The Developmental State and Export Transformation: Georgia's Trade with the EU through Heterodox Economic Lenses

Authors: Tato Khundadze, Salome Topuria, David Adeishvili

Rethinking Free Trade and Development

In the modern political landscape, free trade agreements are often framed as clear paths to prosperity. Georgia's Association Agreement with the European Union, hailed as a landmark deal, was expected to transform the country into a more dynamic, export-driven economy. And yet, a decade later, the evidence tells a more complicated story.

This blog explores Georgia's export performance to the EU not merely by numbers, but through the analytical frameworks of heterodox economists like Mariana Mazzucato, Erik Reinert, Ha-Joon Chang, and Robert Wade. These thinkers challenge the idea that market liberalization alone leads to real development. Instead, they argue that an active, strategic state is critical to fostering innovation, upgrading production, and guiding structural transformation.

Georgia has indeed seen some growth in exports to the EU, with a 26% increase since 2016. But this increase pales in comparison to the 172% growth in exports to CIS countries over the same period. More importantly, the quality of exports tells a sobering story: resource-based and low-tech goods continue to dominate, while high-tech exports remain stagnant. This suggests that Georgia's trade expansion has not been matched by industrial upgrading—a point central to the heterodox critique of free-market orthodoxy.

What the Data Really Says

Looking closely at the data, the picture becomes clearer. Although the number of different products (as measured by HS6 product codes) has grown, Georgia's export basket to the EU remains heavily concentrated. The top 10 domestic export products make up 85% of total domestic exports to the EU—higher than in 2014. Moreover, the share of resource-based products has doubled since 2010, and low-tech exports have grown significantly. High-tech exports, meanwhile, have not been budgeted.

Even more telling is the trend in "local exports," or goods produced domestically rather than re-exported. These have decreased in relative terms. From 2014 to 2020, local exports to the EU fell from 22% to 20% of Georgia's total domestic exports. While there was some early growth following the Agreement, it soon plateaued and began to decline.

Change-point analysis techniques show that there has been no notable structural break in export growth trends that can be attributed directly to the Agreement. In other words, the EU trade deal has not significantly reshaped Georgia's economic trajectory. These trends underscore the argument made by heterodox economists: access to markets is not the same as building the capacity to compete in them.

Why the State Still Matters

The lesson from Georgia's experience becomes evident when viewed through the work of Mazzucato, Reinert, Chang, and Wade. Reinert warns against specialization in "bad" activities—those that don't scale or generate innovation. Georgia's reliance on resource-based exports fits this warning. Mazzucato, meanwhile, argues for the "Entrepreneurial State," which actively shapes markets and drives innovation. Georgia's passive approach contrasts sharply with this vision.

Chang's historical work reminds us that the very countries now advocating liberalization once used protectionist policies to build their own industries. Georgia, by contrast, has liberalized without equivalent state strategies to nurture domestic firms. Wade's research on East Asia further supports this: the most successful exporters didn't just open up—they governed markets, investing in key sectors, managing competition, and guiding firms toward long-term goals.

Georgia's case confirms what heterodox theory predicts: trade liberalization, while necessary, is not sufficient. For meaningful export transformation, the state must do more than facilitate—it must lead. This means investing in innovation, shielding emerging industries, and building institutions that can sustain complex, high-value-added production.

In short, Georgia's path to prosperity requires rethinking the development playbook. Market access matters, but without a mission-oriented state behind it, true transformation will remain out of reach.