David Lammy, the UK’s Foreign Secretary, has lent his voice to the growing call for reparations for former colonies in the British West Indies. Advocates argue that financial compensation would provide a much-needed economic boost to these nations, helping them overcome the burden of low economic growth. However, this view is fundamentally flawed. Akin to foreign aid, reparations are unlikely to catalyze genuine economic development. Decades of evidence demonstrate that foreign aid has been unable to foster sustainable growth in developing countries and reparations would function as such. In reality, market-oriented reforms and investments in human capital that facilitate technological adoption are more effective means of economic transformation.
A large body of research underscores the inefficacy of foreign aid in driving economic development. Chala Abate, in the study, “Is Too Much Foreign Aid a Curse or a Blessing to Developing Countries?” highlights the paradox of aid dependency. Many recipient nations experience diminished incentives for structural reforms due to continued aid inflows. This dependency stifles institutional development, fosters corruption, and discourages the emergence of a robust private sector. Abate further emphasizes that institutional quality and economic freedom are essential factors that determine the success or failure of foreign aid. When foreign funds flow into poorly governed states, they exacerbate inefficiencies rather than fostering long-term progress. Pouring money into badly managed countries is a disservice to citizens of the receiving country and taxpayers in developed countries
Similarly, Elena Groß and Felicitas Nowak-Lehmann Danzinger, in a paper examining the effects of aid on productivity, find that aid inflows have an adverse effect on total factor productivity. Unlike loans, grants sponsor less viable economic projects which are insufficiently scrutinized. Initiatives supported by loans encourage ownership and prudent operations to minimize default and the risk of failure. The absence of stringent conditionalities for grants weakens the incentives for productivity. Hence, the provision of grants to low productivity countries amplifies economic problems.
In a related study, Thanh Dinh Su and Canh Phuc Nguyen argue that human capital plays a critical role in enhancing the relationship between foreign aid and economic growth. When human capital is strong, foreign financial inflows are more likely to be used productively, facilitating technological adoption and innovation. However, in nations lacking skilled labor and institutional capacity, aid often fails to translate into tangible improvements. Also, aid initiatives are likely to fail when bureaucracies lack the competence to administer sophisticated projects. Essentially, many developing countries are unable to properly benefit from aid because they are experiencing a human capital deficit.
Highlighting the example of Africa, some scholars posit that aid inhibits development. Thomas Ayodele and co-authors, in “African Perspectives on Aid: Foreign Assistance Will Not Pull Africa Out of Poverty,” provide a damning assessment of foreign aid. Between 1960 and 1997, over $500 billion—the equivalent of four Marshall Aid Plans—was injected into Africa. Rather than promoting self-sustaining growth, this influx of aid fostered economic dependence and stagnation. In fact, the more aid Africa received, the lower its standard of living became. From 1975 and 2000, per capita GDP in sub-Saharan Africa fell at an average annual rate of 0.59 percent, declining from $1,770 in constant 1995 international dollars to $1,479. Aid has not only failed to emancipate Africa from poverty but has actively contributed to the persistence of ineffective policies and bloated bureaucracies.
Tanzania’s socialist experiment—Ujaama—serves as a striking example. Western donors, especially from Scandinavia, eagerly supported the initiative, pouring an estimated $10 billion into Tanzania over two decades. Despite this extensive backing, the results were disastrous. Between 1973 and 1988, the country’s economy contracted at an average annual rate of 0.5 percent, while average personal consumption plummeted by 43 percent. Far from fostering prosperity, foreign aid perpetuated economic mismanagement and deepened Tanzania’s reliance on external funding.
Additionally, the Chad-Cameroon Pipeline project further illustrates how foreign aid frequently fails due to poor governance and corruption. Initially, the program was praised for its transparency, with a legal foundation requiring that 85 percent of oil revenues would be disbursed to poverty reduction in key sectors like education, health, infrastructure, and rural development. However, mismanagement soon derailed these efforts. By 2000, just a year after oil extraction began, the Chadian government had already diverted $4.5 million of an initial $25 million oil bonus to military spending.
In 2003, when pipeline construction was completed and revenues surged, financial discipline continued to erode. By 2006, the government amended the 1999 revenue management plan, expanding discretionary spending. This led to even greater misuse of funds, with military expenditure being 4.5 times greater than spending on health, education, and social programs combined. Corruption became so rampant that, by 2008, the World Bank had no choice but to terminate its involvement in the project. This case highlights the reality that financial inflows—when received by governments lacking strong institutions—often serve to entrench corruption rather than foster development.
Haiti provides another cautionary tale of how foreign aid fails to create sustainable development. Terry Buss, in “Foreign Aid and the Failure of State Building in Haiti from 1957-2015,” documents how billions of dollars in foreign assistance have not only failed to stabilize Haiti but have actively contributed to political instability, corruption, and economic stagnation. The country has remained heavily dependent on international aid, yet its governance structures remain weak, and its economic growth has been negligible.
Following the 2010 earthquake, an influx of foreign aid was meant to help rebuild Haiti’s infrastructure and economy. However, much of the aid was misallocated due to a lack of transparency and government inefficiency. International NGOs, rather than local institutions, controlled the bulk of the relief efforts, further sidelining Haitian leadership and weakening state capacity. Instead of fostering long-term economic resilience, aid perpetuated dependency and mismanagement. Even prior to the earthquake, decades of foreign assistance had done little to improve Haiti’s economic outlook, as weak institutions and poor governance prevented productive use of funds.
The Haitian case epitomizes a broader trend: when aid is given to countries with fragile institutions and a history of misgovernance, it exacerbates existing problems rather than solving them. If reparations were to be funneled into former colonies with similar governance challenges, there is little reason to believe they would be used any more effectively than past foreign aid efforts.
Instead of following Haiti’s errors, policymakers should focus on research from the developing world that touts the importance of human capital investments. Stanley Emife Nwani, in “Human Capital Interaction on Foreign Aid-Growth Nexus: Evidence from South Asia and Sub-Saharan Africa,” argues that human capital development, rather than foreign assistance, is the key determinant of economic growth. Nwani explains that foreign aid does not stimulate growth in South Asia and Sub-Saharan Africa but rather promotes over-dependence on external assistance which saps initiative. However, its negative effects were mitigated by human capital.
Likewise, Honoré Tékam Oumbé and colleagues, in their paper, “Analyzing the Effect of Foreign Aid on Industrialization: Evidence from Africa,” demonstrate that aid flows have had little impact on industrialization in Africa. The authors argue that human capital investments were more important since they equipped people with the skills to function in an industrial society. Furthermore, economic liberalization and business-friendly policies have also been important drivers of industrial expansion.
The example of Jamaica is instructive. Despite receiving over €1.5 billion in aid from the European Union since 1975, the country has struggled with stagnation and economic mismanagement. It was only through market-driven reforms—such as reducing trade barriers, improving fiscal discipline, and liberalizing business regulations—that Jamaica began to see meaningful improvements in economic performance.
Jamaica’s recent success is not an isolated case. Rwanda—another developing country that has undergone significant economic transformation—serves as an even clearer example of the primacy of reform over aid. Rwanda’s impressive economic turnaround was facilitated, not by foreign aid, but by policies emphasizing investment in education, entrepreneurship, and infrastructure development. Under President Paul Kagame, Rwanda prioritized economic freedom, streamlined bureaucratic inefficiencies, and improved property rights—all factors that foreign aid alone could never achieve. For example, Kagame’s government deregulated the coffee sector by permitting farmers to freely trade with buyers from around the globe.
Calls for reparations rest on the erroneous assumption that financial transfers will rectify the economic prospects of ex-colonies. However, evidence from decades of foreign aid initiatives shows that such funds often lead to dependency, mismanagement, and stagnation rather than sustained growth. As seen in Jamaica and Rwanda, economic liberalization, human capital investments, and entrepreneurial progress are the true engines of development. Rather than pursuing reparations that mimic the failures of foreign aid, policymakers in former colonies should focus on pro-market reforms that empower their populations to generate wealth independently. History has shown that prosperity is built through economic freedom and self-reliance—not through perpetual financial transfers from former colonial powers.
