How Developing Nations Have Been Navigating Funding Gaps Post-USAID
| By Olivia Ernst |
Developing nations struggle to finance budget gaps following the dismantling of USAID. China has stepped in to help, but the future of its support remains uncertain.
Developing Nations Struggle Under Trump’s Aid Cuts
Donald Trump’s January 20th executive order freezing foreign aid ignited widespread debate over the potential repercussions of dismantling USAID. While the full effects are still unfolding, the elimination of nearly 86% of USAID programs by March has had profound and immediate impacts on emerging market economies (EMEs) and frontier market economies (FMEs) that depended on the agency’s assistance. Beyond worsening humanitarian and health crises, many governments now face acute budget shortfalls and are now seeking alternative solutions to fill the financial void left by USAID.
Managing the Funding Gap Left by USAID
USAID funding constituted a significant portion of many EMEs’ and FMEs’ budgets. For example, the agency financed approximately 3% of Mozambique’s GDP, an economic construct emblematic of numerous other African FMEs. Countries such as Rwanda, Uganda, Kenya, and Tanzania now face financial vacuums, challenging their governments with increased direct costs for healthcare and infrastructure projects previously funded by USAID. Some FMEs, such as Malawi, even relied on USAID to fund public services more than their national government, leaving massive fiscal gaps to fill.
In response to the fiscal shock that the USAID freeze has caused, many countries have taken their own measures to finance the budget gap in recent months. For example, Ethiopia, whose largest partner for development and humanitarian initiatives was USAID, implemented new domestic taxes in March to address the gap. Many countries have also implemented debt-relief measures to free up resources for financing the funding gap. According to Reuters, six out of the top ten recipients of American aid are either in or are at risk of debt distress. Consequently, the vast majority of African countries have been directing resources to manage debt interest, reducing available funds to finance public service initiatives previously supported by USAID. To address this, African leaders launched the African Leaders Debt Relief Initiative to restructure debt and lower borrowing costs for developing nations. Other examples of multilateral collaboration include the Asian Development Bank’s flagship initiative to promote disease prevention and control, which launched in July.
America’s Retreat, China’s Opportunity
In addition to their own efforts, developing nations have increasingly relied on China to finance the funding gap left by USAID. Since the agency’s collapse, China has stepped in on numerous occasions to fund initiatives previously supported by USAID. For example, in February, China provided Cambodia with support for the Cambodian Mine Action Centre, a demining initiative previously supported by USAID. China has also provided support to the Pacific Island Nations as the US has stepped back, particularly with trade deals. Additionally, China has acted through the Asian Infrastructure Investment Bank this summer to promote development initiatives. As the largest contributor, holding 26% of the bank’s votes, China has used its influence in the organization to urge more cross-border development funding.
Despite these advancements, China’s alternative outlook and approach to development aid cast doubt on whether it will fill USAID’s shoes. On average, its annual foreign aid only totals about a tenth of what USAID spent on pre-Trump. This leaves a major financial gap, which China has expressed resistance towards filling as many of its own citizens still live in impoverished conditions. President Xi Jinping has also publicly criticized direct aid, claiming it creates dependence and thus hinders many countries’ ability to escape the “middle-income trap”. Even if China were willing to entirely replace USAID funding, analysts argue that it lacks the specialist humanitarian expertise to provide aid in conflict zones or during disease outbreaks. Furthermore, while China has replaced some of USAID’s projects, its ties with EMEs are largely in the form of concessional loans, rather than grants, which characterized the majority of USAID’s assistance. Though some qualify as foreign assistance under OECD criteria, many are commercial. China’s different approach to development means that the grant-heavy assistance once supplied by the US will likely not be replaced, leaving countries at risk of more financial burden and debt.
Reevaluating Global Aid Strategies in a Post-USAID World
While it is unlikely China will fill the funding gap entirely, it is the only global economic superpower that has shown any indications of stepping up to the plate. The EU has stated it is not equipped to fill the funding gap left by USAID in Ukraine, let alone the other 100+ developing nations previously supported by the agency. With no signs of USAID returning soon, developing countries will likely have to continue turning to independent or regional initiatives to cover the shortfall and mitigate potential financial burdens and debt risks.
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