Patriotism Aids Development: Tapping into Diaspora Bonds

With the current economic recession, the debt crisis and market risks, the World Bank has advised countries to consider diaspora bonds in order to facilitate capital flow and funnel money for international development initiatives. Essentially, diaspora bonds are utilized by countries (or private sectors companies) as an instrument of debt to raise capital from overseas citizens. Citizens of the state who live outside of the birth country and in more prosperous countries are welcome to buy bonds and invest in funding capacity building projects. Thus, capital is pooled from the support of a network of “patriotic” diasporas to aid development endeavors such as bridge building, and extensive road networks.

In the past, countries such as Israel and India have been more successful in their utilization of diaspora bonds to reinvigorate the development finance sector. Countries such as Bangladesh, Colombia, El Salvador, Ghana, Greece, Italy, India, Ireland, Jamaica, Kenya, Mexico, Morocco, Nepal, Nigeria, Pakistan, Philippines, Romania, Senegal, South Korea, South Africa, Spain, Sri Lanka, Uganda, Zambia, and Zimbabwe are in the process of deliberating on different ways to engage with development financial tools such as diaspora bonds to fund the country’s development programs.

Each country is case specific and has sought out different strategies to incorporate diaspora bonds into their development trajectory. For example, the Greek government has high hopes that emigrants of wealthier developed countries will reinvest in Greece through the purchasing of their diaspora bonds. The vast amount of financial resources collectively saved by migrants is not at all a small figure. In fact, migrants from developing countries who settle in countries with higher GDPs have amassed a total of $400 billion. Much of this capital resource is highly coveted by financiers and investors who understand the important implications of the funds, and realize that the current financial climate is in dire need of additional monetary resources.

Ethiopia is one case where the pros and cons of diaspora bonds are scrutinized and assessed. Ethiopia’s first attempt at marketing diaspora bonds was advertised as the Millennium Corporate Bonds, which ultimately did not meet expectations because of slow sales, high risk, low future earning potential, and political risk factors. However, recently Ethiopia reintroduced a diaspora bond by renaming it the “Renaissance Dam Bond.” These bond investments will eventually be used to aid the building of Africa’s largest hydroelectric dam. Once the second round of bond sales are underway, the chances of successful sales will be much higher for the following reasons: the government has pledged to take a more active role in promoting the sales of these diaspora bonds; the bond’s minimum denomination of $50 dollars will increase the number of sales; the bond is transferable and can be used as collateral; and finally the Commercial Bank of Ethiopia will cover the cost of remittance fees. These additions may provide  just enough support for Ethiopian diaspora bonds to become a marketable development investment venture.

Similarly for Nepal, the first round of diaspora bond financing launched in 2009, known as the “Foreign Employment Bond,” was unsuccessful due to a host of issues: lack of publicity, limited targeting, unattractive interest rate for potential buyers, and commissions percentage was too high. Nonetheless, the Nepalese government has decided to continue issuing the bonds in 2011 by marketing to a larger number of countries, increasing publicity, and allowing a longer window of sales opportunity. These modifications resulted in improved sales, proving that policy adjustments can make a significant impact in a government’s ability to raise the much needed capital from abroad.

Africa, too, is hungry for greater development investments in every sector from technology to agriculture. Many African  governments are actively pursuing diaspora bonds in order to float new development projects. As mentioned in the New York Times article, “To Help Africa, Sell Diaspora Bonds,” a total of 23 million African migrants around the world have a pooled annual savings of $30 billion. The development sector is in need of extra capital and the diaspora bond market is selling the bonds in small denominations, from $100 to $1000, which allows more potential investors to buy diaspora bonds.

More exploration needs to be probed into understanding why there was such a strong uptake in Israel and India and not so much in the case of Ethiopia (initial efforts were hampered by a number of factors). Intuitively strong national identification will propel people to invest in their mother country, but a critical question is how to improve future diaspora bond sales and have investment become successful across the board.

Packaged as diaspora bonds, the strong ties and national patriotism to communities abroad could be an effective solution to current capital shortages in many developing countries.


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