The global outlook for development finance is shifting rapidly, in what may be the most significant shake-up since the end of World War II and the Marshall Plan.
Under the Trump administration, the U.S. has terminated $60 billion in yearly foreign assistance and eliminated USAID, its main aid agency, in all but name. Other countries may follow suit. Germany and Japan, the largest remaining bilateral donors, are contemplating reductions in foreign aid spending, while the UK and the Netherlands have slashed theirs by a third or more. Meanwhile, Beijing is overhauling its flagship global infrastructure program, the Belt and Road Initiative (BRI), to address repayment risks, project performance issues, and reputational problems. Although China remains the single largest source of international development finance (including aid and credit), the U.S. was the single largest bilateral provider of aid until this year—raising questions about which country, if any, may step into the breach.
To help make sense of this rapidly changing landscape, AidData, an international development research lab at William & Mary, held a panel discussion in late March to explore how Indo-Pacific countries in particular can bargain for better deals from their development partners. Over 150 attendees participated virtually and in-person at the William & Mary Washington Center.
Financing infrastructure development is a strategic priority for Indo-Pacific countries seeking to spur economic growth and close longstanding infrastructure gaps. Home to half the world’s population and two-thirds of global economic growth over the past five years, the Indo-Pacific region is also a focal point for geostrategic competition between traditional donors—like Australia, Japan, the EU, the U.S., and the UK—and China, the world’s most significant emerging donor. Funding infrastructure development is costly, and tariffs proposed by the Trump administration could weigh heavily on the region’s economies, for which the U.S. is a top trade partner.
Amid this complex environment, AidData’s wide-ranging panel discussion explored how leaders in the Indo-Pacific region can negotiate more favorable aid and credit deals with foreign donors and creditors, as well as where those donors and creditors may go from here.
The discussion was moderated by Felix Salmon, chief financial correspondent at Axios, and leading international development finance experts served as panelists, including Alice Albright, former CEO of the Millennium Challenge Corporation; Bradley C. Parks, executive director of AidData; Kai Kajitani, economics professor at Kobe University; and Shehan Semasinghe, Sri Lanka’s former state minister of finance.
China as a top lender
Any conversation around prospects for development finance in the Indo-Pacific must involve China, now the single largest official source of credit to the developing world.
“China’s major competitive advantages are scale, speed, and near-term economic impact. For the last 15 or 20 years, if you wanted to bankroll a big ticket infrastructure project in a low- or middle-income country that was going to cost millions or billions of dollars, China was the lender of first resort,” said Parks.
AidData’s own data reveals the sheer scale of Beijing’s grant-giving and lending between 2000 and 2021. “1400 infrastructure projects have secured loans worth at least $100 million each from China, 750 projects [are] worth at least $250 million or more, and 163 projects [are] worth over $1 billion,” said Parks.
These projects are implemented with lightning speed: an average Chinese-funded project gets implemented in 2.8 years, while a comparable project from a multilateral development bank would typically take 5-10 years, according to Parks. And they quickly lead to economic benefits: AidData research finds that just one loan-financed project from China delivers almost a full percentage point of additional economic growth, and benefits accrue within 24 months of the loan being approved.
“If you’re a governing elite in a low- or middle-income country, this is a compelling and clear value proposition,” said Parks.
But the Indo-Pacific region’s biggest lender is switching up its model, with big implications for borrowers. “There are major changes underway in China’s portfolio,” said Parks, which is increasingly focused on key growth sectors like green technologies and the critical minerals needed to fuel them. However, according to Kai Kajitani, an economics professor at Kobe University, “this kind of “Green Marshall Plan” will be difficult to realize…China’s lending to emerging economies has already reached its limit. It will be difficult for China to lend [more] to support this.”
Among the most consequential changes in China’s portfolio have been a move from bilateral to syndicated lending, where multiple lenders partner on a single loan, and a pivot from project-based lending to bailout lending, increasingly denominated in RMB and not U.S. dollars. Both are designed to increase the chances that Beijing will be repaid and reduce the odds that it will take large financial losses.
“China has now entered the era of debt reschedulings galore…the reality [is] that some of their biggest borrowers have solvency problems, not only liquidity problems,” Parks said. More than 80% of China’s overseas lending portfolio in the developing world is to countries in financial distress, AidData research finds.
Creditor cooperation in the Indo-Pacific
Debt is a top issue for not only policymakers in Beijing, but also those in Indo-Pacific capitals ranging from Apia, Samoa to Vientiane, Laos. More than a dozen Indo-Pacific countries are at high risk of debt distress, according to a 2023 report.
Shehan Semasinghe, Sri Lanka’s former state minister of finance from 2022 to 2024, represented the country during a major debt restructuring with its largest creditors, which included not only China but also India, France, and Japan. One key component was a deal with international sovereign bondholders, involving a $12.5 billion restructuring that was a crucial step for the country’s $3 billion IMF program.
“We were able to set an example to the rest of the world: if you are really keen on getting your debt sorted, there is a way out,” said Semasinghe, discussing how Sri Lanka threaded the needle. “The challenge was on the principle of comparability [of treatment]: how equally all creditors were going to share the burden.”
Semasinghe highlighted as an important milestone the official creditor committee co-chaired by Japan, France, and India, with China as an observer, at the 2023 Spring Meetings of the IMF and World Bank in Washington, D.C. The committee was crucial for sustainability: while China did not formally join, they were happy to bilaterally discuss and negotiate with Sri Lanka, shared Semasinghe.
Indo-Pacific countries like Sri Lanka must juggle sensitive relationships with multiple creditors, and they are acutely aware of the tradeoffs when seeking financing.
“Options for countries have become very clear, different, and stark. [What] will become even more of a factor going forward is cost…there is a desire to have more and more development activity financed by the private sector, and cost of capital will be a big factor for consideration,” said Alice Albright. Until this January, Albright served as the CEO of the Millennium Challenge Corporation (MCC), an independent U.S. aid agency that provides grants to countries that qualify due to good governance and potential for economic growth.
But as sovereign powers compete to provide aid and credit in the Indo-Pacific, they must be careful to leave room for local voice and choice. “Countries that we worked with at MCC clearly do not want to be pushed into one corner or another. They don’t want to be seen as saying, ‘we’re only going to go with China, [or] a particular bilateral, [or] multilaterals.’ In fact, given how extensive the development needs are, they can’t afford to do that,” said Albright.
Development finance faces headwinds
Going forward, how much aid and credit traditional powers will be able to provide in the Indo-Pacific is an open question. “If you represent a rich democracy…you may start to find it increasingly difficult to compete against China,” said Felix Salmon, chief financial correspondent at Axios and the event’s moderator.
The same headwinds that are dragging down development finance in other advanced economies have also hit Japan, historically a top donor and creditor for the Indo-Pacific. “Japan has been deeply committed to providing financial assistance for infrastructure projects, especially in Asian countries. However, in recent years, the ratio of Japan’s foreign aid to GDP has fallen significantly,” said Kajitani. “This is due to long-term economic stagnation and a shift in public opinion against aid.”
The event wrapped up with a Q&A session in which attendees raised a range of issues, including: how China is addressing debt repayment and resettlement challenges; how individual countries can better negotiate with creditors like China that are not in the Paris Club; what role the U.S. plays in coordinating among creditors; and how to preserve the infrastructure created by U.S. development cooperation, given USAID’s termination and the winding down of billions of dollars in grants and cooperative agreements.
On the last question, it seems unlikely that one outsized actor—China or otherwise—will swoop in and fill the gap left by the U.S. in foreign assistance. “This is not a U.S.-specific challenge. [Europe is signaling] that their increased defense expenditure is likely going to come at the expense of their aid and development. I think we’ll see a major reduction in the total development finance envelope,” said Parks. Resource scarcity, he argued, will demand that difficult decisions be made.
