The age of “generous” foreign aid is over. The rich world’s commitment to official development assistance (ODA) is fading fast. Aid budgets are flatlining – or even declining – as a result of shifting domestic priorities, political polarization, and demands from budget hawks in the United States and Europe.
Climate-finance pledges, once trumpeted as evidence of global solidarity, are increasingly drawing from existing commitments, rather than being backed by new money.
But the aid pullback is only part of the story. The deeper, more corrosive problem is that while rich countries send pennies to the Global South, the Global South is sending dollars back. According to new research from the University of Massachusetts Amherst’s Political Economy Research Institute, developing countries in Africa suffered an astonishing financial outflow of $2.7 trillion between 1970 and 2022.
Meanwhile, inflows from ODA and foreign direct investment were only $2.6 trillion. Despite all the talk of “mobilizing capital” to promote development, the global financial system has enabled a net loss for Africa. Some of this leakage is old news; capital flight, tax evasion, and profit shifting by multinationals are well-known issues.
Equally, MDBs need to move beyond their cookie-cutter risk models and get serious about investing in institutional capacity, not just megaprojects.
But the situation has been exacerbated by interest-rate shocks, surging debt-service costs, and a private sector that is increasingly unwilling to invest in the Global South. While donor governments wring their hands over whether they can afford to give more, the Global South is steadily hemorrhaging resources.
The hard truth is that development finance is not just about unlocking more aid; it is about plugging the leaks and giving countries the tools to mobilize their own capital on affordable terms. That means rethinking the architecture of development finance from the ground up.
The first step is to change the conversation. Rather than focusing on the G7’s dwindling generosity or clinging to hopes that wealthy countries will wake up to their historic responsibilities, we should recognize the overlooked potential of the Global South’s own financial institutions.
Among these, national development banks (NDBs) remain woefully underutilized, even though domestic public resources are known to be the most reliable source of development finance. Domestic financial commitments tend to be more stable than aid, more accountable than footloose private capital, and more aligned with local development priorities. But to mobilize resources at scale, countries need strong, well-equipped public financial intermediaries.
NDBs, when properly empowered, are uniquely suited to this role. With their deep understanding of the domestic risk landscape, they can lend countercyclically when commercial banks retreat, and they can crowd in private finance by absorbing early-stage risk. Some are already doing this: the Brazilian Development Bank (BNDES), the Development Bank of Southern Africa, and Indonesia’s PT Sarana Multi Infrastruktur have each shown how NDBs can promote infrastructure development, innovation, and climate resilience.
So, why isn’t this happening on a wider scale? The problem, in many countries, is that NDBs face steep borrowing costs, because they are constrained by their sovereign’s credit rating. Forced to borrow at high interest rates, they must lend at even higher ones. Moreover, their access to international finance is limited, their mandates are often narrow, and their governance structures are outdated.
Fortunately, multilateral development banks (MDBs) – the World Bank, regional development banks, and institutions like the New Development Bank – can help to address these issues. Instead of trying to lend directly into every country and sector themselves, MDBs should focus on strengthening and capitalizing NDBs.
By providing concessional finance, equity, loan guarantees, and technical support, they can help national banks extend credit on better terms, scale up operations, and take on greater developmental risk.
The issue is not more or less aid. The issue is replacing the current approach with a fairer, more effective system that ends the net financial outflows and ensures genuine economic sovereignty. The system we need already exists in an embryonic form. Now we must bring it fully to life.
Recent work by Boston University’s Global Development Policy Center makes the case for such “blended finance from the ground up.” When MDBs take early risk – by injecting equity or subordinated debt into NDBs – they can unlock domestic savings, attract pension-fund investment, and create project pipelines that are grounded in national development strategies, rather than donor preferences.
This is not just some technocratic tweak. It represents a fundamental shift from treating the Global South as a passive recipient of finance to recognizing it as the pilot of its own development.
True, additional reforms are still needed. NDBs must ensure greater transparency, upgrade their risk-management strategies, and do more to align their lending with environmental and social targets. Equally, MDBs need to move beyond their cookie-cutter risk models and get serious about investing in institutional capacity, not just megaprojects.
The potential payoff is enormous. Imagine a world where MDBs leverage their $1 trillion in capital not to make a few more loans, but to catalyze more than $10 trillion in public and private domestically sourced investment across the Global South. Development finance would be driven by local priorities, supported by global capital, and focused on long-term transformations.
As delegations from around the world gather in Seville for the Fourth International Conference on Financing for Development, there is growing recognition of the critical role that NDBs can play in mobilizing domestic resources and promoting inclusive growth. The task now is to turn this insight into a paradigm shift.
The issue is not more or less aid. The issue is replacing the current approach with a fairer, more effective system that ends the net financial outflows and ensures genuine economic sovereignty. The system we need already exists in an embryonic form. Now we must bring it fully to life.
(Laura Carvalho is Director of Economic and Climate Prosperity at the Open Society Foundations and Associate Professor of Economics at the University of São Paulo)
Copyright: Project Syndicate
