Reparations Won't Work

Human capital, not foreign assistance, is the key determinant of growth.

Feb 27, 2025

Written by Lipton Matthews.

David Lammy, the UK’s black Foreign Secretary, has lent his voice to growing calls for reparations to be paid to former British colonies. Proponents insist not merely that reparations are just, but that they would provide a much-needed boost to nations burdened with weak economic growth.

This view is fundamentally flawed. Just as foreign aid often does more harm than good, reparations will not lead to real economic development. Decades of evidence show that aid has been unable to kickstart growth in developing countries, and there’s no reason to believe reparations would be any more effective. What such countries really need is market-oriented reforms and investments in human capital that facilitate adoption of new technologies.

In a recent study, the Ethiopian scholar Chala Abate highlights the paradox of aid dependency: foreign inflows undermine incentives for structural reforms in recipient nations. This dependency stifles institutional development, fosters corruption, and discourages the emergence of a robust private sector. Abate also notes that institutional quality and economic freedom are pre-requisites for the success of aid. When aid flows into poorly governed states, it exacerbates existing inefficiencies by rewarding corrupt actors. Paradoxically, then, aid is least effective in the countries that need it most. Pouring money into such countries is not merely wasteful but actively harmful.

Likewise, Elena Groß and Felicitas Danzinger have documented the adverse effect aid has on total factor productivity. Because someone’s money is on the line, projects funded through loans are heavily scrutinized: backers have an interest in ensuring that operations are managed prudently. Aid is different. The absence of stringent oversight weakens incentives for sound management. As a consequence, valuable resources go into projects that are much less likely to succeed.

In a related study, the Vietnamese scholars Thanh Su and Canh Nguyen from Vietnam argue that sufficient human capital is critical for aid to translate into growth. When human capital is abundant, foreign inflows are more likely to be used productively, facilitating innovation and adoption of new technologies. But in nations lacking skilled labor and institutional capacity, aid often fails to bring tangible improvements. Bureaucracies simply lack the competence to administer sophisticated projects.

Similar conclusions were reached by Thomas Ayodele and co-authors. In ‘African Perspectives on Aid: Foreign Assistance Will Not Pull Africa Out of Poverty’, they provide a damning assessment of foreign aid. Between 1960 and 1997, over $500 billion – the equivalent of four Marshall Plans – was injected into Africa. Rather than promoting self-sustaining growth, this influx fostered economic dependence and stagnation. In fact, the more aid Africa received, the lower its standard of living became. From 1975 and 2000, sub-Saharan Africa’s GDP per capita measured in real terms fell at an annual rate of 0.59 percent, declining from $1,770 to $1,479. Aid has not only failed to lift Africa out of poverty; it has actively contributed to ineffective policies and bloated bureaucracies.

Tanzania’s socialist experiment, Ujaama (meaning “fraternity” in Swahili), serves as a striking example. Western donors eagerly supported the initiative, pouring an estimated $10 billion into the country over two decades. Yet the results were disastrous. Between 1973 and 1988, the Tazanian economy contracted at an annual rate of 0.5 percent, while average personal consumption dropped by 43 percent. Far from bringing prosperity, foreign aid led to economic mismanagement and deepened Tanzania’s reliance on external funding.

The Chad-Cameroon Pipeline project further illustrates how aid fails due to corruption and poor governance. The program was initially praised for its transparency: it included the condition that 85% of oil revenues be disbursed to poverty reduction in key sectors like education, health and infrastructure. 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 into military spending. In 2003, when pipeline construction was completed and revenues surged, financial discipline continued to erode. By 2006, the government amended the revenue management plan, expanding discretionary spending. This led to an even greater misuse of funds: military expenditure far exceeded spending on all health, education and social programs combined. Corruption was so rampant that by 2008, the World Bank had no choice but to terminate its involvement in the project.

Haiti provides another cautionary tale of how foreign aid frequently hurts those it is intended to help. In a 2025 paper, Terry Buss documents that billions of dollars from external funders have not only failed to stabilize the country but have actually contributed to corruption, political instability and economic stagnation. While Haiti’s governance structures are weak and its economic growth is negligible, the country remains heavily dependent on foreign assistance.

Following the 2010 earthquake, an influx of money was meant to help rebuild Haiti’s infrastructure and economy. However, much it was misallocated due to a total lack of transparency. International NGOs controlled the bulk of relief efforts, sidelining Haitian leadership and weakening state capacity. Even prior to the earthquake, decades of foreign assistance had done little to improve Haiti’s outlook.

The Haitian case exemplifies a broader trend: when aid is given to countries with fragile institutions and a history of poor governance, it exacerbates problems rather than solving them. If reparations were funnelled into similarly backward countries, there is every reason to believe they’d be just as ineffective.

Instead of repeating past errors, policymakers should consider research from the developing world that emphasises human capital investments. In a 2021 paper, Nigerian scholar Stanley Nwani argues that human capital, not foreign assistance, is the key determinant of growth. He explains that aid has not stimulated development in South Asia or Sub-Saharan Africa; rather, it has promoted dependence and sapped initiative.

In another paper Honoré Oumbé and colleagues demonstrate that aid flows have done to little to promote industrialization in Africa. Like Nwani, they argue that human capital investments were far more important, as they equipped people with the skills needed to function in an industrial society. Economic liberalization and business-friendly policies also played a role in industrialisation.

The example of Jamaica is instructive. Despite receiving over €1.5 billion in aid from European countries since 1975, the country experienced economic stagnation. It was only through market-driven reforms – reducing trade barriers, improving fiscal discipline and liberalizing business regulations – that Jamaica's economic performance began to improve.

Its recent success is not an isolated case. Rwanda, which has undergone something of an economic transformation, offers even clearer evidence that reform almost always beats aid. The country’s impressive turnaround was achieved not through foreign assistance but through improved property rights, investment in education and support for entrepreneurship. In short, Rwanda prioritized economic freedom. For example, Paul Kagame’s government deregulated the coffee sector by permitting farmers to trade freely with buyers from around the globe.

Calls for reparations rest on the erroneous assumption that all poor countries lack is money. In reality, their problems go far deeper. And there is now overwhelming evidence (much of it compiled by scholars from the relevant countries) that giving money just leads to dependency, mismanagement and stagnation. As the cases of Jamaica and Rwanda illustrate, economic liberalisation and human capital investments are the true engines of development. Lammy ought to spend less time virtue-signaling and more time reading up on economics.

Lipton Matthews is a research professional and YouTuber. His work has been featured by the Mises Institute, The Epoch Times, Chronicles, Intellectual Takeout and American Thinker. His email address is: lo_matthews@yahoo.com