technique, is cheaper and employs 34 more people. Now find the wage at which the two cost the same:
Above a daily wage of about Frw 4,706, B becomes cheaper. The choice depends on the relative prices of labour and capital.
The curve is an isoquant: every point on it produces the same 1,000 units. An isocost line joins combinations that cost the same; its slope is , the wage relative to the cost of capital. A firm produces at the point where its lowest isocost just touches the isoquant. When labour is cheap (flat green line) that is A, a labour-intensive technique; when labour is dear (steep orange line) it is B, a capital-intensive one. Policies that make capital artificially cheap, such as subsidised loans or duty-free machinery, push firms towards B even where labour is abundant.
| Labour-intensive | Capital-intensive | |
|---|---|---|
| Jobs | Many jobs for each franc invested | Few jobs for each franc invested |
| Capital and foreign exchange | Little needed; often local tools | Much needed; machines usually imported |
| Skills | Simple skills, learned on the job | Technicians and engineers needed |
| Output and quality | Smaller output, more variable quality | Large, uniform output that meets export standards |
| Scale | Suits small markets and small firms | Needs a large market to use full capacity |
| Income distribution | Spreads income among many workers | Concentrates income with owners of capital |
| Growth | Less saving and reinvestment, some argue | Higher profits to reinvest, some argue |
Factors that influence the choice: relative factor prices; how much capital and foreign exchange are available; skills; the size of the market; quality standards in export markets; the type of product (some processes, such as cement, have no labour-intensive version); tied aid that comes with foreign machinery; and government aims, such as jobs or rapid growth.
Definition
Intermediate technology: technology between simple traditional tools and advanced, large-scale machinery: cheaper, smaller and easier to run and repair. The idea comes from E. F. Schumacher, Small Is Beautiful: A Study of Economics as if People Mattered (1973).
Appropriate technology: technology suited to a country's resources and needs: in a low-income country, one that uses abundant labour and local materials, saves scarce capital, can be maintained locally and protects the environment.
Schumacher argued that poor countries were importing "advanced" technologies designed for rich countries with expensive labour, which created few jobs and could not be maintained. In 1966 he and colleagues founded the Intermediate Technology Development Group, today called Practical Action. Appropriate technology is not always low technology: for a Rwandan household beyond the grid, a solar home system is the appropriate technology, and by the end of 2025, 25.3% of Rwandan households relied on solar for their electricity (REG).
| Need | Appropriate technology | Why it fits |
|---|---|---|
| Light and phone charging off the grid | Solar home systems | No power lines needed; small, affordable units |
| Cooking fuel | Improved cookstoves; biogas from manure | Less firewood, less smoke, local materials |
| Processing crops | Small cassava graters, maize shellers, oil presses | Cheap, repairable, add value in the village |
| Water | Rainwater tanks; treadle and solar pumps | Simple to run; no fuel |
| Building | Compressed earth blocks | Local soil, little fuel, labour-intensive |
Limitations: lower output per worker; products may not meet export standards; can be seen as "second-best" by consumers and governments; and wages stay low if productivity stays low.
Definition
Technology transfer: the movement of technical knowledge, methods and equipment from one country or firm to another. Technology development: building a country's own capacity to adapt, improve and create technology.
| Channel of transfer | How it works |
|---|---|
| Foreign direct investment | Multinationals bring machines, methods and management; local staff and suppliers learn |
| Licensing and franchising | A local firm pays royalties to use a patent, brand or process |
| Joint ventures | Local and foreign firms share ownership, so knowledge is shared too |
| Turnkey projects | A foreign contractor builds a complete plant and hands it over ready to run |
| Imports of capital goods | Technology is embodied in the machines a country buys |
| Training and the diaspora | Students and workers return with skills; foreign experts train local staff |
| Reverse engineering | Copying and adapting products by taking them apart (within patent law) |
Problems of technology transfer: high royalties and fees; technology that is inappropriate to local factor prices; restrictive contracts (for example, bans on exporting); dependence on foreign suppliers for parts and upgrades; and little learning if local workers are kept out of skilled jobs. Transfer works only where there is absorptive capacity: educated workers, engineers and local firms able to learn.
Technology development therefore needs domestic effort: technical and vocational training, university research linked to industry, public research bodies such as Rwanda's National Industrial Research and Development Agency (NIRDA), quality standards, protection of intellectual property, and support for start-ups and innovation hubs.
Warning
"Appropriate" does not mean "primitive". The appropriate technique is the one that fits a country's factor endowment and needs. Where a product must meet strict export standards, or where no labour-intensive process exists (cement, beer, pharmaceuticals), a capital-intensive technique may be the appropriate one.
Tip
For any question on choosing a technique, start from the factor endowment: Rwanda has abundant labour, scarce capital, scarce foreign exchange and limited skills. Then ask what the product needs (scale, quality, process). The best answer usually mixes techniques: labour-intensive where possible, capital-intensive where necessary.
Important
Discuss. A foreign investor offers to build a highly automated garment factory in a special economic zone, employing 300 workers. A local alternative would employ 2,000 people with simpler machines but produce lower-quality output. Which should the government encourage, and on what conditions?
Schumacher Center for a New Economics, "E.F. Schumacher Discussing Appropriate Technology" (panel recording, 19 March 1977). Hear the originator of intermediate technology explain his argument in his own words, months before his death in September 1977.
Practice
Sources and credits
Written by Ganzaa: the text, the isoquant diagram, the tables, the worked example and the practice items. The costs and quantities in the opening case, the worked example and the practice items are illustrative.
