McKinsey_Diaspora Bonds_ New Easmerging Market Capital

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25.5.2014 Diaspora Bonds: New emerging market capital

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Dele Meiji Fatunla

Diaspora Bonds: Newemerging market capital

Gerard Lyons A growi ng role for Sovereign Wealth Funds

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Dele Meiji Fatunla Edito r

Diaspora Debate

Dele Meiji Fatunla is a writer and

researcher based in London. He is

editor of Diaspora Deba te, part of

the Royal African Society's African

Argum ents b log.

Q.

Yes No

Dia spora members often send money back home tosupport family or friends, but lending money togovernments can entail greater risk of waste or corruption. Would you invest in a Diaspora Bond?

Vote

Yes No

Q. Are you a member of a diaspora?

Vote

Diaspora Bonds: New emerging market ca pitalFrom the Greeks to the Chinese, diaspora communities are always eager to

assist the fortunes of the people who have remained in their homelands.

Theres no better demonstration of this desire than the huge flow of funds that

are remitted each year from prosper ous nations to poo rer ones, particularly

in Latin America and Africa. Remitta nces have become a vital part of the

social safety net, cushioning millions of families across the globe and keepingthem from falling into a financial abyss.

Despite the high volume and frequen cy of remittances, however, these funds

are only a surviv al mechanism. They are based on bon ds of attachment that

are personal, rather than national; in most cases, they are uncoordinated at a

national level. While remittances off er evidence that m embers of diasporas

care about their home countries even if its primarily to keep their loved

ones off the breadlinethese funds do not and will not offer a permanent path

to developme nt. 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

cas h-strapped develop ing

countries to gain access to the

hard-earned savings of their

emigrant sons and daughtersone

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 diasporasIsrael 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 restric ted 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. T hree 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 countrys

sovereign debt.

Buyers may continue to purchase bonds, even when markets are skeptical about a nations economic

outlook. (Israel has borne this out, as sales of Israeli diaspora bonds rose during the Six-Day War.)

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Countries in essence rec eive a patriotic discount when they issue diaspora bonds, as investors are o ften

willing to accept returns much lower than they might on the open market.

Patriotism, its famously been said, is the last refuge of the scoundrelbut its 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 f inance, 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 operatestarting with how they relate to their

diaspora populations.

In recent y ears, a number of c ountries have issued diaspora bonds with limited success, most notably Keny a and

Ethiopia. Part of the problem has been a lack of awareness that the product existed within the targeted diaspora.

But crucially and heres the rub for most nations with diasporasit 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, ev en 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 informationcampaign; 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 wasnt 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 thats 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, o r that the ties immigrants feel for their loved

ones cant be generalized into a more patriotic act of bond investing, its 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 invo lved, the bonds could prov e 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.
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6 Comments

NamSor Applied Onomastics

Very interesting concept, we look forward to see it grow in practice. We design an applied

onomastics solution (name recognition) and we believe it would be useful to target diasporas andmarket such bonds. Recently, we co-submited an innovative economic development project'Agr oDiaspo ra ' for co nsideration by the African Forum, because we believe that money is mostuseful when combined with a supply of talent, the bonding between people : bonding makes better bonds.

Sam ochieng

Very educative article about the diaspora bonds

ABEKE ODJEGBA

The issue that the diapora community of sub-saharan Africa origin will have is not raising theneeded funds but the efficiency of spending of their governments and the s trategic thinking of thesegovernments.

DiaporaJonny

Yes, great article, keep the news flowing on this important topic.

Anon

" treat them as returning customers". How true a statement! Needs to start with much muchgreater political accountability.

darbyfilms Mod

Love this article!
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