The debate over applying modern procurement theory to developing countires

Flexibility In Government Procurement Needed For Developing Countries By Riaz K. Tayob.

Riaz K. Tayob is the South African Representative of SEATINI (the Southern and East African Trade Institute), currently reading for a PhD in Technology Governance under Prof. Rainer Kattel at Tallinn University of Technology (Estonia). In this article he presents the debate:

The reality of the global economic crisis seems not to have affected the rationale for trade liberalisation in general, and for government procurement in particular. Given the paucity of standard textbook or neoclassical economics to explain the crisis (including the crisis on the Millennium Development Goals in most developing countries), there ought to be more analysis that grapples with the evidence and the relevance of the theories that underpin liberalisation.

One such approach included in a recently published journal article considered whether it is advisable for developing countries to use public or government procurement for development and whether developing countries should join the World Trade Organization (WTO) Government Procurement Agreement (GPA). The paper concludes that if public procurement for innovation (PPfI) is to be seen as part of their industrial-policy portfolio, accession to the GPA would not help, and advises against it.

And public procurement as part of industrial policy has a lot more to offer developing countries than is generally demonstrated in the typical studies undertaken, it finds. It does, however, mean that developing countries would first have to develop more robust innovation policy skills and competences, which may be lacking, and they should not directly transfer the respective policies from the developed world.

The article “Public Procurement as an Industrial Policy Tool: An Option for Developing Countries?” by Prof. Rainer Kattel and Veiko Lember appears in the Fall 2010 issue of the Journal of Public Procurement. It surveys the key arguments for and against joining the GPA, and argues that government procurement should not be seen only as an indirect support measure for development, but as a direct vehicle for promoting innovation and industries, and thus growth and development.

WTO Government Procurement Agreement

Only about 40 countries have joined the WTO GPA (a plurilateral agreement) including from the developing world Hong Kong (China), South Korea and Singapore and through the European Union, ten Eastern European countries. The GPA requires that signatories apply the principles of openness, transparency and non-discrimination (most-favoured nation treatment and national treatment) to national public procurement laws. The agreement applies above certain thresholds, for those sectors included in the positive or negative list annexed to the agreement, with exceptions allowed for “high national interests” or military products.

Government procurement, which constitutes more than 10 percent of the national economy in most countries, is perceived as one the main barriers to free trade. Discriminatory government procurement, according to the (neoclassical) theory of comparative advantage, makes states worse off in the long run because it leads to inefficient allocation of resources and limits the benefits of free trade: access to other markets, increased competition, job creation and budgetary savings.

The article states that the current debate on WTO and government procurement has been mostly about the relationship between trade and procurement and not so much about public procurement and economic development as such. The WTO approach assumes that liberal trade rules and maximum competition will eventually lead to sustainable economic growth both in developed and developing countries.

According to the article, using public procurement for developmental goals, in particular innovation (PPfI – public procurement for innovation), is seen in the literature as a demand-side policy measure through which governments can generate new markets for companies in order to develop new technological capabilities and solutions. However, the paper distinguishes PPfI from government purchases of “off-the shelf” products, procurement for innovation involves procurement that needs additional research and development work and thereby influences the innovative capacity of providers.

The article notes that while policy space has become much narrower for industrial policy under the WTO, it shows why it is still important for developing countries to use the still-available policy options. This would allow for the needed policy learning to take place through experimentation and is less open to rent-seeking and capture by interest groups.

A maximum level of competition may not be the best solution for developing countries and, instead, a more strategic policy view could be used that mixes competition with cooperation.

Direct public procurement for innovation represents one possibility that can be used to affect the technology life cycle, promote clusters and innovation systems, and thereby increase urban, regional and national competitiveness, the authors argue. The role of the public sector could be seen as a facilitator of innovation processes especially in the fluid phase of technology development because both social and economic benefits for the region and/or nation state might follow.

Concretely, the authors suggest several ways that public agencies can support innovations through procurement: The creation of new markets for products and systems that go beyond the state-of-the-art; the creation of demand “pull” by expressing its needs to the industry in functional or performance terms; the provision of a testing ground for innovative products; the provision of the potential of using public procurement to encourage innovation by providing a “lead market” for new technologies/solutions.

Compared to the (traditional) supply-side innovation policy measures, the public sector can use PPfI to act as a demanding first buyer by absorbing risks for socially/ecologically demanded products (where significant financial development risks prevail) and by promoting learning (where procurement introduces strong elements of learning and upgrading into public intervention processes). The government can also be the demander, bear higher entry costs, create critical mass, signal the market and link innovation to production – and not just increase internal capacities of producers.

Comment: The article is much longer than this extract, eliciting and examining many issues in the academic debates over the subject matter of procurement per se and the social policy context of government contracting and economic development.

While most of the academic argument is way over my head, I sense an agenda that strives to return to the "pick a winner" past of economic "development" practice. It is disturbing the extent to which this article lauds the ability of government to pick up the cost of technological advance, with the implication that profits might be privatized whilst losses are socialized. Quoting from extracts of the article:

For evolutionary economists, entrepreneurs seek technological innovation in order to create market failures, where technological development is anything but linear and technology is anything but freely available. The paper favours the perspective of procurement from the evolutionary economics

using public procurement for developmental goals, in particular innovation (PPfI – public procurement for innovation), is seen in the literature as a demand-side policy measure through which governments can generate new markets for companies

the public sector can use PPfI to act as a demanding first buyer by absorbing risks for socially/ecologically demanded products (where significant financial development risks prevail)

the government can also be the demander, bear higher entry costs, create critical mass, signal the market and link innovation to production – and not just increase internal capacities of producers.

The role of the public sector could be seen as a facilitator of innovation processes especially in the fluid phase of technology development because both social and economic benefits for the region and/or nation state might follow.

To me, the article lays a framework for rationalizing the removal of government contracting from the spotlight of transparency, accountability, planning and fair and equitable treatment, and placing it in the smoke-filled back room, to be protected by social preferences whose social good has not been opening studied and decided.


I hope I'm mistaken.

When government picks "winners" to allocate resources to, it backs them for political purposes whether the "winner" in fact wins or fails. The political incentive to cover-up losses is greater than the economic incentive that drives business. Competition is the umpire between businesses. Influence and corruption and conflict of interest is the umpire in government demand economy.

It might work, but the need for absolute transparency, accountability and fairness at every stage of the process is even greater in that regime than the usual competitive procurement regime.