1 month ago
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With funding for the United States Agency of International Development (USAID) frozen by US President Donald J. Trump for three months, China and Japan are expected to step up as development partners for Asia-Pacific countries' development partners and expand their influence in the region, according to the Economist Intelligence Unit (EIU).
"Although the USAID freeze will be hugely disruptive to individual development programs, we do not believe that—even if indefinite—it will pose a serious threat to macroeconomic, political or social stability in the affected countries. That is partly because other nations are likely to step up and fill the gaps. Multilateral institutions will also probably take on more projects," Alex Holmes, EIU's regional director for Asia, said in a Feb. 12 report.
Citing EIU estimates, Holmes noted that "the most exposed to USAID cuts are generally small countries, where the inflows are significant relative to the size of their economies," such as Cambodia, Laos, Myanmar, Nepal, small Pacific island-nations, and Timor-Leste.
USAID support to the Philippines is equivalent to only less than 0.1 percent of its gross domestic product (GDP).
Holmes believes that the lack of near-term financial aid from Washington would allow Beijing and Tokyo to foster greater development assistance to their regional neighbors.
"China's leaders will probably see the freezing of US aid as an opportunity to expand the country's global influence. This is likely to be most prominent in the Pacific Islands, where the funding sums are smallest and countries are in a strategic position to potentially counterbalance the AUKUS [Australia-UK-US] security partnership," Holmes said.
Besides what the EIU described as China's "renewed ambition" in the Pacific region that has led to bigger aid in recent years, Holmes also expects more funding support to be extended to Cambodia and Laos among member-states of the Association of Southeast Asian Nations (ASEAN).
"China has been expanding its outreach to global south economies. Official foreign aid expenditure accounts for less than 0.02 percent of China's GDP—much lower than in developed economies. We expect that level to rise as China takes on a greater role in global affairs," Holmes said.
"However, it is important to note that Chinese support tends to take different forms, with greater use of bilateral commercial lending and a focus on projects that could benefit China's global influence or domestic economy, which means it will not be a like-for-like replacement of US aid," he added.
Also, Holmes said "Japan, which has been keen to expand its trade and investment with ASEAN, is another potential donor that may step up its support."
But Holmes pointed out that ramping up Japanese foreign aid may be constrained by Japan's worsening fiscal deficit. "We expect growth in Japanese aid to be tied to the government's commercial considerations in supporting the expansion of the business sector."
With the looming emergence of China and Japan as more reliant development partners of Asia-Pacific countries, "and Western influence in the region will be damaged, largely to the benefit of China and other rising middle powers," Holmes warned.
He also cautioned that "alternative development financing is likely to be more loan-like than grant-like, with a stronger commercial angle and, potentially, a higher cost in terms of repayment terms." USAID provides grants to its development partners instead of loans, saving beneficiaries from interest rates.
