Aid cuts will deepen the divide, leaving poorer countries behind

The consequences of recent aid cuts are far from uniform, but they are likely to hit the region’s poorer and more aid-dependent economies the hardest, along with sectors where Western donors have traditionally played a leading role.

In larger economies such as Indonesia, Thailand, Malaysia, the Philippines, and Vietnam — where aid is small relative to the country’s own resources, and non-concessional lending plays a major role — the effects will be less significant. Although development support for important social sector priorities could be significantly affected.

By contrast, smaller and more aid-dependent nations are far more exposed. Between 2015 and 2023, foreign aid (ODA) made up 95% of total official development finance in Timor-Leste, 84% in Myanmar, and 81% in Cambodia. In those economies, Western ODA is particularly important for human development activities. In Laos, for instance, education ODA from the United States, United Kingdom, and European Union is equivalent to 22% of the government education budget,¹ and health ODA from those donors is equivalent to 11% of the country’s health spending.²

Across the region, Western aid cuts risk harming progress in health, education, and general environmental protection. Aid from the United States, United Kingdom, and European Union plays an outsized role in these sectors, funding 68% of biodiversity and environmental development projects, 37% of education, and 18% of health. Alarmingly, these donors also account for about two-thirds of development funding for civil society. Reductions in Western aid will disproportionately impact these critical sectors.

Humanitarian support, while somewhat protected from US cuts, also faces headwinds. Team Europe, responsible for about 25% of humanitarian aid, is seeing major cutbacks from key players such as Germany and France.³ Asian donors provide roughly 34%, with their support remaining relatively stable for now.

Southeast Asia’s poorest countries — Cambodia, Laos, Myanmar, and Timor-Leste — have already lost out the most amid stagnating ODF to the region, despite facing high and rising poverty. Total ODF flows to these countries have almost halved since 2020, falling from $9.8 billion in 2020 to just $5.2 billion in 2023. This has occurred even as these countries have faced higher rates of extreme poverty, with World Bank estimates for the share of people living below $2.15 PPP⁴ per day having risen in Laos, Myanmar, and Timor-Leste (estimates for Cambodia are not available).

Equally troubling is that the decline in ODF to these countries mostly reflects a reduction in aid, though non-concessional loans have also declined sharply. Concessional loans to lower income countries have fallen from more than $3.7 billion in 2020 to $2.4 billion in 2023, though they remain slightly above the pre-pandemic average. More concerning is the sharp decline in grant funding, which has fallen by one-third since 2020 and is now 25% below pre-pandemic levels. Two main factors explain this trend: Myanmar’s 2021 military coup, which led most development partners to withdraw; and Laos’ mounting debt burden, which is affecting its access to even concessional finance. Only Japan, China, and the United States remain engaged in Myanmar. Meanwhile, Cambodia has seen increased support from traditional donors and steady backing from China. Aid to Timor-Leste has remained relatively stable.

By contrast, development support to the region’s stronger developing economies — Indonesia, Vietnam, and the Philippines — is steady, while poverty in these countries has continued to decline. The composition of ODF to these stronger economies has also remained stable in terms of grants, concessional loans, and non-concessional loans.

The result is a deepening development divide: Southeast Asia’s higher income countries are capturing the lion’s share of international ODF, while lower income nations are being left behind despite pressing needs. If the current trajectory continues, especially amid Western aid cuts, this divide will become more entrenched, undermining the region’s long-term stability, equity, and resilience.