US Foreign Aid With Chinese Characteristics

The Diplomat

2 days ago

The dismantling of USAID is the culmination of a decade-long realignment of Western approaches to development, inspired by China's Belt and Road Initiative.
The GSEZ Mineral Port in Gabon, one of the projects supported by public-private partnership via the U.S. International Development Finance Corporation.
As President Donald Trump takes a chainsaw to U.S. foreign aid programs, it would be easy to attribute such extreme measures to MAGA isolationism or DOGE zealotry. While anti-globalist and anti-government ideologies certainly played a role, the shift away from traditional foreign aid is not limited to the U.S. and does not represent a full-scale abandonment of development finance. Indeed, Trump's moves represent the culmination of a decade-long realignment of Western approaches to development, inspired by China's Belt and Road Initiative (BRI).
The retreat from traditional foreign assistance cuts across the Western world. By 2026, estimates hold that foreign aid budgets will have fallen by over one-quarter in Canada and Germany and by close to 40 percent in Britain, compared with 2023 levels. Overall, G-7 countries, which account for 75 percent of foreign assistance, spent 28 percent less in 2025 than in 2024.
Yet even as Trump's Big Beautiful Bill cut foreign aid, it also provided new funding – a $3 billion revolving fund – for the International Development Finance Corporation (IDFC), which was created by the 2017 BUILD Act. The IDFC is up for renewal this year, and the House Foreign Affairs Committee has already voted in support of authorizing its operations for another seven years with a lending cap of $120 billion, double the initial level.
The IDFC was intended as an answer to China's BRI, which represented an alternative to traditional Western approaches to aid.
The Development Assistance Committee (DAC) – a club of Western donor countries – defines Official Development Assistance (ODA) as concessional finance directed toward developmental projects in low- and middle-income countries. The DAC encourages transparency and discourages the tying of aid to purchases of goods and services from the donor country. Most DAC countries emphasize 'soft' aid, focused on health, education, and humanitarian assistance. ODA typically draws upon budgeted funds that must be renewed annually.
Very little of Chinese development finance meets these criteria. Instead, China's development finance is commercial in orientation. Most loans are initiated by policy banks – the China Development Bank and the China Export-Import Bank – that raise funds by issuing bonds to investors. Loans carry near-market interest rates and must be repaid in full. Much of Chinese development finance has been channeled through the BRI, which focuses on infrastructure construction. Loans through these policy banks and others have amounted to well over a trillion dollars over the past decade.
Western countries have followed China's lead both in commercializing development finance and in driving more resources toward infrastructure development. The latter move has transpired under the guise of various initiatives: the BUILD Act (U.S.), Build Back Better World (U.S.), the Global Gateway initiative (European Union), the Blue Dot Network (U.S., Australia, Japan), the Quality Infrastructure Investment Initiative (Japan), and the Partnership for Global Infrastructure and Investment (G-7).
The competitive ambitions of the West have been limited by a paucity of available public funds, which makes it difficult to match the scale of China's BRI. This problem gave rise to efforts to leverage public money to mobilize private capital for development purposes through blended finance initiatives.
At the multilateral level, a group of multilateral development banks issued a planning document titled 'From Billions to Trillions: Transforming Development Finance' in 2015. This paper outlined a vision for mobilizing private financial resources toward Global South infrastructure and other developmental needs. This was followed by the World Bank's 'Maximizing Finance for Development' initiative and the United Nation's 'Global Investors for Sustainable Development Alliance.'
These projects and those discussed below constituted what Daniela Gabor characterized as a 'Wall Street Consensus.' Many types of infrastructure take the form of public (or semi-public) goods. Public goods, by their nature, are underproduced relative to their social utility because producers cannot exclude consumers from benefiting once the goods are produced. The Wall Street Consensus aims to make infrastructure projects 'bankable' or attractive to private investors by shifting the risk of unprofitability to the state. If successful, private money is pooled with public funding through blended financing models such as syndicated bond issues. In this 'development as derisking' model, private capital is 'escorted' into the process of financing infrastructure through the creation of new asset classes freed of investor risk. In 2018, the G-20 declared support for a Roadmap to Infrastructure as an Asset Class.
Two types of risks must be minimized for private investors: regulatory risk and financial risk. Reducing regulatory risk includes lower environmental and safety standards, guaranteed grid access, legal protections against nationalization, and liability limits. Financial risk is managed through guaranteed toll revenues, preferential credit, loan guarantees, tax relief, or subsidies. Multilateral Development Banks (MDBs) or DAC donors help build state capacity in project identification and development, provide expertise in securitizing infrastructure assets for the market, and offer partial financing or loan guarantees.
The necessity for subsidies and other forms of state support arises from the fact that more than half of infrastructure projects in emerging economies do not promise sufficient cash flow to attract private investors. Even projects with dedicated revenue streams often carry demand risks, meaning they turn unprofitable if demand for the service declines. Governments may be compelled to include contract provisions that promise to cover revenue shortfalls with public funds when demand falls below certain thresholds.
Seth Schindler, Ilias Alami, and Nicholas Jepson noted that what Gabor referred to as the 'derisking state' becomes both more dependent upon global finance and increasingly interventionist in shaping market outcomes. This contrasts with the Washington Consensus, which counseled state neutrality vis-à-vis the market, but also differs from the East Asian development model, where state intervention sought to shape the behavior of national capital rather than global capital.
By relieving private investors of risk, states aim to amplify the capital that can be mobilized toward critical development needs beyond national savings or the resources of MDBs and bilateral donors. The trade-off is the acceptance of risk by the developing state, a danger highlighted when the COVID-19 pandemic and rising interest rates threatened the solvency of many highly indebted countries.
The U.S. International Development Finance Corporation fits this model. The BUILD Act described its purpose as to 'provide countries a robust alternative to state-directed investments by authoritarian governments and United States strategic competitors.' With a financing authority of $60 billion, the IDFC seeks to 'crowd-in' private capital with a flexible toolkit that includes nonconcessional loans, loan guarantees, export credits, political risk insurance, equity investments, and technical assistance.
Largely due to IDFC activity, nonconcessional development finance flows jumped from 4 percent of overall U.S. aid spending in 2020 to 36 percent in 2021. Among the major projects funded by the IDFC are investments related to the Lobito Corridor in Southern Africa, which aims to create transportation links allowing Western firms to access critical minerals that are presently monopolized by China.
Ironically, this growing Western emphasis on nonconcessional, commercialized development finance with an emphasis on infrastructure development comes at a time when China has scaled back the BRI (largely due to growing evidence that many recipient countries have exceeded their borrowing capacities) and begun allocating more resources to 'soft' aid through the Global Development Initiative.
An obvious drawback of the blended finance model is that it diverts attention and resources from traditional concessional aid and the investment in health, education, and disaster assistance that remain essential.
But even on its own terms, the effectiveness of the Wall Street Consensus remains in doubt. A 2020 report by the Center for Global Development concluded that the overall flow of blended finance had been disappointing and that the great bulk of MDB-mobilized private financing was directed to middle-income rather than low-income countries. A 2019 study by ODI Global reached similar conclusions. In low-income countries, on average, each $1 in public development financing mobilized only $0.37 in private finance.
Blended finance was constrained by the low risk tolerance of both public and private actors in the face of environments hampered by poor governance and few profitable investment opportunities. Since most blended finance flowed to middle-income countries and to 'hard' sectors, such as transport and energy, as opposed to social sectors, the report suggested that the increased priority given such investments came at the expense of programs that more directly targeted poverty in low-income countries.
Indeed, the proposed doubling in the funding cap for the IDFC cannot substitute for the human costs that follow from the cuts to U.S. Official Development Assistance, which one study suggests will lead to 14 million deaths over the next five years. Traditional aid may have drawbacks, whether evaluated as a tool of U.S. foreign policy or in terms of development effectiveness, but abandoning it in favor of the privatization of development finance is neither wise nor humane.