From donor to investor: The dangers of the development paradigm shift
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Article summary
- Major donors try to detract attention from ODA cuts with new rhetoric.
- World Bank and IMF continue to present private capital mobilisation as ‘win-win’ and only alternative.
- Reduced ODA and greater reliance on private finance risks deepening existing barriers to positive development outcomes.
As the world faces geopolitical turmoil, development cooperation has been hit by substantial cuts. Eleven members of the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) have announced Overseas Development Aid (ODA) cuts for 2025-27. A turn away from traditional bilateral finance, such as grants or concessional loans, continues to intensify. A June 2025 OECD report projected a drop of between 9 and 17 per cent in ODA in 2025, following a 9 per cent drop in 2024, with deep uncertainty on the outlook going forward. Donors such as the UK are shifting the narrative, justifying ODA cuts by repositioning engagement with recipient countries as “mutually beneficial”, where rich countries shift “from donor to investor”, thus justifying a shift away from grants and concessional loans, which many consider essential non-debt producing sources of finance, to a renewed focus on new ‘joint investments’ and financing tools. According to Belgium-based civil society organisation (CSO) Eurodad, rich countries are failing to uphold the “developmental and regulatory role for the state.”
The OECD report warned that cuts to multilateral commitments could trigger a “second wave” of extremely harmful impact on low-income countries (LICs) and the world’s poorest, and stressed the importance of maintaining multilateral spending, including through the International Development Association (IDA), the World Bank’s low-income country arm that provides grants and concessional loans to LICs. Moreover, in a January report, Eurodad highlighted that ODA quality has also worsened, including in multilateral spending, and noted that OECD DAC members blocked structural reform at the 2025 Fourth Financing for Development Conference in Seville (see Observer Summer 2025). In the absence of aid, and under the auspices of mobilising private finance, development cooperation is increasingly seen as an arena for private sector-led growth. Multilateral institutions like the World Bank Group (WBG) and the IMF are contributing to the deepening of this riskier model of development, doubling down on the strategic mobilisation of private capital to achieve economic growth, whilst failing to produce the promised development impact (see Observer Autumn 2024).
For sale: Seats at the development table
Given the drop in ODA, accompanied by the increased rhetorical focus on ‘joint investments’ on national development, questioningif and how private actors with profit-seeking interests can play a central role in achieving human development goals is essential – especially considering the failures of the Bank’s “billions to trillions” agenda (see Guest analysis, July 2025). Under President Ajay Banga, the World Bank continues to emphasise that development is a “strategic investment” in global growth and stability, with a focus on creating jobs and accelerating private sector investment. In an April 2025 Financial Times op-ed, Banga wrote that the key question to be asked of countries is, “What does the future look like here – and why should we invest in it?”, without referring to human rights or the Sustainable Development Goals once. He declared, “Our ultimate goal is to help countries build dynamic private sectors that convert growth into local jobs.”
However, Alex Campbell of the International Trade Union Confederation (ITUC) commented that the Bank’s intense focus on job creation as a development outcome suffers from the private-sector bias at the heart of the new developmental shift, noting:
“Jobs are defined so vaguely as to include nearly any investment that could plausibly support business, therefore private investment equals jobs…the Bank does not seem willing to change course. But the development impacts of its investments will suffer, and its shareholders – not to mention the communities it serves – will notice that the jobs promised on paper did not appear in reality.”
The Bank’s use of job creation as a proxy for development highlights how this investment-driven model of development, away from ODA, prioritises capital flows over attributable positive social impact and economic transformation.
Not a tonic for missing aid
Encouraging borrowing countries to shift reliance away from grants and concessional loans and towards private finance is particularly dangerous amid rising debt distress globally. Expanding reliance on private capital while countries are heavily constrained by fiscal consolidation further transfers risk and vulnerability to borrowing countries. In 2024, WBG Chief Economist Intermit Gill called the Bank’s “billions to trillions” agenda a “fantasy”, amid net outflows of private finance from the Global South. In addition to the higher interest rates paid by low- and middle-income countries and currency depreciation, the growing share of debt owed to private creditors has increased the cost of servicing external debt. In many cases, debt repayments rival or exceed public spending on health or education, and UK-based CSO Debt Justice found in 2025 that of a sample of countries receiving long-term IMF loans, all saw overall public spending per person cut by 10 per cent over the course of their IMF programme.
With countries like the UK reframing development as partnership, it must be questioned whether the private finance solutions being offered to bridge the gap truly prioritise the developmental needs, or if the collaborative effort is a one-way street facilitating deregulation, regressive tax structures and special economic zones that further stray from people-centred outcomes. Eurodad’s report noted that counting private sector instruments like guarantees of private investors has “diluted ODA’s core developmental purpose. Reported aid volumes risk being inflated through the inclusion of non-concessional and commercially oriented flows, without clear evidence that these resources align with the priorities of countries in the Global South or deliver meaningful development outcomes.”
Donors may insist this is an opportunity to move on from the system of dependency exacerbated by aid and create a new set of financing solutions. But ODA is a moral obligation that remains essential to meeting human needs, a task that private finance has yet to prove itself capable of, let alone redressing decades of immense wealth extraction from the Global South.
