The G7 democracies have launched a partnership for global infrastructure and investment, targeting investment in developing economies, but delivery has stalled. Inflation, domestic politics and, in Europe, an energy crisis are compounded by US–China rivalry and a climate of distrust between developed and developing countries. Can a turnaround be hoped for?
Despite its better angels, and its aspirations to do more, the attempt by the Biden administration to galvanize support, both at home and with its G7 partners, to ‘build back better’ continues to face significant barriers. The original idea of such an initiative was to foster a sustainable post-COVID-19 economic recovery in low- and middle-income countries, focusing on areas such as climate resilience, healthcare, digital access and gender equality. But the global context has now become even more challenging. As pressures mount – higher food and fuel costs, extreme weather events, political unrest, rising interest rates – the demand by developing countries for debt relief, climate finance and greater investment grows even as the financial resources available become more constrained.
As we write, the prospect of a debt crisis is imminent, with around 54 countries in need of debt relief if they are to avoid extreme poverty and development setbacks and begin to tackle climate change. Whether the current situation becomes a systemic global debt shock is less clear. But whatever financial scenario unfolds in the next months, massive economic damage seems certain to occur – with sharply lower global growth, ruinously high inflation and huge social costs.
This in turn raises broader questions for international development cooperation. The current economic climate underlines the imperative for developing countries to construct effective and equitable partnerships with donors and secure reliable access to external financing. Yet relations between developing and developed countries are more fractious than ever. Trust between developing countries, private investors, and governments in the G7 and other advanced economies is missing, just when a new social contract that resets the terms of engagement is most critically needed.
Pressures in rich countries
The geopolitical context in which international development partnerships are being pursued is a significant barrier to their success. Domestic political support in the G7 countries for an ambitious global agenda has also come up short. Internal division and economic stress have diminished their room for policy manoeuvre. With anti-foreigner and anti-immigrant discourse pervasive across the West, this is not an obvious moment to mobilize support for what domestic electorates often perceive as expensive acts of altruism.
In the US, former president Donald Trump and Trumpism continue to dominate the Republican Party, and so political opposition to public spending on non-citizens has become more entrenched. This resonates at a time of high inflation and fuel prices, and among a population that has long assumed that the US government spends far more than it really does on international development. If a Republican returns to the White House in early 2025, this would likely undermine the potential for US leadership that is necessary to steward a global recovery and ensure progress on sustainable development. And almost regardless of the outcome of the 2024 US presidential election, further Republican influence in the US Congress is likely to add significant constraints to public spending on international development.
The current economic climate underlines the imperative for developing countries to construct effective and equitable partnerships with donors and secure reliable access to external financing.
In the UK and Europe, also, the outlook for development assistance is not good. An energy crisis in Europe could continue for two or three winters in succession, and has already impeded political support in the UK for funding a just, equitable and green recovery and economic transformation. Under Boris Johnson’s leadership, the UK cut its development aid and released a development strategy more focused on trade and investment than on poverty relief or development. The UK is now spending an increasing share of its development assistance budget at home rather than abroad, and its commitment to foreign aid could plummet to a mere 0.3 per cent of gross national income. The current economic crisis means that a return to higher levels of assistance is unlikely anytime soon.
Moreover, the wider global environment in which to finance and deliver foreign aid is only likely to become more challenging. The prospect, and in many developed economies the reality, of recession and the reduction of estimates for economic growth worldwide will make it more difficult to raise money, and to overcome the trust deficit between rich countries and developing ones. In October, the International Monetary Fund (IMF) cut its forecast for global real GDP growth in 2023 to 2.7 per cent from an earlier projection of 2.9 per cent in July. In contrast, global growth set a rapid pace of 6 per cent in 2021 (albeit off a very low base). Why does this matter? As the old saying goes, charity begins at home, and this is the attitude voters in developed countries are likely to adopt if a recession, or even just a sharp slowdown, occurs. ‘For many countries, recession will be hard to avoid,’ said David Malpass, the president of the World Bank, in June 2022 at the time of the bank’s own growth estimate reductions.
Pressures in developing countries
A slowdown in significant and systemic parts of the global economy also presents both short- and longer-term difficulties for developing countries. The immediate issue is one of stabilization: public finances, already weakened by a build-up of debt in the decade before COVID-19, have come under further pressure from the direct and indirect economic effects of the pandemic. One in every five developing countries is undergoing ‘significant fiscal and financial stress’, according to a group of experts that met recently in Barbados. Rising global interest rates could worsen matters, making future borrowing more expensive for emerging market governments, and forcing them to allocate more of their limited budgets
to servicing existing debt.
These challenges are exacerbated by the inflationary fallout from Russia’s war in Ukraine, with the conflict’s impact on food and energy supplies contributing to sharply higher prices for basic commodities. ‘The world is on the brink of the most severe cost-of-living crisis in a generation,’ according to Rebeca Grynspan, secretary-general of the United Nations Conference on Trade and Development. ‘The FAO food price index is at historic heights, and hundreds of thousands of people are already facing famine as a result.’ This only makes the establishment of a new strategy for international assistance and development more urgent.
Yet if anything, the longer-term picture is even more concerning. The more resources developing countries must devote to economic ‘firefighting’, the less room for manoeuvre they have to tackle underlying development needs. The threat is not just that a global recession ‘will spare no one, [and] lead to more poverty and hunger’ but that it will ‘delay the transition to a sustainable future’. With few exceptions, developing countries have not adopted redistributive and transparent development models that can meet the long-term needs and demands of their populations.
As a result of all these factors, the overall process of assistance and development is at a critical juncture.
The foreign aid conundrum
With this context in mind, this multi-author research paper examines some of the fundamental challenges to development cooperation and proposes solutions for meeting them. It frames the research question around the concept of ‘building back better’ – reflecting the expression initially used by the G7 for a post-COVID-19 recovery programme launched in mid-2021. Within this broad topic, our contributors analyse multiple different dimensions to foreign aid and development cooperation, ranging from donor–recipient tensions to climate finance to the role of the G20.
The essential dilemma we seek to address is how to conceive of development investment and assistance in ways that are adapted to shifting political and economic currents, while avoiding (among other issues) the unpopular ‘conditionalities’ of past donor funding. A global recovery will require public leadership and a heavy dose of private investment, but it will also require careful management of geopolitical competition, overcoming a North–South trust deficit, and rethinking standard practices in the existing development institutions.
Part of this challenge is the need for donors to respect the agency of aid recipient nations without moving to an unchecked system in which vested interests and local elites can secure funding (and dominate its distribution) without sufficient transparency. Any new model of development assistance must have more effective – yet visibly equitable – arrangements for responsible and accountable stewardship of funds.
A spectrum of solutions
Perhaps inevitably, given the daunting scale of the development challenges, our contributors propose ideas that span a wide spectrum of ambition – from pragmatic technical measures to more fundamental reforms. In Chapter 2, Creon Butler, Rob Yates and Tim Benton explore first principles for a sustainable recovery. Respectively, they observe that economic policy cooperation should focus on issues where consensus is strong and the challenge can be framed in a politically low-profile manner; call for universal health coverage to be prioritized in domestic public spending; and underline the need for a reimagined environmental capitalism that respects planetary boundaries. Jim O’Neill, former chair of Chatham House, also proposes that the IMF adopt a more flexible definition of fiscal sustainability in its economic assessments of member countries, and that its Article IV surveillance encompass a review of national health systems.
Chapter 3 covers the increasingly confrontational geopolitics of foreign aid, with Bernice Lee and Cynthia Liao stressing that US–China competition threatens to undercut the potential of development assistance in developing countries. The authors call for greater alignment between these major powers, and propose tactics for how developing countries can better position themselves to manage this competition.
The need to leverage limited public sector funds is a recurring theme throughout this paper, and in Chapter 4 Creon Butler and Theo Beal extract lessons for the current period from previous G20 initiatives to mobilize private finance for development in Africa and beyond.
In Chapter 5, Rebecca Christie looks at the diminished status of the ‘Washington consensus’, the proliferation of development banks, and the implications of these trends for conditionality – both in international lending to developing countries and in the financial architecture more broadly.
In Chapter 6, Lilia Caiado Couto considers proposals to enhance climate finance, identifying the need for common global definitions of low-carbon assets so that institutional investors can reweight their portfolios around sustainability, while Mark Malloch-Brown thinks a shortage of climate funding from international financial institutions (IFIs) could be addressed through the creation of a ‘climate finance institution’ – a kind of CFI rather than an IFI, as it were.
In Chapter 7, Marianne Schneider-Petsinger looks at the digital sector. She sets out the scale of global inequality in terms of access to the internet, and proposes mechanisms for securing greater commitments in this arena.
And in Chapter 8, Mark Malloch-Brown and Leslie Vinjamuri offer a dose of realism about the contemporary challenges the developing world faces. The authors propose strategies for building the trust between donors and recipients that is essential if private capital is to be mobilized at scale in advancing key development objectives.
