Beyond Free Trade Orthodoxy: Rethinking Georgia’s Free Industrial Zones through a Developmental State Lens

Authors: Irakli Gelashvili and Usup Bitsadze

Introduction: Why Zones Fail When Strategy Fails From Shenzhen to Singapore, special economic zones have served as instruments of structural transformation when embedded in coherent state-led industrial strategies. In contrast, Georgia’s experiment with Free Industrial Zones (FIZ), particularly in Poti, reveals the limitations of adopting free trade orthodoxy without corresponding institutional and developmental frameworks. The Poti FIZ—established in 2008 and handed to private foreign investors—has failed to generate meaningful employment, industrial upgrading, or long-term economic transformation. This failure is not incidental but rooted in a broader misunderstanding: free trade zones cannot substitute for national development strategy. Heterodox economists such as Erik Reinert and Ha-Joon Chang have long emphasized that economic development requires more than openness—it demands productive capabilities, policy coordination, and learning-based industrialization. Mariana Mazzucato stresses the importance of mission-oriented institutions and state leadership in shaping markets, while Robert Wade points to the role of selective protection and strategic state intervention in successful late-industrializing economies. From this standpoint, Georgia’s hands-off approach to FIZs, centered on deregulation and foreign capital attraction, lacks the essential ingredients of developmental success. The Case of Poti: Privatized Zone, Public Failure In 2017, the Georgian government sold a 75% stake in the Poti Industrial Zone to China’s CEFC, with an obligation to invest $150 million over 11 years. Yet this echoes earlier attempts: in 2009, 3 million sq.m. of port land had been leased for 99 years to RAKIA (Ras Al Khaimah Investment Authority) for $155 million. Despite initial promises—including 400 enterprises and 200 million USD in investment the outcomes were paltry: one rice-packaging firm employing 20 people and widespread layoffs

following the port’s sale to APM Terminals. In 2016, most of the land was quietly returned to the government.

The reasons often cited—geopolitical insecurity post-2008 war, the global financial crisis, or managerial missteps—miss the broader institutional failure: Georgia did not integrate its FIZs into a national industrial policy. In a country already shaped by extreme economic liberalism, the added tax incentives of a free zone provided few marginal gains. Even former Finance Minister Nodar Khaduri remarked that “Georgia itself is, to some extent, a free industrial zone.” The result: FIZs became enclaves detached from domestic capabilities, not catalysts for upgrading.

Incentives Without Strategy The Poti FIZ enjoyed customs exemptions, profit tax holidays, property tax reductions, and VAT waivers. Yet these incentives were designed in isolation—without support for

technological upgrading, skills development, or domestic linkages. A study by GEOWEL found that despite the potential for 18% higher profits due to tax advantages, the cost of doing business remained high, and few firms were willing to relocate. Crucially, no coherent effort was made to link FIZ firms with local suppliers or labor markets, as in successful East Asian cases.

Contrast this with China’s approach. In zones like Shenzhen, fiscal incentives were paired with public investment in infrastructure, R&D, training, and procurement. Local governments retained revenues and issued long-term development loans. Most importantly, zones were embedded within broader industrial goals—technology absorption, clustering, and export diversification. Chinese SEZs were not liberalization projects; they were tools of economic engineering. Lessons from Structuralist Theory: Trade is a Means, Not an End as Reinert argues, “what you export matters”: high-value goods with increasing returns and knowledge spillovers (e.g., machinery, electronics) drive prosperity.

Georgia’s FIZs, in contrast, remained low-tech and import-reliant. Mazzucato’s theory of market co-creation suggests that public agencies must actively build capacity in key sectors—through grants, partnerships, and long-term missions. Georgia’s FIZs lacked this direction entirely. The Vietnamese experience is equally telling. Although it built 64 export zones, failure to integrate them into the local economy limited spillovers. Firms operated in isolation, and knowledge transfer stalled. UNCTAD and UNIDO both warn against enclave economics where zones become self-contained areas with no link to national development.

Toward a Mission-Oriented Alternative for Georgia Rather than relying on foreign investors to deliver transformation, Georgia must develop a mission-oriented industrial strategy. This requires:

1. Reclaiming public leadership in FIZ management, following the Chinese and Korean models of local-government-led zone coordination.

2. Investing in infrastructure and workforce training, not merely deregulation.

3. Embedding zones into national value chains via supplier development, licensing agreements, and coordinated procurement.

4. Linking incentives to performance, such as technology transfer, investment, and local employment quotas.

5. Focusing on domestic champions, not waiting for foreign corporations to build factories in a geopolitically sensitive region.

In the long run, Georgia’s development must be built on upgrading its production structure, not on trading privileges or passive liberalization. Free Industrial Zones are tools—not goals—and only deliver results when governed by a capable, future-oriented developmental state.

Conclusion

The failure of the Poti Free Industrial Zone is not the result of bad luck or poor execution alone. It reflects a deeper flaw: the importation of policy templates from neoliberal theory without attention to local capabilities, historical experience, or developmental sequencing. Heterodox economics offers a clearer roadmap—one where the state is not a referee, but an architect of industrial transformation. Georgia must go beyond the hype and start building that state.