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Donald Trump’s attempt to align foreign aid with his America First policy is too blunt and will have deadly consequences. Rather than simply furthering Washington’s interests, the US president’s actions may trigger the next debt crisis in the world’s poorest countries.
The White House’s order to freeze funds disbursed by the United States Agency for International Development (USAID), pending a 90-day review, may herald a dramatic shift to more transactional giving. Trump demonstrated as much on Monday when he warned he might cut aid to Jordan and Egypt if they refused his demand to take in Palestinians, who would be displaced under the president’s plans to take over the Gaza Strip, according to a Reuters report.
It’s a high stakes gamble. USAID represented about 65 per cent of Washington’s total $72 billion of foreign assistance in 2023. The headline figure, equal to just 1.2 per cent of annual federal spending, makes the US the world’s single largest aid donor.
A retrenchment will jeopardise returns the United States has earned in the six decades since establishing the agency. Aid conveys US soft power, develops overseas export markets for US companies and farmers, reinforces intelligence gathering, and shores up Washington’s ability to respond to global crises.
Removing this support abruptly, and furloughing staff required to deliver it, is dangerous for the world. The immediate mayhem has crippled global efforts to relieve hunger and prevented the distribution of medicines, such as a treatment that stops mothers from passing HIV to their children.
There is, without doubt, a case for reforming the aid industry, which is bloated and inefficient. As little as 4.0 per cent, opens new tab of USAID funding went to local frontline actors who constitute an essential part of aid interventions between 2019 and 2021, according to an Oxfam study. In 2021, the agency set a goal to send 25 per cent to local organisations by 2025.
The industry has suffered from bureaucratic inertia in part because so many lives depend on the money, says Alan Boswell, Crisis Group’s project director for the Horn of Africa. He warns that while African leaders won’t miss civil society and pro-democracy programmes funded by aid, the freeze is triggering a collapse of the broader industry because the United States is such a large donor.
The challenge today is the intense dependence of low-income countries on external aid. For Syria, the Central African Republic, Afghanistan, Burundi, Somalia, South Sudan, Mozambique, Niger, Liberia, Yemen and Malawi, for example, overseas development assistance represented 11 per cent to 52 per cent of gross national income per capita in 2023, data from ForeignAssistance.gov shows. Out of the top 10 recipients of US aid, the International Monetary Fund reckons that six are either in debt distress or face a moderate to high risk of falling into it.
The timing of Trump’s assault also follows multiple crises that have strained government budgets, including the pandemic and war in Ukraine. In 2023, developing countries spent a record $1.4 trillion to service their debt because of skyrocketing interest rates, or roughly 4.0 per cent of their gross national income, according, opens new tab to a World Bank report. It also notes that of 68 low-income countries, about 16 per cent are in external debt distress while 35 per cent are at high risk of it.
Ethiopia illustrates how the problems could quickly compound. The country run by Prime Minister Abiy Ahmed relies on aid to host one of the world’s largest, opens new tab refugee programmes, tackle drought, and reduce deaths from disease. The United States disbursed $1.8 billion to the East African country in 2023, mostly comprising USAID humanitarian assistance. That is just shy of the $1.4 billion the country spent in 2023 servicing external publicly guaranteed debt.
In an extreme scenario where Washington’s review of USAID results in terminating assistance, policymakers in Addis Ababa would need to decide whether to make up the shortfall. Ethiopia could fund some humanitarian initiatives itself at a fraction of the cost of US agencies, but replacing the whole lot would be a stretch.
So, whether financially or socially, stability will suffer in the conflict-affected nation. As it stands, Ethiopia is also in the “final stages” of restructuring some of its $29 billion in external debt after defaulting on a eurobond in 2023. In July, it secured an agreement with the IMF for a new financing programme worth $3.4 billion.
In these situations in low-income countries, IMF lending is typically meant to catalyse, opens new tab financial support from other donors and development partners like USAID. If no one steps up, it will be harder for Ethiopia to keep up the reforms the IMF is banking on, raising the chance of another default and probably worsening the global refugee crisis. Though China is a large creditor to the country, the People’s Republic is unlikely to significantly step up aid without strings attached.
China’s growing role in sovereign debt standoffs arguably helps to justify a more transactional US approach to aid. The problem right now is that donor countries’ agencies lack any clout in testy restructuring processes, Rafael Romeu, CEO of DevTech Systems and senior associate on prosperity and development at the Center for Strategic and International Studies, warned, opens new tab last year.
Debt negotiations have become trickier in a distrustful world, where a growing array of bilateral and commercial creditors have emerged. Romeu advocates for introducing some aid instruments that allow for greater leverage during restructuring talks, which would help to defend aid agencies’ missions. Giving donors more of a seat around the table during debt workouts, he adds, would also help to make sure that aid is not inadvertently servicing interest payments to commercial creditors, including from China.
In other words, there are many ways that Washington could thoughtfully overhaul USAID to make it more effective and aligned with US foreign policy goals. Trump is not doing that. He is doing something else entirely. The White House incumbent’s actions may remove a vital financial backstop for some of the world’s poorest countries – and cost many lives in the process.