This trend is not limited to a few of the largest donors. 22 of the 33 member countries of the OECD Development Assistance Committee have cut their aid budgets to foreign countries, and only four countries are meeting the UN target of 0.7% of gross national income for official development assistance.
The outlook for next year does not allow us to hope for an improvement in the situation: the largest donors of the Development Assistance Committee have announced new cuts. Of particular note is the Donald Trump administration, which has frozen almost all aid to foreign countries and disbanded the Agency for International Development (USAID), which distributed the lion’s share of U.S. state aid.
Meanwhile, the UK plans to cut aid spending from 0.5% of gross national income (GNI) to 0.3% by 2027. Due to similar cuts in Europe and North America, international aid is changing, humanitarian and climate programs are being halted, and funding shortfalls are emerging in key sectors (health, education, clean energy).
Reliance on aid is no longer an option, so the international community should look for a wider range of sources of finance to support green, sustainable economic growth. These sources include national development banks, industrial investment funds, sovereign wealth funds, institutional investments in public markets, and innovative mechanisms, including debt swaps and public-private partnerships (PPPs). These instruments allow to unlock domestic resources, attract long-term investors, and achieve synergies between public goals and private capital.
Mutual funds offer a promising way to attract non-traditional development partners while reducing the dependence of developing countries on debt financing. Public investment funds, public and private financial institutions, and various private entities can participate by acquiring stakes in state-owned enterprises, financing infrastructure projects, and joining PPPs. Such participation not only eases the debt burden, but also increases the return and quality of state property management.
Government-sponsored and mission-oriented public development banks have the necessary capacity to provide patient capital for green and sustainable investments in developing countries. The Institute for New Structural Economics at Peking University has created a pioneering database of state development and financing institutions on which future research can build to identify effective ways to use these institutions to support low-carbon growth.
In response to growing demand from countries in the Global South, development partners have in recent years begun to increasingly apply a “full value chain” approach to the green transition. This strategy promotes low-carbon technology transfer, digital innovation (including trade in services), and industrial modernization. All this allows countries included in China’s Belt and Road Initiative (BRI) to accelerate their transition to sustainable development.
Empirical research evidence supports this approach. An analysis of 139 BRI countries found that between 2013 and 2022 – following policy directives to go green and low-carbon – their carbon intensity (i.e. CO2 emissions per unit of GDP) fell significantly. These findings are consistent with another new study showing how China’s solar expansion is helping to transform Africa’s energy sector.
Investments in infrastructure and industrial development also have positive spillover effects. As data from Sub-Saharan Africa shows, the presence of at least one Chinese-funded infrastructure project in a second-tier administrative unit (similar to a municipality) corresponds to a 5% increase in nighttime illumination (a popular proxy for economic activity). In neighboring regions, illumination has increased by 10-15%, which means that the benefits of such projects are not limited to the location of direct investment.
In response to the changing challenges of financing for development, traditional and non-traditional financial donors and lenders should shift from aid to multi-dimensional strategies to support developing countries, combining trade, investment, infrastructure, green technology and digital connectivity (including fintech services). Importantly, such cooperation should be seen as a mutual learning process, with partners playing complementary roles and sharing responsibilities.
Yes, there are mistakes along the way. For example, until 2021, China financed the construction of coal-fired power plants, which slowed the reduction of CO2 emissions. But by recognizing these results as a policy mistake, it is possible to increase accountability and encourage self-correcting mechanisms in the international development ecosystem. Through continuous learning and adaptation, global partners will be able to create a more sustainable and inclusive system of financing for development.
Justin Yifu Lin,
former chief economist and senior vice president of the World Bank,
now Dean Emeritus of the National School of Development and Director of the Institute of New Structural Economics at Peking University.
for New Structural Economics at Peking University.
Yang Wang,
senior researcher at the Global Development Policy Center
(GDPC) at Boston University.
© Project Syndicate, 2025.
www.project-syndicate.org
