Prime Minister Tony Abbott has announced Australia's overseas aid agency will be absorbed into the Department of Foreign Affairs and Trade (DFAT), as part of a wide-ranging shakeup of the public service.
Mr Abbott, who has planned a $4.5 billion cut to foreign aid, said the shift will more closely align the aid budget with the government's diplomatic policies.
Peter McCawley, a former director-general of AusAID, has recently returned from Indonesia where he worked as an economist with USAID.
He told Radio Australia's Asia Pacific the proposed changes won't impact Australia's foreign aid to Indonesia, but the region could see it as a winding down of diplomacy.
"Inevitably the signal is that Australia is winding back a little bit, and it's not just a signal to Indonesia," Mr McCawley said.
"There is inevitably something of a signal to the Asian region that Australia is tilting in some other direction and perhaps pulling back from development issues and tilting towards diplomatic issues.
"But I believe the real question is not what is the impact on Indonesia and other countries in the region, but what is the impact on Australia and what is the impact on our own standing in the Asian region."
Concern over 'ground trembling' changes
Former AusAID deputy director-general Annmaree O'Keeffe says while the details are yet to be released, she has some serious concerns about the merger.
"Ground breaking isn't really the right term, it's really ground trembling," Ms O'Keeffe told Pacific Beat.
"This is going to have big ramifications for Australia's aid program. How it is going to be managed really remains to be seen.
"There is tension from time to time between AusAID and DFAT in terms of how development can support foreign policy objectives."
Ground breaking isn't really the right term, it's really ground trembling.
This is going to have big ramifications for Australia's aid program.
Annmaree O'Keeffe, research fellow at the Lowy Institute for International Policy
The Canadian Government recently merged the country's foreign aid agency, CIDA, into its Foreign Affairs Department.
Ms O'Keefe says the new Abbott government appears to be taking the lead from Canada and New Zealand.
"Both countries with conservative governments and perhaps Australia's government has decided to take a leaf out of the Canadian and New Zealand books," she said.
"That would be a shame because I do think it does have a big impact and effectiveness of development programs if it's not really clearly focused on development outcomes."
Australia's international reputation being "trashed"
Archie Law, executive director of charity ActionAid Australia, told News Radio there is a clear conflict in allowing DFAT to take control of AusAID.
"There is a conflict because then you start getting into this ridiculous discussion around how aid is a part of a global relationship to lift people out of poverty but it's actually all about trade," Mr Law said.
"And this has been the dominant narrative from conservative politics for the last 20 years."
Mr Law says he has received phone calls of disappointment from colleagues worldwide since the announcement.
"Unfortunately, I was with the United Nations in New York when Australia had this sort of policy before, and Australia wasn't highly regarded on the international stage," he said.
"We're in the middle of a busy 18 months where Australia could emerge with a lot of pride and respect in international community. These three big announcements over the last two weeks do nothing but really trash our international reputation."
The ABC understands AusAID's director-general Peter Baxter has resigned, but the government disputes this.
A spokesperson for Foreign Affairs Minister Julie Bishop says Mr Baxter has taken extended leave and the government looks forward to his continued service in another senior official role.