The frailties of diaspora bonds
The interest in diaspora bonds is sustained by the theoretical potential to finance development in poor economies by raising funds from expatriate communities, often labor migrants, living abroad. At the start of the COVID-19 pandemic in 2020, as developing nations faced sudden reversals in capital flows, diaspora bonds were hypothesized to counter the international capital markets’ volatility. A year later, the most recent bout of portfolio ‘de-risking’ and less optimistic outlook for emerging markets by the international institutional investors may prompt renewed calls for tapping into diaspora. But is the alternative scheme so easily deployable?
Diaspora bonds are sovereign debt securities issued by countries appealing to the altruistic motives of their cultural and national diasporas across the world. Historically, there have been several attempts to leverage the diaspora premium, with Israel and India running the most effective diaspora bonds initiatives.
In the early days of Israel’s statehood, the country turned to the global Jewish diaspora for support, establishing the Development Corporation for Israel (DCI) and formally asking for a public loan instead of a philanthropic gift. Since 1951, the DCI run diaspora bond program raised by mid 2021 over U.S. $46 billion, aided by a comprehensive outreach campaign. The initiative has helped open Israel to international capital with subsequently more diversified debt securities issuances, while offering its diaspora a unique investment instrument. The economic viability and technical flexibility of Israel bonds remains unmatched with options for donations, contributions to pension funds, and other uses with small-sum subscription minimums. Channeling funds into a variety of infrastructure, energy, high-tech, and other projects, diaspora’s financing has been instrumental to Israel’s state-building from inception of the Israel Bonds program.
Unlike Israel, India’s coming to its diaspora was less clear-pathed. India’s rapprochement with its multilayered global diaspora was in late 1980s introducing formal designations for Indians abroad (e.g., Non-Resident Indians, NRI) recognizing diaspora’s economic and cultural impact. India’s diaspora bond-like instruments included the India Development Bonds in 1991, followed by Resurgent India Bonds in 1998, and India Millennium Deposits beginning in 2000. The latter two bonds were restricted to the NRIs but all three were issued at times of India’s economic and political crises at below prevailing market interest rates (or “patriotic discount”—a characteristic of diaspora bonds term structure).
Elsewhere others have speculated with diaspora bonds (e.g., Ethiopia, Greece, Kenya, Nigeria, Sri Lanka), albeit with minimal success. Matching either Israel’s or India’s programs has been a challenge, even in national crisis (e.g., Greece’s 2011 failed attempt to raise $3 billion from its diaspora). Where the first issue may have been successful, follow up attempts failed lacking demand from diaspora investors. Instead, some have advanced smaller-scale mechanisms for diaspora’s financial involvement in local development (e.g., Moldova’s DAR 1 + 3).
Yet, the idea continues to tempt policymakers (e.g., Armenia’s recent announcement).
Idiosyncrasies of a developing country’s macroeconomics and financial markets aside (which technically should not matter by design in an altruistic diaspora investment scenario), what saddles the latest attempts and what explains the effectiveness of the programs in Israel and India is the treatment of the embedded misconceptions about three frail, yet, critical categories—diaspora, remittances, and trust—revealing uneasy diaspora and home country relationship.
First, not all migration leads to a monolithic diaspora that acts in unison towards its ancestral home. A long tradition in history and sociology confirms the non-linear multilayering of socio-cultural factors of diaspora self-identification, compounded by generational and geopolitical splits. Diaspora then is a dispersion of people, ideas, motivations, and transnational identities in historical continuum. Neither cultural similarity nor semblance of altruistic motives guarantee a diaspora bond effectiveness, as both Israel and India realized in community-tailored adaptations of their programs.
Second, while potentially critical for alleviating extreme poverty, remittances sent by labor migrants to their families are individualistic and susceptible to the host economies’ business cycles, with limited beneficial macroeconomic effects at home. While diaspora bonds, if successful, may indeed become meaningful instruments to fund development, neither the small sums nor the temporary nature of remittances are stable financial sources for a debt security in the unforgiving international markets. The reputational damage to the issuing country is too significant to bank on remittances or single contributions from affluent diaspora individuals. Capturing collective potential of remittances, a more migration-focused entity streamlining small scale transfers into infrastructure and development, e.g., Migration Development Bank, may be a better alternative.
Lastly, the above observations are compounded by a mix of political, cultural, social, and other aspects of mistrust, accumulated over generations of disconnect and lacking certainty in domestic matters, between home country and its diverse diaspora. Therefore, establishing sound frameworks fostering and strengthening mutual trust, may serve as a necessary step for home-diaspora engagement infrastructure prior to piloting a new debt instrument, even if structured to reach a retail diaspora investor. A possible application of such structure in the diaspora bond context may be a State–Diaspora Supervisory Board – a mixed group of fund managers, business professionals, and regulators from diaspora and home country overseeing the diaspora borrowing program.
For structurally weaker developing nations, a sufficient condition may be to explore non-conventional alternatives such as, for example, issuing diaspora green bonds. Funding local economic development in an environmentally sustainable way, shifting to competitive low-carbon economic models with diaspora green bonds, may provide a transparent and socially responsible financing vehicle accepted by the risk averse diaspora. Learning from experience and exploring such pragmatic innovative solutions, may help to resolve the frailties of diaspora bonds leading small economies to finally meaningfully capturing the elusive diaspora premium.
By Ph.D. Aleksandr V. Gevorkyan
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