Governments Squander the Power of Their Own Purse

Dec 6 , 2025
By Ricardo Hausmann , Yariv Gabay

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Shifting the paradigm from purchasing products to buying solutions, governments are beginning to view procurement officers as technology scouts and innovation managers. The narrative is moving from compliance and cost control to questions of how public challenges, if solved creatively, could generate new industries. In this commentary provided by Project Syndicate (PS), Ricardo Hausmann, a professor at Harvard Kennedy School and director of the Harvard Growth Lab, and Yariv Gabay, head of the Governmental Vehicle Administration in Israel's Ministry of Finance, urged policymakers to consider not only what to buy, but how their choices today might signal new opportunities for private sector investment tomorrow.

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Governments have long recognised that innovation drives economic growth. To nurture it, they have created ministries, agencies, and incubators, offering grants, subsidies, and prizes to innovators with promising ideas.

But as one of us observed more than a decade ago, the largest untapped potential store, public procurement, remains largely overlooked.

Public procurement (the goods, services, and labour that governments buy) accounts for about 15pc of global GDP, or roughly 13 trillion dollars. Yet despite its scale, it is one of the world's most underused economic levers. With a simple shift in mindset, public procurement could evolve from a routine administrative function into a major engine of technological progress and industrial transformation.

The United States is a prime example. When the US Air Force commissioned Boeing to design the B-52 bomber in 1946, it was not simply buying an aircraft. It was underwriting the research that would later produce the Boeing 707 and propel America to global leadership in commercial aviation. Similarly, Israel's sustained investments in defence and water technologies continue to spawn world-class civilian industries.

When governments use procurement to address local problems, the resulting knowledge can have an immense global impact. But as any gold miner knows, the easiest ore to extract lies near the surface. Reaching deeper, richer veins requires better tools, more effort, and a clearer sense of where to dig.

Procurement is no different. The obvious opportunities – contracts that directly stimulate industries such as energy, healthcare, and infrastructure – have already been exploited. The next frontier can be found in the procurement process itself, particularly in how governments communicate their needs and how those signals shape private innovation.

For decades, governments have used a tool called the Request for Information (RFI), a formal method of soliciting the market's input on existing options before deciding what to buy. In the pre-Internet era, when public agencies struggled to map out suppliers and technologies, RFIs were essential. In an age of digital platforms, big data, and AI, they may feel antiquated, like an old pickaxe hanging on a wall.

But they may be exactly the tool needed to reach the deeper layers of the procurement goldmine.

Consider monetary policy. Central banks influence investor expectations not only by adjusting interest rates but also by signalling that they might do so in the future. Procurement often works in a similar way. When a government issues an RFI for an innovative solution (AI-powered wildfire detection, for example, or low-carbon cement), it sends a strong signal that it may soon become a buyer. For entrepreneurs and firms deciding how to allocate their scarce research and development budgets, that signal can shift the calculus, as the prospect of a large, reliable customer transforms an otherwise risky idea into a viable investment opportunity.

In this sense, RFIs can move markets before a single contract is signed. If procurement is a goldmine, RFIs are the seismic sensors that reveal where the next deposit could be. By expressing curiosity rather than commitment, governments can nudge innovators to tackle important problems without picking winners or spending money prematurely.

Government procurement also has a considerable certification effect. Once a product survives the rigours of public purchasing, such as specifications, audits, and compliance checks, private buyers infer that it is reliable, scalable, and safe. A government's stamp of approval thus reduces uncertainty, which markets tend to dislike more than risk.

This certainty premium can turn niche technologies into mainstream choices. A private hospital may adopt a new medical device once a public health system has done so, and construction firms may switch to a novel material once public-works agencies approve it. These are the quiet multipliers of innovation. But even the best-designed RFIs can target only what we already suspect exists. The deeper challenge is epistemic.

How do we discover what we do not yet know to seek?

Some countries have begun experimenting with open innovation portals that allow the public to submit ideas and prototypes. Platforms such as Innovative Solutions Canada and Austria's Marktplatz Innovation give inventors, startups, and researchers a direct way to pitch ideas to policymakers, who can then evaluate, refine, and test them, preparing the strongest proposals for wider adoption.

Such mechanisms are particularly well-suited to developing countries, since they require no new laws, special budgets, or additional bureaucracy. Instead, they simply transform existing procurement offices into listening posts where citizens and firms can propose greener infrastructure, more efficient technologies, or other ways to improve public services.

But to realise this vision, governments should shift from buying products to buying solutions. Procurement officers, whose work has long centred on compliance and cost control, should also be equipped for technology scouting and innovation management. They should be encouraged to ask which public challenges could give rise to new private industries if solved well; how a single purchase might generate knowledge and new capabilities; and what signals today's decisions send to investors about the future.

Policymakers should also recognise that public procurement is not merely an expense line. When used strategically, it can be the world's most powerful instrument of industrial policy. Instead of collecting the few nuggets lying on the floor of the procurement goldmine or scraping a little off the walls, governments should venture deeper, into the shafts where new industries are formed. The risks are real, but so are the rewards. And as every miner knows, gold favours the bold.

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PUBLISHED ON Dec 06,2025 [ VOL 26 , NO 1336]

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