Rethinking Development Policy: Reconciling National Interest, Impact, and Partner Priorities

Europe finds itself at a moment of reckoning. The continent must rethink its place in a world that is becoming more fragmented and more competitive by the day. The shifting US security strategy has delivered a blunt message: the era in which Europeans could depend on Washington as a strategic constant is over. At the same time, the economic foundations on which Europe—and Germany especially—built their prosperity are eroding. Geopolitics are partly to blame, but so is China’s dramatic transformation from global manufacturing hub to assertive economic power with its own strategic ambitions.

In this new landscape, Europe has little choice but to pursue new partnerships and forge new strategic alliances. That task is complicated by Europe’s waning influence in several frontier sectors, not least artificial intelligence. But it would be wrong to view the present moment solely as a sign of weakness. Around the world, many governments are searching for alternatives to the binary choice between China and the United States. Development policy, with its long-standing experience and wide array of tools for building relationships, sits at the heart of this emerging opportunity.

Lines of reasoning

Against this backdrop—and amid shrinking development budgets—calls to align development policy more closely with national interests have grown louder across Europe. The debate often crystallizes into two distinct camps.

On one side are the “traditionalists,” who argue that development policy already serves donor interests—strengthening soft power, opening doors, and paying dividends over time—and should be expanded, not repurposed. For them, the danger lies in pushing development policy too far toward donor governments’ strategic agendas, turning partner countries into instruments for foreign policy aims. Such a shift, they warn, would erode credibility and ultimately weaken development impact by sidelining partner priorities.

These concerns are real. But traditionalists sometimes overlook how much the development landscape has changed. The number of projects has ballooned, average project size has shrunk—often below $100,000— and a growing crowd of actors now competes for space on the ground. This fragmentation undercuts ownership and reduces impact. Even well-designed projects often fail to meaningfully address larger structural challenges. And the charge that development cooperation undermines country ownership is not new. Partner institutions continue to struggle with administrative complexity and with donor approaches that frequently fail to align with national systems. Donors often resist partner requests—such as for infrastructure— in favor of their own thematic preferences.

On the other side are the “critics,” who start from a domestic political reality: development budgets will only survive if they enjoy strong support at home. In an age of fiscal tightening and rising demands on public resources, this support cannot be taken for granted. Critics see development policy as a tool that should help address geopolitical tensions and domestic concerns, from irregular migration to economic sluggishness. They call for greater consideration of national private-sector interests and want domestic companies to benefit more directly from public funds—both bilateral and multilateral.

But this approach also carries risks. Overemphasizing donor-country procurement can backfire, undermining credibility and diminishing soft power. OECD data show that tied aid inflates costs by roughly 30 percent, reducing effectiveness and running counter to international rules that donors themselves claim to champion. Credibility erodes even more quickly when donors cut budgets while simultaneously tying remaining funds. And if one donor ties its aid, others may feel compelled to follow suit, triggering a downward spiral.

Can these opposing views be reconciled? Can development impact, national interest, and genuine partner orientation coexist? Germany—Europe’s largest donor, now rethinking its development agenda—offers a useful lens through which to consider such an approach.

Building blocks of a new approach

A reconciled strategy rests on three key building blocks.

1. Building real partnerships by focusing on areas of mutual interest

Partner orientation does not imply that donors cannot pursue their own interests. The question is how those interests are defined. A forward-looking approach should meet two key criteria.

First, development cooperation should focus on areas of genuine mutual interest—e.g., climate action that drives development, technology development, or stronger health systems that help prevent future pandemics. Cooperation around global public goods offers enormous potential to align incentives, especially in climate, fragility, global health, and biodiversity. Such partnerships must be grounded in shared visions and produce tangible benefits for both sides.

Second, donor interests must be conceived in a long-term, open-minded way. Narrow objectives— such as maximizing donor procurement or deterring migration—undermine genuine partnership and undercut long-term development outcomes. Donors seeking to give national interests greater weight must begin by identifying plausible areas of shared interest. That may require greater selectivity in partners and sectors.

This shift has institutional consequences. Aligning development policy with national, long-term interests requires much closer cooperation between development agencies and other ministries— including those responsible for diplomacy, defense, economic policy, and the environment. Crucially, this cooperation must run both ways. Development agencies must support national priorities—Germany’s hydrogen strategy is one clear example—while other ministries must integrate development considerations into their own agendas, such as ensuring that hydrogen production in partner countries generates local value.

“Policy coherence for development” has been discussed for years, but progress has been minimal, often reduced to time-consuming bureaucratic rituals. A more effective approach would be to focus on a limited number of shared objectives with clear goals. This would also help development agencies cope with this challenging task, thus building a firewall against attempts to instrumentalize development policy to further other agendas.

Handled well, such an approach could broaden domestic support for development cooperation, mobilizing new constituencies beyond the usual civil-society actors and churches.

2. Aligning donor contributions

Overcoming fragmentation requires far better coordination—with partner-country systems and among donors. Development contributions must align more closely with national policies and structures, and donors must coordinate more effectively.

One path forward is to shift from scattered small projects to large, transformational programs or “missions,” combining all instruments—finance, technical expertise, policy dialogue—into coherent packages. For Germany, with its long-standing division between technical and financial cooperation, this is a particularly demanding task.

A second option is to expand the use of country platforms, where donors pool resources under a framework defined by the partner government. The Just Energy Transition Partnerships (JET-Ps) already offer a real-world example, with donors and partner countries working jointly to phase out coal. The EU and multilateral institutions should play a central role in such an approach, given their financial weight and convening power. Ideally, they would coordinate overall efforts while bilateral donors contribute actively and take the lead where they hold comparative advantage.

For Germany, this means consolidating its sprawling project portfolio and concentrating new resources on three or four priority missions. Those missions could focus on the priorities outlined in the coalition agreement, such as energy or raw materials. The BMZ should also revisit its resource-planning system (the IPA), which remains slow and cumbersome. A mission-driven approach needs a planning system that is more flexible and geared toward learning and results. Wherever possible, it should be incentive-based. BMZ has successfully pushed the World Bank to adopt a Framework for Financial Incentives that promotes investments in global public goods. BMZ could learn from this and offer countries willing to invest in climate, biodiversity, global health, and crisis prevention preferential financing terms and additional resources. This aligns with the coalition agreement, which emphasizes moving beyond rigid country allocations.

BMZ's strategic leadership of GIZ and KfW should also be strengthened. Wherever possible, administrative management should be replaced with clear objectives, incentives, and results-based oversight. The coalition agreement's plan to encourage competition among implementing partners and integrate technical and financial cooperation more effectively is a promising start. A mission-oriented approach requires this kind of flexibility.

Finally, BMZ must reinforce two capacities: strategic planning—anchored in international evidence and best practice—and deeper policy dialogue at the country level. Transformational programs depend on policy reform and institutional change. Instruments like budget support and results-based financing play a central role. At present, KfW leads most sectoral policy dialogue; BMZ must step up its involvement.

3. Mobilizing all private contributions and actors toward priority missions

For years, development actors have invoked the slogan “from billions to trillions” to signal the scale of private investment needed. As public budgets tighten, the call has grown urgent—but results remain underwhelming. This is a problem; development progress, as well as the transition to low-carbon energy, cleaner transport, sustainable agriculture, and green industry, cannot happen without large-scale private capital.

Traditionally, efforts have leaned heavily on blended finance—public subsidies to de-risk private investment. But this approach needs an overhaul. Mobilizing private capital must be rooted in a strategy for transforming entire sectors or building new markets, echoing what the EU and other advanced economies are doing at home. In transport, for instance, subsidies only work when paired with regulation (such as emission standards) and public investment (like EV charging networks). Relying mainly on subsidies is not only ineffective—it is fiscally unsustainable. The IMF calculated in 2023 that fully relying on de-risking instruments would raise a typical middle-income country’s debt ratio by about 50 percent.

A wide consensus recognizes the need for better private-sector mobilization. A G20 working group and other experts have issued comprehensive proposals: stronger guarantees, deeper local financial markets, more equity instruments, and much broader use of policy-based financing. Institutions worldwide are rethinking their toolkits, and Germany’s government has presented a paper that contains promising elements aligned with expert advice.

Still, the debate in many donor countries remains narrow, often dominated by the idea that development policy should secure more procurement contracts for domestic firms. A more forward-looking approach would focus instead on sectors where domestic companies genuinely excel. Germany remains a manufacturing powerhouse but has limited comparative advantage in other areas, e.g., in building feeder roads in Africa. Aligning development priorities with national strengths can benefit both sides. A change in donors' procurement rules may also be justified if it serves the development priorities of partner countries. A recent example comes from the World Bank, which has reformed its procurement rules to promote local content and job creation.

National interests, partner orientation, and development impact are not mutually exclusive. Reconciliation is possible. But achieving it will require substantial changes in how development agencies work—and how they collaborate with other ministries. Strong leadership will be essential to set political direction, overcome turf battles, and channel scarce financial and administrative resources into a clear set of missions.