Financialization - The Dramatic Reset of Development Finance: What aid workers, businesses, and governments can do about it.

Readers of this newsletter will be aware that the question of how all humans can live well within the planetary boundaries influences most of my thinking and has been top of mind throughout my more than three-decade career at the intersection of politics and business. Development funding plays a crucial role in addressing this question and in achieving the Sustainable Development Goals (SDGs) – but we are currently witnessing a rapid paradigm shift in the way such funding works. While the conversation about the need for a rebooted financing model is not new, the dramatic, abrupt shifts in the ecosystem make the landscape around this conversation entirely new. To address this, Bayer is actively monitoring and engaging with various initiatives and models being discussed within think tanks, foundations, and UN organizations, focusing on how the SDGs can be effectively financed in the future.

But right now, the current disruptions and geopolitical power shifts, which are compounded by a dramatic reset of development funding in many donor countries, leave me deeply concerned. Increasingly, we are no longer fine-tuning the details of how we progress quickly enough in the right direction; instead, we appear to have lost momentum and are on the brink of straying into the wrong territory.

In recent years, the global development community has received ever-increasing sums of funding to improve the lives of the most vulnerable communities – and correspondingly, criticism of their efficiency and effectiveness in doing this has mounted. And while I admit that development funding is not a perfectly functioning system, much of the current vitriol directed at it feels overblown. Course correction (if that was ever the intention) has well and truly turned into “over-correction”.

Some of the world’s biggest donors are scaling down their contributions

In 1970, world leaders agreed to set a target of 0.7% of gross national income (GNI) for overseas development assistance (ODA). Yet fifty years later, although funding has increased steadily, only five countries (Norway, Luxembourg, Sweden, Germany, and Denmark) are managing to meet this 0.7% target. Starting with the United Kingdom in 2020, governments around the world have been cutting support. What you will see below is a pattern of cuts, with ODA no longer reaching low- and middle-income countries:

• Just last week, the UK’s Prime Minister Sir Keir Starmer announced a dramatic reduction in its aid budget, which will drop from 0.5% of GNI to just 0.3% by 2027 to fund increased investment in defense spending. This follows a steady diminishment over the past few years: between 2020 and 2021, the UK’s ODA fell from GBP 15.2 billion to GBP 11.4 billion, following its decision to reduce its spending target from 0.7% of GNI to 0.5% while the scope of spending was broadened. Humanitarian support (-43%), health spending (-52%), and education funds (-64%) dropped significantly. (Also of note is that in recent years, 29% of the UK’s budget has been devoted to hosting refugees locally, which does not reflect the stated purpose of ODA.)

• In 2024, France announced it would slash its EUR 13.9 billion development funding by EUR 742 million, and later in the year even confirmed further cuts of EUR 1.3 billion for 2025 – a total reduction of over EUR 2 billion. Recently, the goal to reach 0.7% of GNI has been postponed to 2030.

• The Netherlands will start to reduce its ODA by EUR 350 million in 2025-2026, before increasing cuts to EUR 2.5 billion annually from 2027. Aid will be limited to a few regions in Africa and the Middle East that “directly contribute to [Dutch] interests”.

• Before calling a snap election, the German government cut ODA in 2024 and 2025 by more than EUR 1.8 billion in total, making it very likely the country will fall short of reaching the 0.7% target for the first time since 2019.

• Against this backdrop, Switzerland’s decision last year to keep its spending capped at around CHF 11 billion (EUR 11.7 billion) almost sounds like good news. Notably, Switzerland and all the countries above have also shifted billions away from LMICs to aid Ukraine.

The U.S. is the foundation for global development funding – but this foundation is at risk of crumbling

Although all the countries above are pillars of development funding, the United States is the foundation upon which these pillars stand – which is what makes the current shifts so seismic. The U.S. government is the single largest aid donor in the world, according to the United Nations, accounting for more than 40% of all humanitarian aid the UN tracked in 2024. Initially, the country planned to spend about $58.4 billion on international assistance programs in the 2025 fiscal year, according to January 2025 projections from the Congressional Budget Office. The actions of the new administration since January 20, which last week were upheld by the Supreme Court, will have an unprecedented impact on how development is funded and supported.

Moreover, while the massive cuts in the countries listed above generally follow the normal government budget process, the U.S. administration is testing the boundaries of impoundment (actions taken by the President to defer or rescind funds already approved by Congress) and seems to be following a zero-based budgeting approach with its recent cuts. By questioning vast swathes of spending and undergirding headcount, USAID and other aid-related spending measures (with minuscule exceptions for critical humanitarian programs) have been put on hold or withdrawn. On top of the USAID freeze, an additional Executive Order mandates a six-month review of all intergovernmental organizations and treaties to which the U.S. is a party. This review aims to evaluate whether these affiliations align with U.S. interests, and will influence a decision on whether the U.S. should seek to reform them – or simply withdraw entirely.

Financialization of aid will be the new normal

At this juncture, it’s pointless to get entangled in the politics surrounding the aforementioned government decisions – much has already been said and written about the current impasse. To better understand where global development finance is heading, I am more interested in the underlying thinking, as this helps decipher where we are going. The best explanation I could find for what could be the rationale behind the recent actions is summarized in this blog published in early January by Joe Londsdale and Ben Black, two insiders on the current administration’s thinking.

This piece suggests that the new approach to U.S. development funding is based on a pivot away from development projects that require provisioning experts on the ground, complex grant approvals and detail-oriented management – and towards a Development Finance Corporation (DFC)-led, investment-focused, lean, and business-investment complementing approach. The really big question for me, the answer to which will perhaps only be clear by the year-end, is how radical this shift – from public sector-led and financed aid, to issue-based collaborations involving multiple stakeholders – will turn out to be.

Regardless, all the signs suggest that development funding is heading down the path of “financialization” – the process by which financial institutions, markets, etc., increase their size and influence in an economy, system or entity. And while the financialization of aid represents a paradigm shift, it does not have to spell disaster. For one thing, target countries can, to a certain extent, adapt their economies and financial structures in ways that buffer them against geopolitical shifts. Moreover, we know that financialization can be leveraged to the benefit of communities in lower-income countries; at Bayer, we have already operated such a model in several initiatives. For instance, together with the Bayer Foundation and our investment fund Leaps by Bayer, we piloted crop insurance and other innovative financing mechanisms for smallholding communities. We might need to think about extending more blended finance for insurance models to the health sector, too. Even more obviously, financialization could push for reducing interest rates for local communities and businesses.

But every investment needs a foundational social fabric composed of basic human rights including, but not limited to, health, education, nutrition, public safety, and property rights. Going forward, who secures this?

Health and food will be hit hard – and will need to adapt fast

Right now, out of the three foundational areas of development funding for the world’s poorest countries – food, health, and education – we can see the most immediate devastations of the paradigm shift in health. This is due to several compounding factors: many countries cutting their aid back significantly; the United States and Argentina leaving the WHO; and the freeze on USAID’s programs such as fighting AIDS, tuberculosis, Malaria, Ebola and many more. And while some of the U.S.’s programs may be reinstated within a more narrowly tailored health program or via smaller contributions to multilateral programs, they will only work if local infrastructure (like health workers) remains functional. The signal is clear, though: there will be less investment in boots on the ground from the United States, which will force European and Middle Eastern donors to decide if they are willing to fill the void. Germany, for example, needs to judge if it can deploy more than 80% of its GIZ (development agency) staff in the field, rather than in Eschborn near Frankfurt am Main, or in Brussels. Other potential donors and governments on the receiving end also need to step up their game and invest in human infrastructure. This would benefit both health programs and local economies, given there are undoubtedly many highly qualified, intrinsically motivated people with deep local experience in need of new jobs.

Food security – and food inflation – will also quickly be hit by the abrupt lurch toward “financialized” aid. Food inflation is already one of the key challenges for many lower-income countries; African countries, for instance, are projected to pay more than USD 100 billion for food imports in 2025, ten times more than at the beginning of this century. Much of the current financial crisis in low- and middle-income countries can be traced back to food inflation, and this will only increase with funding freezes and cuts, which will pull the rug from under agricultural research and innovation institutes like CGIAR. Such hubs make a huge difference for farming communities around the world and empower them to produce climate-resilient crops, which in turn help promote food security and reduce food inflation. Moreover, while the new U.S. administration has thankfully signaled a continued commitment to the World Food Program (WFP), which plays a crucial role in mitigating food inflation, it has simultaneously increased the pressure: many of the frozen or terminated USAID-funded programs for food aid helped to reduce the burden of food inflation, while also providing income for farming communities in the United States. This balance has now been disrupted, and no investment-funding-driven development model will work if inflation forces the target countries to cut their domestic spending on food imports. Nor will it magically increase the agricultural productivity of the countries deprived of funding; for this, investing in rural communities and basic food productivity is essential.

For the “financialization” of aid to work, particularly in the fields of food and health, we must solve a tricky conundrum: figuring out how to ensure conducive conditions on the ground in order to stimulate investments. Businesses do not invest in low-income countries because of philanthropic conviction. At Bayer, for example, we invest because we see opportunities for our global health business unit or for our smallholder business. The underlying risk profile for those investments is now in flux due to the multifaceted upheaval in development funding – and this is a big deal for businesses, which require stability and an enabling environment if they are to justify an investment risk. Now, investment security will be heavily dependent on the development community’s adaptability (especially among players who have not previously prioritized collaboration with businesses).

Moreover, better orchestration between philanthropic funders, corporations, development funders, and in-country governments is needed. The upending of the development landscape calls for a completely new model to support the basic social fabric of communities. In this respect, initiatives like the EU Global Gateway – an initiative that meets the interests of both businesses and local communities – will be crucial. The benefits of such results-oriented projects are threefold: they help maintain the donor country’s so-called “soft power” and create investment opportunities for its private sector, while also providing tangible economic benefits for target countries and communities.

Now, more than ever, we need to seek out dialogue and partnership

The reduction of development funding in many European countries, combined with the abrupt end to the current model of development funding in the United States, presents a huge challenge for many groups: the tens of thousands of people who made it their mission to improve the lives of disadvantaged communities around the world; the businesses who see opportunities in LMICs; international finance institutions; existing philanthropic partnerships; the organizations who provide much needed humanitarian aid; the researchers who focus on less profitable but critical health and food interventions in remote areas. The list could go on.

But we need to adapt to the changing winds and seek a dialogue, even (especially!) at a time when political divide is currently the dominating factor. In talking to many in the development community, however, I have recently sensed hesitancy in speaking up for fear of retribution. It is critical, therefore, that we do not forget the billions of humans who have no access to safe drinking water, a toilet, health infrastructure, schooling, nutritious food, or housing – and who need politicians, businesses and the development community alike to find a path out of the current situation. They have no voice in this debate, nor do they benefit from finger pointing.