Last February, the abrupt termination of more than 80 percent of USAID projects left millions without essential support, raising questions about whether a fundamental change in global aid is underway. With a US$60 billion budget in 2023, USAID was the world’s largest bilateral donor, operating almost exclusively on a grant-based model. Officially, USAID’s closure has been linked to inefficiencies or framed as a partisan decision. Yet beyond ideology, the move reflects a broader transformation in development aid—potentially marking the final shift to a global loan-based model.
Since its founding in 1961, USAID has largely operated through grants rather than loans, a model shaped by both necessity and strategy. During the Cold War, the US recognized that funding civil society, independent media and governance reforms was crucial for promoting democratic resilience in countries where authoritarian regimes held power. Unlike loans, which required government approval and repayment, grants allowed the US to bypass state controls, enabling funding to reach actors who could drive systemic changes, even in politically repressive environments.
When the global debt crises of the 1980s exposed the dangers of over-lending to developing nations, the international development community followed the US in prioritizing grants as a safer alternative. However, this model has not been without challenges. Some argue that grants have fueled aid dependency, inflation and misuse of funds, with some governments diverting them to cover existing debts rather than fostering long-term development.
Beyond financial inefficiencies, grants have also been criticized for their structural power imbalances. The USAID grant model has often been viewed as a tool for advancing geopolitical interests, shaping national policies, and channeling funds almost entirely through international organizations. While recent efforts have aimed to shift power, local organizations have historically received only a small share of resources and had limited influence over funding decisions and program design. In contrast, loans—while creating financial burdens—give governments greater control over how funds are allocated. However, both models have failed to empower civil society in defining and leading their own development agendas.
Over the past decade, faced with rising national debts, many donors have gradually shifted back toward concessional loans—low-interest, long-term financing. They argue that loans promote stronger financial discipline and local ownership, making aid more sustainable. These loans are often delivered through financial institutions, with aid funds used to subsidize interest rates or guarantee risks—ensuring profitability despite favorable terms.
But this shift is not just about economics; it is also geopolitical. As China’s Belt and Road Initiative (BRI) expanded, Beijing emerged as the largest lender to developing countries, offering financing often tied to resource extraction agreements, infrastructure control, and political leverage.
To counter China’s growing influence, Western donors are now promoting loans with more favorable terms, seeking to provide an alternative source of financing. Yet, while concessional loans may reduce reliance on Chinese lending, they also pose risks. Many developing countries are already drowning in debt, and adding more—no matter how concessional—could deepen financial instability rather than alleviate it. If not carefully structured, these loans may replace one form of economic dependency with another.
Beyond economics, this shift carries stark political implications. Governments are unlikely to borrow to fund projects that challenge their authority. Instead, loans may be directed toward state-controlled initiatives, strengthening surveillance, expanding security forces, or consolidating power.
Furthermore, loan-based aid is more likely to prioritize infrastructure, energy, and revenue-generating projects over sectors like health and education, which may receive less funding due to their lack of immediate financial returns. While some concessional loans include conditions for social investments, the overall shift could reinforce existing inequalities in countries where access to services is already uneven.
Recent history has also shown the dangers of debt-driven development. Zambia and Sri Lanka both collapsed under massive debt burdens, triggering severe economic crises, social unrest and authoritarian crackdowns. The more countries rely on debt to finance development, the more they risk sacrificing social protections, governance reforms, and political freedoms.
The dismantling of USAID’s grant-driven model may mark the end of an era—one in which USAID was a tool for democratic resilience, civil society empowerment and governance reform. But this shift isn’t limited to developing nations. Even in the West, economic priorities increasingly influence political choices, sometimes at the expense of democratic values. The erosion of civil society, once seen as a problem in fragile states, is now emerging in developed ones. When politics is driven by short-term economic logic, it risks overlooking the deeper impacts of inequality, social fragmentation and authoritarian drift. As the global aid architecture shifts, the question is no longer just how development is financed, but what kind of world it is financing.
Sara Piazzano is an independent development policy expert.
