Mission-Oriented Procurement for Industrial Transformation: Reclaiming the Developmental State in Georgia

Authors: Ketevan Jincharadze, Zaza Rukhadze, George Tutberidze

Since 2012, the Government of Georgia has introduced a series of programs aimed at stimulating local production. Initiatives like Produce in Georgia, Agrocredit, and large-scale investments by the Partnership Fund signal a turn toward more active economic policy. Yet, despite this visible state presence, structural transformation remains elusive. Unemployment, poverty, and deepening inequality continue to plague Georgia's economy. The share of the population living in absolute poverty stands at 21.3%, and real unemployment is significantly higher than the official 12% figure.

These persistent failures suggest that Georgia’s policy framework—still largely tethered to neoliberal orthodoxy—lacks the institutional depth and strategic coherence needed to drive industrial upgrading. One of the most underutilized levers for transformation lies in public procurement policy. While the government has focused on transparency and anti-corruption in procurement processes, it has neglected the developmental and market-shaping role that procurement can play—a role well-recognized in heterodox economic thought.

The Forgotten Tool: Procurement as Industrial Policy

Public procurement in Georgia accounted for over 4 billion GEL in 2016, or about 11% of GDP. This is not a marginal channel. As Mariana Mazzucato argues, such public spending can and should be used not just to purchase goods and services efficiently, but to create new markets, foster innovation, and build domestic capabilities. However, Georgian procurement policy remains indifferent to questions of technological learning and local value addition. It neither tracks how much procurement spending leaks abroad, nor does it impose meaningful local content requirements or performance obligations on foreign suppliers.

According to the State Procurement Agency, approximately 65% of procured goods (excluding oil) are imported. This implies that over 1.2 billion GEL in goods procurement annually leaves the country, representing nearly 4% of GDP and 12% of the state budget. Such capital outflows deprive the domestic economy of demand that could otherwise be directed toward industrial deepening and job creation.

From a heterodox standpoint—particularly that of Ha-Joon Chang and Erik Reinert—this is a wasted opportunity. Procurement can function as a de facto subsidy for local firms, helping them overcome scale and learning barriers. Rather than relying on comparative advantage theory and assuming optimal outcomes through open competition, the state can actively build comparative advantage through procurement—a logic long practiced by successful late industrializers.

Global Lessons in Mission-Driven Procurement

Far from being an anomaly, such developmental uses of procurement are common across the globe. In the United States, the Buy American Act and Buy America provisions reserve government contracts for domestic firms and mandate local content thresholds—50% or more depending on the product category. These policies, some dating back to the 1930s, helped nurture key sectors such as aerospace, IT, and steel manufacturing. The state didn’t merely react to market failures; it shaped markets.

Similarly, Turkey grants up to a 15% price preference to local firms in public procurement and imposes offset obligations on foreign contractors, especially in defense. These obligations often include technology transfer, joint production agreements, or capacity-building requirements—mechanisms designed to inject external know-how into the domestic economy.

China, Japan, and the EU have also used procurement strategically. Despite liberalization in the EU, foreign suppliers still constitute only around 7% of public procurement. In contrast, Georgia’s high import share in procurement reflects not just openness, but policy underdevelopment.

As Reinert notes, countries that successfully industrialized used procurement not simply to buy what was cheapest, but to create demand for local firms, help them accumulate productive capabilities, and incentivize innovation. The state, in this view, acts as a midwife of structural change, not a passive purchaser.

Beyond Neoliberal Constraints: Toward a Developmental Procurement Policy

Georgia's current approach reflects what Mazzucato calls a “market-fixing” mindset—assuming that markets exist and the state's job is to correct inefficiencies. Instead, a mission-oriented strategy would involve “market-shaping”: identifying key industrial sectors, setting ambitious goals (such as import substitution in pharmaceuticals, green construction, or digital infrastructure), and using public procurement to create sustained, guaranteed demand in these areas.

This doesn’t imply shielding inefficient firms indefinitely. Rather, as Robert Wade emphasizes, procurement preferences should be conditional—linked to performance targets, technological upgrading, or export readiness. Foreign suppliers, too, can be required to contribute to domestic capacity through countertrade agreements, joint ventures, or local assembly mandates.

At a minimum, Georgia should implement a tiered procurement policy that:

• Grants local content preferences in strategic sectors.

• Establishes offset or technology transfer obligations for large contracts.

• Creates a tracking system to assess domestic value-added in public procurement.

• Uses procurement planning as a tool of industrial coordination, linked with agencies like Produce in Georgia and the Partnership Fund.

 

Conclusion: Reclaiming the Developmental State

Georgia remains mired in the belief that markets alone will drive its economic transformation. But as the global experience and heterodox theory show, transformation is not automatic—it must be engineered. Public procurement, if aligned with a coherent industrial policy, can be a cornerstone of this effort. The 4 billion GEL the state spends annually is not just a cost—it is latent industrial demand, which can be channeled to support domestic firms, generate employment, and accelerate technological learning.

The challenge is not just to buy cheaper. The challenge is to buy strategically—with an eye toward what kind of economy Georgia wants to build.