Tag Archive for: development aid

Australia can take USAID’s place in the Pacific islands

One of the first aims of the United States’ new Department of Government Efficiency was shutting down USAID. By 6 February, the agency was functionally dissolved, its seal missing from its Washington headquarters.

Amid the sudden shutdown, Australia must increase its developmental aid to Pacific islands before China fills in.

The most aid-dependent countries—the Freely Associated States, including Marshall Islands, Palau and the Federated States of Micronesia—happen to be among the most strategically located for US resistance to possible Chinese aggression against Taiwan, Japan and the Philippines. Maintaining aid to them is doubly important.

Moreover, island countries across the Pacific suffer from intense poverty and are unusually vulnerable to climate change.

The Pacific islands’ geostrategic importance necessitates aid to achieve ideal defensive posture. The primary military value of the islands is that they enable the US to disperse military assets across the wide expanse of the region. The second island chain provides several secondary and tertiary operating locations important in a Sino-American conflict. Important islands include Palau, and Yap and Chuuk in the Federated States of Micronesia.

The Pacific is important to China’s counterinsurgency strategy, which aims to prevent reinforcement of the US’s position inside the first island chain. Limiting access is the name of the game for military strategists on both sides of the Pacific. If Beijing were to convince countries in the second island chain to let the Chinese army’s rocket force deploy ballistic missiles on their soil, that would be devastating for the US. The DF-17 medium-range ballistic missile has a range of 1600km, while the DF-ZF hypersonic glide vehicle has a range of 2000km. Given that there are currently no viable defences against hypersonic weapons, this would effectively box US navy carrier strike groups out of much of the Pacific Ocean.

The Pacific is the world’s most aid-dependent region and thus particularly susceptible to China’s coercion. Pacific states are small with few natural resources, making them reliant on aid to develop. Between 2008 and 2021, the region received more than US$40 billion in aid.

Aid packages are only effective in scoring geopolitical influence insofar as they align with the priorities of Pacific countries, which are increasingly concerned with adapting to the negative impacts of climate change. This makes complete sense: rising sea levels, declining fish populations and increased natural disaster prevalence all spell a true existential threat. With the planet surpassing the 1.5 degrees C limit outlined in the Paris Climate Agreement, Pacific island states will need further aid to diversify food sources and build seawalls. USAID created the Pacific-American Climate Fund in 2020 specifically to help Pacific island countries weather the effects of climate change through grants and loans to local organisations. This program ceased with the agency’s sudden closure.

It is perfectly reasonable for these states to look for a more reliable source of funding, which China is eager to provide. This is a real threat: on 15 February, the Cook Islands signed a comprehensive strategic partnership agreement with China. This agreement is just the latest in a series: in 2019, China sent generous economic aid to Solomon Islands, leading the Pacific state to drop its diplomatic recognition of Taiwan. Kiribati soon followed.

Australia is the ideal candidate to aid the freely associated states to prevent a Chinese fill-in. China is the second-largest provider of aid to the Pacific after Australia. US aid is primarily directed to the Federated States of Micronesia, Marshall Islands and Palau, with whom the US has Compacts of Free Association. These three states contain key dispersed military operating locations and they received about 82 percent of the roughly US$250 million the US sent to the region in 2022. These states are therefore sensitive to a funding freeze. The Biden administration signed into law US$7.1 billion in aid to them in 2024, though USAID’s axing has likely disrupted this funding.

Australia is best equipped to fill the void left by the US, given its robust relationships with many Pacific countries. Additionally, most US money dedicated to Pacific aid goes through Australian NGOs. This decreases the need to alter existing programs, which increases the chances of a smooth transition.

The shutdown of USAID has been an enormous hit to US soft power and its ability to counter China in the Pacific. But the worst outcomes can be avoided through the intervention of steadfast allies—especially Australia.

This article has been amended to omit references to AusAID, which was absorbed into the Department of Foreign Affairs and Trade in 2013.

Australia’s international spending reveals uneven ambition

How Australia funds development and defence was front of mind before Tuesday’s federal budget. US President Donald Trump’s demands for a dramatic lift in allied military spending and brutal cuts to US foreign assistance meant that a discussion was unavoidable. The difficult politics of increasing defence spending in Europe continues, and the British government has cut aid to pay for a rise in its defence budget.

This is an important discussion, but we ought to be considering investment in Australia’s strategic posture as a whole.

One way to measure that is the overall level of international spending. Taken together, defence, foreign affairs and trade, aid, the intelligence community and international policing total $72.05 billion for 2025–26, which is about 9 percent of total federal spending.

This share of spending has been steady at a little less than 10 percent since 1999. Attention has understandably focused on a potential lift in the defence budget. But we should think more broadly: there is a strong case that the overall level of spending on tools of ‘statecraft’ needs to rise above its steady level.

Within that $72.05 billion, defence dominates at $58.99 billion. There has been some reprofiling across the forward estimates, but this is consistent with the existing trajectory.

Time will tell whether the Trump administration decides to make an issue of this level of spending, which still hovers around 2 percent of GDP. Time will also tell whether Defence’s ambitious acquisitions program is achievable without further increases.

The official development assistance budget is $5.10 billion. This is about the same as the 2024–25 budget, adjusted for inflation. From a global perspective, with aid spending in retreat in many countries, this is welcome.

We should all recognise the particularities of Australia’s strategic circumstances. One such feature is a neighbourhood of low-income and middle-income countries. Development assistance in this context is not altruism but a strategic necessity. It helps offset risks that are born of underdevelopment, and that directly threaten Australian interests.

Moreover, experts across Southeast Asia have been clear on how Australia should respond to US aid cuts: ensuring stability in existing programs is the top priority.

The foreign affairs and trade budget is $3.91 billion. Within this, the diplomatic or foreign policy operating budget is $1.76 billion. This is a narrower measure, constructed by James Wise and originally published by ASPI. It strips out administered spending and other costs, such as IT and infrastructure, to provide a reasonable measure of Australia’s spending on diplomacy.

As Development Intelligence Lab research has previously noted, of Australia’s relevant budgets over the past 25 years, investment in diplomacy has been the most inconsistent. Although there has been no dramatic cut, projected inflation-adjusted declines in both the overall foreign affairs and narrower diplomatic budgets out to 2028 are concerning.

Australia’s intelligence community will receive a modest real budget rise to $2.05 billion year-to-year (this number excludes the Australian Signals Directorate, which is budgeted under Defence). This tallies with the recently released Smith-Maude Review, which recommends continued investment in Australia’s intelligence agencies, with focus areas including the Office of National Intelligence’s capability as a coordinating agency.

Finally, the Australian Federal Police budget (excluding domestic policing functions) is $2.00 billion, a small real decline compared to the 2024–25 budget. With the federal police now central to high-profile components of Australia’s engagement in Southeast Asia and the Pacific, such as the Pacific Policing Initiative, we can expect the federal police’s international spending to remain significant.

In short, defence spending has been bumped but its trajectory remains essentially the same. Aid, diplomacy, the intelligence community and federal policing are all at about a steady state, with modest inflation adjusted declines across the forward estimates.

The good news is that Australia has not decided to rob Peter to pay Paul. Nonetheless, the big questions remain: in 2025, do we really think that these tools should receive the same share of federal budget they received in 1999?

Things weren’t simple in 1999, and they’ve only become more complex since then. The crisis surrounding East Timor’s independence and then the 9/11 attacks in 2001 marked the beginning of complicated decades for Australian defence and foreign policy.

But Australia is now grappling with how to respond to a fraught position between China and the United States, while also trying to find a durable place among a crowd of ambitious partner nations across Southeast Asia and the Pacific. We need to properly invest in a broad range of tools to navigate this.

A new US humanitarian agency must operate without political blinders

The United States government is considering replacing USAID with a new agency, the US Agency for International Humanitarian Assistance (USIHA), according to documents published by POLITICO. Under the proposed design, the agency will fail its task within the decade.

To succeed, its personnel cannot wear ideological blinders on the sources of crises as they work to prevent them. The agency can—and should—work with partners, including Australia, to assess and share the burden of this crisis prevention.

The agency’s proposed goal is to advance and secure US interests and soft power by preventing crises from escalating into more costly events that require military intervention. This is an excellent goal, but it won’t work if it’s not done well.

Even as part of a transactional strategy to align assistance with concessions, the agency must still respond to what global partners want. The Pacific islands, for example, have been consistent and clear about the interests they’re seeking support on—particularly climate change—and will engage with anyone who takes their concerns seriously. The US has a right to choose where and how it delivers support, but the gaps in that support will be filled by competitors, causing the US to lose influence.

To prepare and prioritise its work, USIHA must be given the independence to assess and respond to global crises based on what’s best for the US—not forced to address a limited set of crises that are politically palatable at any given time. The world is complicated, and the US needs more, not less, awareness. But much of this capacity in the US government has already been curtailed by cost-cutting exercises. An agency can’t tackle crises at the source if it doesn’t understand them, which means US agencies will start falling behind the curve.

If the US administration wants USIHA to serve its interests, it should move to reinstate all such assessment and planning capacity (after it decides Department of Government Efficiency is no longer useful). This must include climate science and meteorological services that provide crucial early warning systems for disastrous weather and climate risks.

Climate change provides a perfect example of how this new agency could quickly fail.

The current administration has treated climate change as an ideological issue, and officials have worked to cut any reference to it they can find. Secretary of Defense Pete Hegseth has himself claimed the Department of Defense ‘doesn’t do climate change crap’.

Pure and simple, this is a misunderstanding. Climate change is driven by physics, and it does not have feelings or care what we call it. Its consequences touch every single aspect of where and how we live, whether through more frequent heatwaves, higher sea-levels or more intense storms and wildfires. Secretary of State Marco Rubio would understand this, considering the increasingly intense hurricanes affecting his home state of Florida.

Managing climate change is about managing risk—determining where, when, and the likelihood its effects will bring harm (or opportunity). There may be different ways to manage that risk, but there is no opting out. We either act, or we let it happen to us. That’s the choice ahead of us.

Climate change is a multiplying factor of future conflicts and tensions that will affect US national security interests while degrading capacity—so the US Department of Defense has to ‘do climate change crap’ whether it wants to or not. This includes dealing with rising sea levels and floods, adapting to changes in submarine warfare and planning for changes to airlift capabilities. It will get harder, not easier, the longer it’s put off.

Similarly, USIHA will fail if it focuses on a narrow set of parameters. There’s no doubt aid and development systems need reform, and there’s no question that global partners can and should move toward greater self-sufficiency. These are goals that everyone wants.

But making these changes will require dedicated and concerted planning, not fast moves designed to break a system and see what shakes out. That approach might work in Silicon Valley startups and boardrooms, but in the real world it costs lives. Such instability can drive the kinds of threats the US wants to avoid dealing with.

Say what you will about USAID, but their professionals were committed to their work and delivered it with integrity, in contrast to a few young, inexperienced keyboard warriors with power that exceeds their sense of responsibility. They should bear the guilt of their actions for years to come—even if they didn’t fully comprehend the consequences of enthusiastically pulling apart a system they did not understand.

If the proposal for USIHA moves past legal challenges to USAID’s status and remains a priority of the US administration, it must be developed and operated with eyes wide open to all risks. If that doesn’t happen, it won’t be worth the investment, and US interests will suffer in the process.

It’s time to rethink foreign aid

Foreign aid is being slashed across the Global North, nowhere more so than in the United States. Within his first month back in the White House, President Donald Trump dismantled the US Agency for International Development (USAID) and froze foreign aid, calling it wasteful and fraudulent. Britain recently followed suit, trading off its international-aid budget for higher defence spending.

Advocates of official development assistance (ODA) rightly argue that it saves lives and serves national interests. But that does not change the fact that the system has been haemorrhaging credibility and resources for years and lacks a convincing narrative.

The upcoming United Nations Conference on Financing for Development, set for mid-2025 in Seville, Spain, will likely reiterate the long-held but rarely met target for high-income countries to spend 0.7 percent of their gross national income on ODA. What is really needed, however, is an independent commission on the future of the international aid system that can forge a new political consensus on the rationales for foreign aid, while also articulating a vision for the post-aid world many are now demanding.

Without an effort to recalibrate and reset foreign aid, the system will face death by a thousand cuts. Its ambition of catalysing sustainable development will be left unrealised, and an eighty-year international cooperation regime will likely collapse with no robust alternative in its place.

The modern global aid regime has looked brittle since the 2008 financial crisis. But the US’s withdrawal is a massive blow to a system whose purpose is laid out in Article 55 of the UN Charter: ‘the creation of conditions of stability and well-being which are necessary for peaceful and friendly relations among nations.’ The US was the foremost champion of these goals: in his 1949 inaugural address, President Harry Truman called for a ‘bold new program’ for sending technology and capital to help nations afflicted by poverty, disease and misery.

By the 1950s, the US was actively promoting foreign aid as a universal obligation, both to avoid shouldering the financial burden alone and to find common cause with anti-communist allies. That led, in 1961, to then-US President John F Kennedy creating USAID. A decade later, nearly all European countries had some kind of aid program, and being a donor had become synonymous with being a modern, developed country.

Even so, spending flagged almost immediately. To reboot donor support, in 1968, the World Bank invited former Canadian Prime Minister Lester B Pearson to lead an independent commission tasked with finding a new rationale for foreign aid. In other words, the Pearson Commission sought a persuasive argument for why affluent countries beset by domestic challenges should be concerned about the plight of low-income countries.

The question remains relevant today. Even before Trump set his sights on US foreign aid, the rationale for such assistance had become increasingly tenuous. In recent years, Global North countries have directed their aid budgets toward a range of foreign-policy priorities, many of which follow the letter but not the spirit of ODA, as defined by the OECD’s Development Assistance Committee.

This includes directing development assistance to Ukraine, a middle-income country which in 2023 became the largest-ever recipient of foreign aid, while the share of aid reaching the poorest countries had declined, and hosting refugees at home, which now consumes at least one-quarter of the aid budget in seven countries.

With other public-policy priorities gobbling up resources earmarked for development assistance, the OECD’s claim that a record amount of foreign aid was spent by donors in 2023 rings hollow.

Meanwhile, foreign aid has become an easy target in high-income countries that face growing fiscal deficits, cost-of-living crises and new security concerns. Right-leaning governments, in particular, often portray this foreign assistance as inefficient and ineffective.

In 2024, seven national governments and the European Union announced $17.2 billion in cuts to ODA to be implemented sometime between 2025 and 2029. Now, the Trump administration has slashed some $60 billion in foreign assistance, while Britain will shrink its aid budget by roughly $7.6 billion per year.

Given that the world’s second-largest donor, Germany, spent $27 billion less than the US on foreign aid last year, it will be difficult for any country to fill such a large gap. And Britain’s decision suggests that there is little interest in picking up the pieces left by Trump’s wrecking ball, likely leaving us at the tipping point of peak aid.

Many have suggested using this foreign-aid crisis as an opportunity to reduce African dependency on politicised external finance through changes to global trading rules and by lowering the cost of capital, or by building a new cooperation paradigm focused on global public investment.

Yet in his drive to ‘Make America Great Again’, Trump has shown no desire to advance such alternative visions and little understanding of the value of the soft power that USAID spent decades trying to cultivate. This is why the elimination of USAID cannot be described as a normal merger between the diplomatic and development branches of government, as in Canada or Britain, but only as an attack on the US’s role as global benefactor. This offensive comes with few domestic political consequences but with a high immediate human cost for those reliant on aid-funded goods and services.

The US’s abrupt inward turn underscores the need to reimagine a global aid system built for a world order that no longer exists. One way to do this is to commission an independent, high-level review of the global aid regime that can articulate a new paradigm that does not rely on the benevolence of any single donor. A Pearson Commission 2.0 could outline several new rationales for international transfers, present alternative financial and policy frameworks, and explore new global institutional arrangements to minimise aid dependency and reduce fragmentation, while still providing for the most vulnerable and helping future generations prosper.

As these massive aid cuts take effect, the risk of contagion is real. Unless the international community undertakes a systematic effort to understand the root causes of the current crisis and explore plausible solutions, countries still investing in ODA may start to worry that they are just rearranging the deck chairs on a sinking aid ship.

Trouble at the World Bank

A scandal is brewing at the World Bank. The Economist recently suggested that the premature departure of its chief economist, Pinelopi Goldberg, is related to the bank’s suppression of a study showing that a material share of its lending to the countries most in need winds up in the hands of corrupt governing elites and shows up as deposits in tax havens.

The Financial Times obtained and published a copy of the bombshell paper, which is dated December 2019; it was later released by the bank. The study examines the financial flows from the 22 countries making greatest use of World Bank lending. They are mainly nations from Africa and Central Asia that receive funding from the World Bank accounting for at least 2% of GDP and total aid receipts averaging 10% of GDP.

Nations in the study include Afghanistan, Armenia, Ethiopia, Mozambique, Rwanda, Uganda and Guyana. The largest tax haven deposits were held by residents of Madagascar, Rwanda, Tanzania, Zambia and Burundi.

The study, by World Bank researcher Bob Rikjers, the University of Copenhagen’s Niels Johannesen and BI Norwegian Business School’s Jørgen Anderson, examined World Bank loans over a 20-year period to 2010.

It then turned to the Bank for International Settlements, which is a Geneva-based institution often described as the central bankers’ central bank, for data on bank deposits in tax havens. The BIS collects data on bank deposits from the residents of 200 countries in 43 international financial centres and makes available confidential data on bilateral deposits from individual countries to researchers.

The study shows that in a three-month period when a country receives foreign aid disbursements equivalent to 1% of its GDP, an amount equivalent to an average 7.5% of the funds received show up as deposits in tax havens. There was no equivalent rise in deposits in financial centres that were not tax havens, such as France, Germany or Sweden.

When the study looked at a subset of seven countries receiving World Bank aid equivalent to 3% or more of GDP, the level of leakage rose to 15%, whereas a larger set of 46 countries with average aid of 1% of GDP showed no statistically significant diversion of funds to tax havens.

‘This pattern is consistent with existing findings that the countries attracting the most aid are not only among the least developed but also among the worst governed’, the report says.

‘The results are consistent with aid capture by ruling elites: diversion to secret accounts, either directly or through kickbacks from private sector cronies, can explain the sharp increase in money held in foreign banking centres specialising in concealment and laundering.’

The more positive message is that among the majority of aid recipients, there’s little evidence of funds being diverted to tax havens.

However, the study notes that its estimates of leakage are conservative, as they take no account of money spent on real estate or luxury goods.

Switzerland and Luxembourg emerge as the most popular destinations for skimmed foreign aid receipts.

Switzerland has some of the strictest bank secrecy rules in the world and a share of the global market for private wealth management of around 40%. There’s evidence that as much as 90–95% of the wealth managed in Switzerland is hidden from the authorities in the owners’ home country. The study notes that other studies based on data leaks and tax amnesties have shown that offshore bank accounts are overwhelmingly concentrated at the very top of the income distribution.

The study is able to discount the hypothesis that the rise in tax haven bank deposits comes from multinational companies avoiding tax, as their deposits would be made through their subsidiary in the haven country, and would not show up as a private deposit from the aid recipient country.

The Economist says the study went through rigorous peer review from other researchers but publication was blocked by higher officials at the World Bank. It is the job of the bank’s chief economist to safeguard the integrity of the bank’s research. Goldberg, who has held the post for only 15 months, is a highly esteemed economist, and was former editor in chief for the American Economic Journal. She is returning to her former post at Yale University.

She has not commented on the controversy, and The Economist noted that her departure may also have been influenced by the World Bank’s recent appointment of former Indonesian trade minister Mari Pangestu (who is well known in Australian trade and diplomatic circles) as its head of development, which includes oversight of the economics department.

The World Bank is sensitive to any suggestions of the corrupt use of its funds, as it requires the continuing political support of its donor countries, particularly the United States. The World Bank advances loans of about US$50 billion a year on concessional terms to developing countries.

The World Bank’s president, David Malpass, who was previously under-secretary of the US Treasury and an appointee of Donald Trump, has been critical of the lack of transparency in the lending of the African Development Bank, saying it had ‘a tendency to lend too quickly and thereby aggravate the problem of country debt’.

Before taking up the post as World Bank president last year, Malpass had portrayed the institution as too big, too inefficient and too reluctant to cut lending to emerging nations such as China that had access to private financial markets. Since he took up the post, lending to China has continued, bringing criticism from the Trump administration.