Restructuring foreign aid

Every decade or so, the global aid industry finds that it must transform to survive. During these periods of change, donor countries restructure their aid agencies, shrink or expand their assistance budgets, and lobby for the creation or dissolution of a UN initiative or two. Typically, once the aid industry conforms to the whims of donor countries, the crisis is averted and business continues as usual.

Since U.S. President Donald Trump began his second term, the aid industry has found itself at another inflection point. The Trump administration has gutted USAID, the world’s largest development agency, ending 86 percent of its programs, shuttering its headquarters, and terminating nearly all its 10,000 employees. At the same time, the Trump administration has slashed funding for various multilateral initiatives on climate, global health, and education.

Today’s crisis, however, is different from those that came before: this could truly be the end of foreign aid as we know it. For decades, global development—that is, the attempt to improve and save lives of the poor—has been driven mostly by foreign assistance provided by wealthy governments. Some scholars and analysts deride this process as the “aid-industrial complex.” But even advocates of foreign aid have come to see it as an industry, including in their efforts to reform it, which approach its defects as matters of business inefficiency. And now that governments in many rich countries have sharply lurched to the right and taken more skeptical stances on aid, this industry is collapsing. As a result, many charity workers, researchers, and academics will be out of jobs. More important, millions of poor people around the world will suffer.

Proponents of global development now face a choice. They can wait for attitudes in donor countries to shift back toward support for foreign aid at some point in the distant future. Or they can reimagine the entire concept of global development, detaching it from aid and rooting it instead in industrial transformation: helping countries shift from subsistence farming, informal employment, and primary commodity production toward manufacturing and services. In truth, the aid industry was already adrift. Its interventions had become spread too thin and often failed to address the key obstacles that poorer countries faced as they tried to upskill their workers, build energy and transport infrastructure, and access new markets. Raising people out of poverty in Africa, South Asia, and parts of Latin America will not only improve their lives but also allow rich countries to maintain their prosperity by creating new markets, and by now, industrial transformation has a strong track record for improving economies. If proponents of global development do not adjust its methods with the times, it will lose its relevance to rich and poor countries alike.

The foreign-aid industry’s primary commodity is official development assistance (ODA), or money from donors that flows to governments, individuals, or groups in poorer places, either directly—such as through budget support to struggling governments—or through projects run by organizations such as Save the Children, Oxfam, or FHI 360. Governments in rich countries are the primary purveyors of ODA. Like any industry, foreign aid has middlemen. But in this business, the middlemen are particularly conspicuous. Third-party entities known as “implementing partners” include international nongovernmental organizations, large private contractors, and consulting firms. If the U.S. government wanted, for example, to distribute fertilizers to small-scale farmers in Bangladesh, they might contract Chemonics, a U.S.-based development contractor, to do it. Indeed, in 2023, Chemonics received the most USAID funds of any of the organization’s contractors: over $1 billion.

To take advantage of network effects and economies of scale, implementing partners cluster around the main sites of production of foreign aid, the capitals of the major donor countries: Berlin, Geneva, London, Paris, Rome, and Washington. As a result, very little aid is distributed by organizations or people in poor countries. In 2020, less than nine percent of U.S. aid was administered by recipient governments or firms based in recipient countries, according to Charles Kenny and Scott Morris, researchers at the Center for Global Development. The visibility of middlemen based in rich countries has long provided fodder to detractors who claim that the aid industry operates inefficiently or even unjustly. There is some truth to this critique. According to an analysis by Devex, a news organization, 47 of USAID’s top 50 contractors are located in the United States.

According to the Organization for Economic Cooperation and Development (OECD), in 2023, governments spent $230 billion on development assistance, compared with $11 billion spent by private foundations.