Diaspora Bonds: New emerging market capital
From the Greeks to the Chinese, diaspora communities are always eager to assist the fortunes of the people who have remained in their homelands. There’s no better demonstration of this desire than the huge flow of funds that are remitted each year from prosperous nations to poorer ones, particularly in Latin America and Africa. Remittances have become a vital part of the social safety net, cushioning millions of families across the globe and keeping them from falling into a financial abyss.
Despite the high volume and frequency of remittances, however, these funds are only a survival mechanism. They are based on bonds of attachment that are personal, rather than national; in most cases, they are uncoordinated at a national level. While remittances offer evidence that members of diasporas care about their home countries — even if it’s primarily to keep their loved ones off the breadline—these funds do not and will not offer a permanent path to development. There is little governments can do to harness the flow of incoming money except make transactions cheaper and easier.
Yet there is an opportunity for cash-strapped developing countries to gain access to the hard-earned savings of their emigrant sons and daughters—one which has been tried and tested by two countries with famously large and industrious diaspora populations, Israel and India. Both nations have had significant success issuing bonds targeted at their diasporas—Israel since the 1950s and India since the 1980s.
Diaspora bonds are essentially a form of government debt that targets members of the national community abroad, based on the presumption that their emotional ties to a country make investing in such products worthwhile. Sales can be restricted solely to members of a particular nationality or opened to all buyers, with nationals receiving a preferential rate.
For governments that have large diaspora populations, the bonds provide an opportunity to tap into a capital market beyond international investors, foreign direct investment, or loans. If governments have experienced difficulties raising money on the international market or attracting investment, diaspora bonds can be an attractive new source of financing. Three other principal benefits stand out for the issuing governments:
- A successful issue, along with the access to steady new funding, may help improve ratings on a country’s sovereign debt.
- Buyers may continue to purchase bonds, even when markets are skeptical about a nation’s economic outlook. (Israel has borne this out, as sales of Israeli diaspora bonds rose during the Six-Day War.)
- Countries in essence receive a “patriotic” discount when they issue diaspora bonds, as investors are often willing to accept returns much lower than they might on the open market.
Patriotism, it’s famously been said, is the last refuge of the scoundrel—but it’s equally the last refuge of the dispersed. The yearning for home and the desire to maintain an attachment, even after decades or centuries away from a homeland, is a powerful emotion that nations can marshal to great benefit. This emotional force has rarely been applied to finance, but it could yet prove an effective fundraising mechanism for emerging economies that are struggling to raise money on the capital markets or through foreign investment.
Still, policy makers and governments would be mistaken to see this as a quick and easy route to the stockpile of savings many diaspora populations have built up. To succeed in raising capital through this mechanism, many governments would have to make painful changes to the way they operate—starting with how they relate to their diaspora populations.
In recent years, a number of countries have issued diaspora bonds with limited success, most notably Kenya and Ethiopia. Part of the problem has been a lack of awareness that the product existed within the targeted diaspora. But crucially — and here’s the rub for most nations with diasporas—it may be difficult to convince people who have fled or emigrated from home due to war, poor economic circumstances, or mismanagement to buy into a product sold by that very same country, even if the leadership of the government has meanwhile changed and the issues might no longer prevail.
Any government that wants to issue diaspora bonds must lay the groundwork with a strong information campaign; perhaps more important, it must also be prepared to give its diaspora communities a greater say in how any funds raised will be used. In Kenya, the fact that diaspora bonds have been used to finance specific projects has alleviated some concern about graft and mismanagement, though the same tactic wasn’t successful in Ethiopia. The hesitance to support individual governments through diaspora bonds can perhaps be overcome at the regional level; African countries such as Ethiopia, Kenya, and Nigeria that have explored diaspora bonds individually might consider pooling their efforts and launching bonds through an institution like the African Development Bank.
For governments unwilling to develop a responsive relationship with their emigrant populations, diaspora bonds may be an idea that’s more attractive in principle than in practice. For those nations that have succeeded, however, appealing to their diaspora has provided a huge payback. India and Israel have raised $32 billion and $11.3 billion respectively through forms of diaspora bonds. A nation like Greece would do well to find a way to tap into the wealth of its kinsmen abroad, as would many nations in the southern hemisphere. For those that argue some diasporas are too poor to fund their home country, or that the ties immigrants feel for their loved ones can’t be generalized into a more patriotic act of bond investing, it’s worth noting that the recent liberation movements in Eritrea and Sri Lanka reportedly relied greatly on support and funding from their respective diasporas.
Clearly, diaspora bonds cannot solve all the problems of countries in need of alternative sources of investment. But they can be part of the solution. To tap that wealth, however, countries will have to focus on engaging with their diaspora populations and treat them as returning customers rather than fair-weather friends. Although there is a high degree of risk involved, the bonds could prove a desirable investment for individuals in the diaspora who want to make a contribution to their home countries. For those two or three generations removed from the homeland, such symbolic activity may take on greater meaning even if family and social ties have weakened.