NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

In 2008, the failure of a single institution, Lehman Brothers, triggered a global financial crisis. The crisis crippled the global economy, not because of Lehman alone, but because of the unseen interdependencies that held the world’s financial system together.

Today, America is in the process of making the same catastrophic mistake, not in banking, but in global aid.

I was at ground zero of the 2008 financial crisis, and I have a terrifying feeling of deja vu. Today I’m the founder of AgUnity, a small company that works alongside many of the world’s aid agencies to support smallholder farmers in developing nations. We help farmers in over 70 countries, and this year we hope to surpass 2 million farmers whose lives we have impacted positively. But in my previous professional life, I spent five years as Asia Head of Treasury, Cash Management and Risk Technology at Lehman Brothers. I worked at the company right up until its collapse, stayed while Lehman’s Asian, European and Middle Eastern operations were acquired by the Japanese firm Nomura, and then became a Global Head at Standard Chartered Bank. I worked closely with the internal finance teams struggling to keep Lehman afloat as our leverage reached 30 or 40 times the money we actually had, and I can tell you this: Even the experts inside the system — those who knew exactly how bad things were for Lehman — failed to see how deeply its collapse would impact the broader financial world.

That blind spot cost America trillions of dollars, and cost the world many trillions more.

When Ben Bernanke, chairman of the U.S. government’s Federal Reserve, allowed Lehman to fail, he was not unjustified. Lehman had taken on unacceptable risk by chasing profits, and its CEO, Dick Fuld, selfishly overplayed his brinkmanship. (Indeed, the bank was so over-leveraged that Bernanke would later argue — rightly or not — that he believed he lacked the legal authority to authorize federal lending to it.)

But what only a handful of people anticipated was how deeply interconnected the global financial system was. Within weeks, the entire global economy spiralled, leading to a host of bailouts that cost trillions and an economic crisis that took years to recover from. Lehman’s collapse wasn’t just about one bank, it shattered an entire ecosystem of interdependent institutions.

The same is about to happen with international aid.

Elon Musk’s narrow-sighted, possibly vindictive decision to shut down USAID, including cutting off the roughly $25 billion in funding the agency delivers to other development organizations, might seem like “just” a callous budget decision. Millions will suffer and even die due to these abrupt, draconian funding cuts. But what many don’t realize is that USAID is the literal backbone of a vast global network. The tens of billions of dollars in funding it provides isn’t just a number, it’s a pillar that supports hundreds of organizations, directly or indirectly, which in turn fund or manage thousands of critical programs worldwide that impact the lives of hundreds of millions of people.

If you remove that pillar, the whole system starts to collapse.

Think about it: Aid organizations have long-term commitments. They have staff, infrastructure, supply chains and ongoing projects, through which they collaborate with countless businesses and other organizations working in some of the most vulnerable communities on earth. This isn’t just cutting a major source of their funding — with some organizations relying on USAID for almost 90% of their income — it is destabilizing entire ecosystems that take years to adjust. In cases like the World Food Programme, where USAID provides a substantial share of the funding, the organization simply cannot quickly reduce operational costs in response to these sudden cuts. For instance, it must continue paying staff and maintaining infrastructure as a project winds down after its funding has been cancelled, which may eat up any remaining funds. That means these organizations’ disbursements of food and live-saving services to those in genuine need will be slashed by far more than just the amount of funding USAID formerly contributed. Those disbursements literally keep people alive. Even if other nations want to step in to fill the shortfall, aid budgets typically take years to approve and allocate. This situation is as unprecedented as the global financial crisis of 2008, and the implications are just as far reaching.

When we allowed one company to fail, we sparked an unprecedented financial collapse — terrible but not irreparable. If we don’t immediately fill the USAID funding void, then we face an unprecedented humanitarian crisis. Life is not repairable, and the instability that results will harm everyone on the planet.

The world cannot afford to wait for NGO’s or governments to figure this out. The financial industry included some of the greatest predictive thinkers in the world, and it failed to predict or prevent the 2008 crisis. Most government bureaucrats and NGOs do not have that sort of skillset: This is not a situation most of them have experienced. And unlike most large corporations, these organizations typically have not developed the downsizing processes required to reduce operational costs effectively. Even when they realize the full extent of the impacts these cuts will have on their work, many — perhaps most — will lack the agility to adapt.

This is the moment for private foundations, philanthropists and impact investors to step up. There is over $1.5 trillion currently invested in “impact” — but not really. The majority of “impact” investment goes toward low-risk investments in things like real estate and renewable energy infrastructure, which offer more or less market rates of return and often attract traditional private investors. It is no doubt better than other investments, but most of those projects could and would be funded in a variety of ways even without the impact label.

Private impact investment and funding rarely reaches the places where it can truly solve life-or-death problems. It has historically been left to USAID and the rest of the global development ecosystem to meet those needs. If there were ever a time to change that, it is now.

David Davies is the Founding CEO of AgUnity.

Photo credit: Bradyn Trollip, via Unsplash.