When Private Wealth Meets Public Scarcity: Rethinking Aid in 2026

Pic by UNOPS

Global development finance is entering a harsher season. Aid volumes dipped in 2024 for the first time in five years, while indebted low‑income countries faced escalating debt service and shrinking fiscal space. Against this backdrop, one question reigns supreme: is Global North private sector activity, both via profit‑shifting practices and the growing use of “private sector instruments” in aid, crowding out government revenue and, in turn, squeezing public assistance to developing countries? This website argues that the answer is increasingly yes. This pressure is visible in the “twin peaks” Yanis Varoufakis, a Greek scholar and politician, described: on one side, a mountain of debts; on the other, a mountain of idle cash withheld from productive investment. The consequence is a regime of public austerity and private abundance that starves public budgets at home and concessional support abroad.

First, the public assistance baseline is weakening. Preliminary OECD data show total DAC ODA fell by 7.1% in real terms in 2024 to US$212.1 billion (0.33% of DAC GNI), driven by lower contributions to multilaterals, decreased aid for Ukraine, and reduced refugee‑hosting costs; humanitarian aid also dropped by 9.6%. The United States remained the largest provider (US$63.3 billion), but overall aid retrenched, and only four countries exceeded the 0.7% ODA/GNI target. UNCTAD’s broader review of ODA trends underscored a persistent gap to the 0.7% norm and warned of sustained strain on financing for sustainable development.

Second, the composition of aid has shifted in ways that add fiscal risk downstream. UNCTAD documented that in 2022 grants fell 8% to US$109 billion while concessional loans rose 11% to US$61 billion, pushing the grant share of ODA to a two‑decade low (63%), a trend that risks compounding debt distress in recipient countries. Although UNCTAD notes a slight reversal in 2023, the multi‑year movement toward lending remains a structural concern, especially as interest rates rose and more countries entered or hovered near debt distress.

Third, donors have expanded “private sector instruments” (PSI), including guarantees, loans, equity, in ODA accounting. OECD decisions finalized in 2023 clarified PSI reporting and aimed to improve transparency; proponents argue PSIs mobilize private capital and diversify tools. Yet watchdogs cautioned that generous discounting and weak safeguards could inflate aid numbers, tilt incentives toward non‑grant instruments, and shift attention away from budget‑support and social sectors. In Varoufakis’s “twin peaks” framing, PSIs risk feeding the peak of idle private liquidity and further privilege financial engineering over predictable public transfers that fund health, education, and climate resilience.

Fourth, private sector practices themselves reduce the tax base in developing countries. UNCTAD’s investment‑based analysis of base erosion and profit shifting (BEPS) finds that tax‑planning via offshore hubs causes significant leakage of development resources and undermines reinvestment; earlier UNCTAD estimates put revenue losses for developing countries above US$100 billion annually. More recent econometric work suggests global corporate tax losses reached US$480–600 billion in 2019, with higher intensity of avoidance outside the OECD, eroding revenue where fiscal space is most constrained. The combined effect is straightforward: when multinational profits are booked elsewhere, domestic treasuries collect less, and governments become more reliant on loans and conditional support rather than grant‑based aid.

Malawi’s fiscal picture makes this concrete. Tax revenue stood at 13.5% of GDP in 2022, a low base relative to needs, while fiscal deficits averaged 11.9% of GDP over 2022–24. Debt service consumed over half of domestic revenues, crowding out priority spending; rigid expenditures and quasi‑fiscal pressures left social sectors underfunded and more dependent on external finance just as aid budgets tighten. IMF surveillance put general government gross debt near 80% of GDP (2025 projection), with an overall deficit above 10% of GDP, and warned that financing needs were crowding out private sector credit. Malawi’s own Annual Economic Report traces the macro pressures and the limited fiscal room to maneuver. While Malawi has introduced targeted tax incentives to attract investment (e.g., mega farm holidays and local employment requirements), incentives can narrow the tax base if not well‑designed, complicating revenue mobilization in the near term.

This overlap between weakened grants, rising loans, and tax base erosion is the channel through which Global North private sector activity “crowds out” public assistance. Profit‑shifting lowers domestic corporate tax; PSIs, by design, prioritize risk‑sharing with private investors rather than guaranteed budget support; and donors retrench on core contributions when domestic political cycles tighten. In a system where in‑donor refugee costs and earmarking have already diverted ODA from programmable country budgets, the marginal dollar of “aid” increasingly bypasses ministries of finance, i.e., Varoufakis’s democracy‑light “techno‑feudalism” logic applied to development finance.

To be clear, private capital is indispensable for climate and infrastructure gaps; the issue is balance and accountability. OECD’s PSI rules do include transparency commitments, and DFIs have started to disclose “additionality” rationales, but published assessments still find disclosure patchy and safeguards weak precisely where low‑income countries need confidence that PSIs do not displace grants or subsidize deals that would have occurred without public support. Meanwhile, the World Bank’s IDA remains a crucial counterweight: FY2025 IDA commitments totaled US$33.8 billion, including US$8.2 billion in grants, with Africa receiving two‑thirds. Yet concessional windows have been flat in real terms for years, forcing balance‑sheet optimization to sustain lending capacity, yet another sign of the twin peaks dynamic.

What should policymakers and advocates demand in 2026? First, re‑center grants for low‑income, climate‑vulnerable countries. With ODA down in 2024 and projections of further cuts in 2025, the only fiscally responsible path is to shield least‑developed countries and sub‑Saharan Africa from reductions, prioritizing health and social protection. Second, embed hard safeguards and public reporting in PSI operations: credible “additionality” tests, development impact tracking, and guardrails against substituting PSIs for budget support. Third, intensify international tax cooperation. UNCTAD’s investment‑based BEPS lens should be mainstreamed alongside the OECD/G20 inclusive framework, targeting conduit‑economy exposures that measurably depress taxable returns. Fourth, in countries like Malawi, accelerate revenue mobilization with fewer exemptions, better audit and digitalization, and measured use of incentives. The World Bank’s Public Finance Review sets out a sequenced agenda to restore stability while protecting essential services.

Varoufakis’s twin peaks paradox is a useful descriptor because it names the system failure: high debt without the productive investment to extinguish it, and high savings held in financial fortresses rather than channeled to public goods. The development finance analogue is clear: leaner grants, fatter loans, more private risk‑sharing but less predictable fiscal support for ministries tasked with delivering rights. To prevent the twin peaks from eating democracy at home and in our partner countries, 2026 must be the year donor politics recommit to grant‑based solidarity, and private capital is harnessed under transparent rules that genuinely expand the pie rather than redistribute risk toward the public purse.

Methods note and data caveats. Charts above use UNCTAD’s reported 2022 ODA composition (US$109b grants vs US$61b loans) and OECD preliminary totals for 2023–2024; the decade‑long grant/loan series is not uniformly published in one comparable format, and 2024 figures are preliminary pending December finalization. Readers should consult OECD DAC Table 1/2 and UNCTAD’s aid trend note for updates and for cross‑checks on sovereign lending shares.