Copyright Project Syndicate
BEIJING – Traditional donors have sharply scaled back their aid commitments to developing countries over the past year. Some, like the United States, have virtually eliminated their aid programs. According to the Organisation for Economic Co-operation and Development (OECD), official development assistance (ODA) from member countries declined by 7.1% in 2024, its first annual drop in six years. This trend was not limited to a few major donors. Of the 33 members of the OECD’s Development Assistance Committee (DAC), 22 slashed their aid budgets, and only four countries met the United Nations’ target of allocating 0.7% of gross national income to ODA. The outlook for the coming year offers little hope for improvement, as major DAC donors have announced additional cuts. Most notably, US President Donald Trump’s administration has suspended most foreign aid and dismantled the Agency for International Development (USAID), which dispersed most US government aid dollars. Meanwhile, the United Kingdom plans to reduce aid spending from 0.5% of GNI to 0.3% by 2027. Similar retrenchment across Europe and North America is reshaping international assistance, disrupting humanitarian and climate-related programs, and creating financing gaps in critical sectors such as health, education, and clean energy. In our 2017 book Going Beyond Aid, we urged developing-country governments to reduce their dependence on foreign aid, not only because it was becoming an unreliable source of funding, but also because other, better ways of financing development were becoming more available. That message is more urgent than ever. As reliance on aid becomes untenable, the international community must mobilize a broader array of financing sources to advance green and sustainable growth. This includes national development banks, industrial investment funds, sovereign wealth funds, and institutional investment in public markets, as well as innovative mechanisms such as debt swaps and public-private partnerships (PPPs). These tools can unlock domestic resources, attract long-term investors, and create synergies between public goals and private capital. Equity investment offers a promising avenue for engaging non-traditional development partners while reducing developing countries’ dependence on debt. Government investment funds, public and private financial institutions, and other private actors can participate by taking equity stakes in public enterprises, financing infrastructure projects, or joining PPPs. Such participation not only alleviates debt burdens but also improves the performance and management of public assets. As government-funded, mission-driven institutions, public development banks (PDBs) have the potential to provide patient capital for green and sustainable investment in emerging and developing economies (EMDEs). Building on the pioneering database of public development and financial institutions created by the Institute of New Structural Economics at Peking University, future research can identify effective ways to harness these institutions to fuel low-carbon growth. Responding to growing demand from the economies of the Global South, development partners have increasingly adopted an “entire value chain” approach to the green transition in recent years. This strategy facilitates transfers of low-carbon technologies, diffusion of digital innovations (including trade in services), and industrial modernization, enabling countries included in China’s Belt and Road Initiative (BRI) to accelerate their shift toward sustainable development. Empirical research supports this approach. An analysis covering 139 countries finds that, following policy directives to incorporate green and low-carbon principles into the BRI, carbon intensity (CO₂ emissions per unit of GDP) among participating countries declined significantly between 2013 and 2022. These findings are consistent with another recent study showing how China’s solar-energy expansion has helped transform Africa’s power sector. Investment in infrastructure and industrial development can also generate positive spillover effects. Evidence from Sub-Saharan Africa shows that the presence of at least one Chinese-financed infrastructure project in a second-order administrative region (comparable to a municipality) is associated with a 5% increase in nighttime luminosity – a widely used proxy for economic activity. Neighboring regions experienced a 10-15% rise in luminosity, indicating that the benefits of such projects extend well beyond the immediate investment site. These outcomes underscore the critical role of infrastructure investment, particularly in energy and transportation projects. By improving electricity access, affordability, and connectivity, they reduce energy poverty, bolster public services, and stimulate economic activity in underserved areas. To meet the evolving challenges of development finance, both traditional and non-traditional donors and creditors should move beyond aid and adopt multidimensional strategies that combine trade, investment, infrastructure, green technology, and digital connectivity, including fintech solutions, to support EMDEs. Importantly, such collaborations should be viewed as a mutual learning process in which partners assume complementary roles and shared responsibilities.
