The key to unleashing funding for development efforts
Laura Carvalho: Director of the Economic and Climate Prosperity Department at Open Society Foundations and Associate Professor of Economics at the University of São Paulo.
The era of “generous aid” from wealthy countries is over. The commitment of the developed world to Official Development Assistance (ODA) is rapidly waning. Aid budgets are stagnating and sometimes even declining due to shifts in domestic priorities, increasing political polarization, and pressures from “fiscal hawks” in the United States and Europe. Moreover, climate finance commitments, once seen as a marker of global solidarity, are often met from existing obligations rather than new money.
However, the decline in aid is only part of the picture. The deeper, more corrosive issue is that Global South countries, despite receiving meager amounts from wealthy nations, are transferring far larger sums abroad. According to new research from the Political Economy Research Institute at the University of Massachusetts Amherst, developing countries in Africa witnessed outflows of $2.7 trillion between 1970 and 2022, while inflows from aid and foreign direct investment totaled only $2.6 trillion. Despite frequent talks of “mobilizing capital” for development, the global financial system has resulted in a net loss for Africa.
Some of these outflows are well-known: capital flight, tax evasion, and profit repatriation by multinational corporations are all documented issues. But the situation has worsened due to shocks from rising interest rates, increasing debt servicing costs, and the private sector’s reluctance to invest in the Global South. While donor governments ponder whether they can provide more, Global South countries continue to deplete their resources.
The painful truth is that financing development is not solely about increasing aid; it’s about preventing leakages and empowering countries to mobilize their own capital on favorable terms. This requires a radical reevaluation of the structure of the development finance system.
The first step is to change the dominant discourse. Instead of focusing on the decline in the generosity of the G7, or clinging to hopes that wealthy nations will awaken to their historical responsibilities, we should recognize the untapped potential of financial institutions in the Global South.
Among these institutions, National Development Banks (NDBs) remain underutilized, even though local public resources are among the most stable sources of development finance. Domestic financing tends to be more stable than aid and more accountable than mobile private capital, often aligning with national development priorities. But to mobilize resources on a large scale, countries need strong and capable public financial intermediaries.
When empowered appropriately, National Development Banks are uniquely qualified for this role. They have a deep understanding of local market risks and can lend when the commercial banking sector contracts, while also attracting private financing by absorbing risks in the early stages of projects. Some are already doing this: Brazil’s National Development Bank (BNDES), the Development Bank of South Africa, and Indonesia’s PT Sarana Multi Infrastruktur all show how National Banks can drive infrastructure development, innovation, and climate resilience.
So why isn’t this approach generalized? In many countries, these banks face high borrowing costs because they are tied to their sovereign credit ratings. Due to having to borrow at high interest rates, they must lend at higher rates as well. Their access to international funding is also limited, their mandates are narrow, and their governance structures are outdated.
The good news is that Multilateral Development Banks (MDBs)—such as the World Bank, regional development banks, and institutions like the New Development Bank—can help address these issues. Instead of attempting direct lending in every country and sector, they should focus on strengthening and enhancing the capital of National Development Banks. By providing affordable financing, capital investments, loan guarantees, and technical support, they can help these banks offer better loan terms, expand their operations, and take on greater risks for development.
Recently, the Global Development Policy Center at Boston University presented compelling arguments for this model of “mixed financing from the ground up.” When multilateral banks take on initial risks—through infusions of capital or concessional debt to National Banks—they contribute to mobilizing local savings, attracting pension fund investments, and building a portfolio of development projects grounded in national plans, rather than donor preferences. This is not just a technocratic adjustment; it is a radical shift that acknowledges that the Global South is not a passive recipient of financing, but a leader in its own development.
It is true that further reforms are needed. National Banks must enhance transparency, develop risk management strategies, and improve alignment of their financial operations with environmental and social goals. Likewise, multilateral banks need to move beyond their traditional risk-ready models and invest seriously in building institutional capacities, rather than relying solely on mega-projects.
The potential return is enormous. Imagine a world where multilateral development banks use a trillion dollars of their capital not just to provide more loans, but to catalyze over ten trillion dollars in public and private investments from local sources in Global South countries. In this scenario, development financing would be driven by national 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, the conviction grows about the vital role National Development Banks can play in mobilizing local resources and promoting inclusive growth. The challenge now is to translate this understanding into a radical transformation of approach.
The issue is not about increasing or decreasing aid, but about replacing the current approach with a more just and effective system that halts net outflows of financial resources and ensures true economic sovereignty. The desired system already exists in rudimentary form. Now is the time to bring it to full life.
