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Can Diaspora Bonds Supercharge Development Investment?
Over the past two decades one of the most intriguing ideas in development finance has been the proposal that developing nations can raise substantial funds from their expatriate communities by creating diaspora bonds. Recently, the economic fallout from the COVID-19 public-health crisis and subsequent sudden exit of foreign capital from emerging markets have reignited interest in the search for alternative development funding. Raising funds from diasporas via the bond, a fixed-income financial instrument, is high on the list again.
A diaspora bond is a government debt security with investors drawn from the country’s nationals living abroad, their descendants, or those with another connection to the nation. Supporters of the diaspora bond idea argue the government can benefit from diversifying its investor base while borrowing at below-market rates, since bonds are offered at so-called patriotic discounts and often during crisis. Advocates say diaspora bonds could generate tens of billions of dollars globally in annual investment, which could be directed towards infrastructure, defense, social, and other projects that may not be enticing to risk-averse international investors. Meanwhile, the diaspora benefits from having a well-defined secure financial vehicle that channels members’ altruistic ambitions to help their country of origin or ancestral homeland. Such reasoning often anticipates diasporas to be especially willing to take on the risk of lending to a financially constrained developing economy. Monetary remittances that recent migrants and others send back are sometimes argued to be the major ways for diasporas to invest in their communities or families at origin. It is plausible—but not guaranteed—that a diaspora bond can take advantage of this connection to channel funding through a government body for broader development purposes.
Despite the appeal of the diaspora bond as a concept, to date only two countries have had large-scale success with such programs: Israel and India. This article examines these cases to provide insight on whether diaspora bonds can truly boost development financing and whether their successes can be replicated elsewhere. While the promises of such a bond mechanism are lofty, there are also significant challenges to sustaining the funding and complex nuances of relations between diaspora and ancestral nations that must be taken into account.
Israel Bonds: Pioneering Diaspora Investment
It was in the early days of Israel’s statehood that the country’s leaders turned to the global Jewish diaspora for support. Leaders including Israel’s first prime minister, David Ben-Gurion, and then-Labor Minister Golda Meir met with Israeli and U.S. Jewish leaders to lay the groundwork for a program to be implemented by the Development Corporation for Israel (DCI). The action was incredibly significant: for the first time, Israel would formally ask for a public loan instead of a philanthropic gift.
In May 1951, Ben-Gurion launched the Israel Bond with a worldwide sales drive, beginning with a rally at New York’s Madison Square Garden. The comprehensive marketing campaign in the United States and internationally contributed to the bond’s success. In recognition of the effort, Meir would tell diaspora members, “You have a stake in every drop of water we pour into our land, in every mile of road built, in every kilowatt of power, in every field, in every factory.”
The new financial instrument quickly gained popularity. In the first year of operations, Israel Bond sales totaled U.S. $52.6 million. Over time the initiative helped open Israel to broader international capital markets with more diversified issuance of long-term debt. Although Israel has recently attempted to move away from borrowing from the diaspora, Israel Bonds remain an important component in the public sector’s external debt structure.
Since that first issue in 1951, Israel Bonds—which are largely issued in the United States and are registered with the U.S. Securities and Exchange Commission (SEC)—had raised more than U.S. $46 billion as of mid-2021. In 2019, Israel Bonds accounted for more than one-quarter of the $4.9 billion in governmental external debt issuance. In that year, total outstanding obligations of Israel Bonds represented approximately 16 percent of the government’s $5.2 billion external debt. Most recently, preliminary results show that, despite the pandemic, Israel Bonds raised $1.8 billion in 2020.
As part of its external borrowing, Israel has also benefitted from the U.S. loan guarantee program. Launched in 1993, this policy has guaranteed Israel’s payments of principal and interest on diaspora and other bonds first up to U.S. $10 billion (from 1993 to 1998) and then up to $9 billion (from 2003 to 2023).
Impact of Israel Bonds
DCI’s widescale and sustained outreach has ensured financial transparency and consistent engagement with diaspora communities. Israel’s diaspora bonds are now offered across global financial markets, with a range of country-specific options in accordance with local laws. Israel has never defaulted on its diaspora bonds, which are denominated largely in foreign currency (up to 94 percent in U.S. dollars), and bonds vary in terms of maturity (the time from issuance to payout), minimum amounts, and incremental options purchases.
Regarding use of proceeds from bond sales, DCI prioritizes a mixed group of sectors such as agriculture, transportation, technology, energy, and immigration. It also assists individual investors to incorporate diaspora bonds into their financial portfolios, as well as to use them as gifts, endowments, or other options. Adding to the support of the country’s economy and social resilience, especially during the COVID-19 pandemic, DCI allows investors to donate bonds to charities, universities, retirement plans, and other groups in Israel.
From the start, DCI has maintained an active informational campaign on the bonds’ accessibility and benefits to Israel. Aside from an online portal and publications geared towards investors, researchers, and the public, DCI organizes and funds events across the world targeting the global Jewish diaspora; these efforts continued online through 2020.
Not Only for the Wealthy, nor Even Solely for the Diaspora
Israel Bonds are affordable and available to retail investors, not just institutional groups or wealthy individuals. This is due in part to the close connection Israel maintains with its diaspora, as well as active efforts to position the bonds as an alternative for generic investors who are not part of the Jewish diaspora, backed by the country’s relative economic success.
Israel’s achievement is one major reason why diaspora bond advocates worldwide have backed the idea more broadly. The ability of the issuing state to adapt to its primary investors’ environments is important to build trust. Collectively, these kinds of efforts speak to the institutional maturity of Israel’s diaspora bond program and its ability to appeal to wider capital markets.
From an economic development point of view, three key conclusions emerge from this history. First, from the very start, Israel’s program was designed to contribute to infrastructure projects as part of the country’s long-term development strategy. Second, Israel managed to achieve legitimacy in the eyes of financial markets because of its transparency, strong debt ratings, and ability to attract both retail and institutional investors. Finally, and probably most critically, the bond program’s success relies on Israel’s grassroots connection to and direct proactive engagement with its diverse diaspora.
This last element was accomplished not only through successful DCI marketing or the diaspora’s altruism and willingness to accept a patriotic discount on its investment, although such motivations may have played a role in the early years. The nuanced understanding of its diaspora has helped DCI also connect with investors on more pragmatic foundations. Over the last seven decades, Israel Bonds have matured into a stand-alone, internationally recognized financial instrument that can adapt to dynamics within diaspora communities, which has reassured members that their investments are safe as well as beneficial to the state.
India’s Experiments Pay Off
Israel’s example is instructive given its long history and institutional maturity compared to all other cases. Closest to Israel’s success is the diaspora bond instrument issued by India, called India Development Bonds (IDB) in 1991, Resurgent India Bonds (RIB) in 1998, and India Millennium Deposits (IMD) beginning in 2000. India’s opening to the diaspora was not quite as straightforward as Israel’s, however. Following a period of some disconnect with emigrants in the period after independence in 1947, the government’s view began to change around the late 1980s, with the growing realization of the economic potential of Indian migrant workers abroad. However, like many other countries, India’s diaspora may be viewed as a complex mix of “old” and “new.” The former are mostly foreign-born descendants of earlier generations of emigrants, while the latter are Indian-born individuals who have migrated more recently. These groups have varying interests, backgrounds, financial capabilities, and motivations about their identity and connection with their country of ancestry.
In recent decades, India has formally recognized its diaspora and important factors surrounding it. Individuals classified as Non-Resident Indians (NRI) have been leading investors in India’s development, over and above the remittances they send. Much of the growth of the country’s information, communications, and technology sector has been driven by NRIs’ active involvement in the Indian economy. At the time of the economic crisis in 1991, IDBs provided a formal mechanism for NRIs to repatriate $1.6 billion.
Leveraging the financial potential of NRIs, the State Bank of India launched the RIB program in 1998 following international sanctions over the government’s nuclear weapons testing, which in turn led to the downgrading of India’s debt and foreign exchange pressures. The new bond was limited to NRI investors, making it a true diaspora bond, and raised $4.2 billion by the time it matured in 2003, with proceeds allocated toward infrastructure. That year, NRIs held close to 60 percent of the country’s sovereign debt to private creditors.
Despite strong response from wealthy NRIs, India’s RIB bond lacked the investor-friendly structure characteristic of Israel Bonds. Unlike Israel, India did not register its diaspora bonds with the SEC as securities, instead floating RIBs as “bank instruments representing foreign currency denominated deposits in India,” which came with fewer regulatory requirements. Rather than offering them on financial markets, the bonds were distributed via the worldwide network of Indian and foreign commercial banks specializing in dealings with NRIs, primarily in the United States, Europe, and the Middle East, and available in U.S. dollars, British pounds, and German deutsche marks. Investors paid no income tax in India on the interest earned and banks used RIBs as collateral for new commercial loans.
Following the RIBs’ success, in 2000 India issued IMDs, raising more than $5.5 billion within the first two months. This turned out to be another success at a time when India was low on foreign exchange reserves. Similar to RIBs, the new bonds were restricted to NRIs and were issued in three currencies (dollars, pounds, and euros), at a patriotic discount, and still not under SEC rules.
Despite raising significant amounts, it is possible that India’s diaspora bonds could have had greater success and continuity had they been offered under the more generally recognizable financial securities rules in international markets such as the United States (which is also home to one of India’s largest diasporas), rather than through NRI-centric banks. Nevertheless, India’s attempts to enter the diaspora-funding market eventually led to more fine-tuned financial products for NRIs, such as joint bank accounts with Indian residents, easier monetary transfers, operations with foreign currency, and real estate deals. These kinds of options may turn out to be more practical in the long run, given the country’s limited financial services and intensifying global competition for institutional investor funding.
Limited Success for Other Diaspora Bond Programs
Over the past two decades there have been attempts to pilot diaspora bonds across a broad range of other countries including Egypt, Ethiopia, Greece, Indonesia, Kenya, Moldova, Nigeria, and Sri Lanka. Yet with minor exceptions, these efforts have been unsuccessful. Notably, Greece at the peak of its debt crisis in 2011 failed in its plans to raise $3 billion from its U.S.-based diaspora. After initially positive responses, Ethiopia in 2008 and 2011 was unable to generate sufficient interest among its expatriates, largely due to high probability of default and environmental concerns about the intended uses of the bond’s proceeds for power and dam projects.
Other countries have periodically returned to the diaspora bond idea but have generally opted for alternative projects and financial innovations to develop stronger ties with their diaspora communities. This strategy can be more successful, since many diaspora members are in fact recent migrants with limited financial means and, often, more stable links to their family members and specific origin communities rather than their country of origin at large.
It is important to register that there were successful diaspora bonds issued by Kenya in 2009 and Nigeria in 2017. However, so far these countries have not been able to move past their first successful bond issues, and so are not on par with the experiences of Israel and India. Competitive pressures accessing global capital markets may explain some of the obstacles. Other issues were the bonds’ structures, lack of demand from the diaspora, and the prominent role of commodity exports in the countries’ economies, which implied financial volatility, particularly for oil-reliant Nigeria. In both cases, the diasporas’ investing interest may have been overestimated.
Diaspora to the Rescue?
There is clearly a sustained interest among developing nations with large diasporas to leverage the economic and financial potential within diasporic communities for local development. In fact, interest in engaging diasporas goes beyond just emerging markets, as advanced economies such as Ireland, New Zealand, Portugal, and Scotland are now actively seeking ways to connect with their communities abroad. In that context, diaspora bonds appear as one strategy of a bigger trend.
However, diaspora bonds have been structured in different ways; some have included guarantees against risks and comply with transparent regulations. Other community-specific financial securities may rely on moral and religious rules and provide banking infrastructure for diasporas to engage financially with their origin country. Importantly, countries’ macroeconomic fundamentals can affect the appeal and sustainability of a diaspora bond program.
It is important to remember that a diaspora bond is not philanthropy, but an investment in a country’s economic development. Mainly issued by a developing country with limited financial markets, such a bond program comes with risks. Diasporas’ altruism may be sufficient for initial periods of investing, however it is unlikely that marketing large-scale borrowing at below-market rates can ensure sustained interest in subsequent years. It turns out that simply having a diaspora does not guarantee the success of a diaspora bond.
The difference between old and new diasporas, mentioned earlier, makes it important for nations considering diaspora bonds to go the extra step to connect with their expatriates, especially those who express altruistic connections without having been born or lived in the country. Economists and financial professionals must realize and embrace the complex and well-studied dynamics within diaspora communities before developing universal solutions. Motivations of subpopulations within a single diaspora are diverse, and their collective financial capabilities may not be sufficient to substitute for significantly larger volumes of capital flows from non-diaspora investors.
As has been already stated, one speculative source of diaspora bond funding is remittances from labor migrants and others. But this may prove a difficult channel to tap. Indeed, evidence suggests that remittances help alleviate extreme poverty and contribute to improvements in recipient households’ living standards. However, that is precisely why it is difficult to transform these individual monetary transfers, intended for specific recipients’ needs, into a common-good diaspora bond. Remittances are monetary transactions between two parties who trust each other; this individual quality is crucial in explaining their limitations in changing the receiving country’s macroeconomic profile. Another challenge pertains to the fact that remittances are dependent on economic conditions in migrants’ destination country and their employment situation.
As such, despite the fact that remittances globally have risen nearly five-fold over the last two decades—and even stayed relatively level during the COVID-19 pandemic—a country aiming to issue a diaspora bond should critically and realistically assess its ability to rely on remittance inflows in lieu of more systematic large-scale diaspora support.
Instead, it might appear more practical for countries with large stocks of migrants abroad to consider longer-term sustainable financing mechanisms that can scale over time. One idea that has gained traction with some researchers: a Migration Development Bank. Rather than attempting to raise large sums of money from the diaspora at once, this development bank could offer mechanisms for formal remittance transfers and streamline financial flows between host and origin countries. Funds would be available to recipients, similar to India’s joint accounts between NRIs and residents, and also contribute to development through lending and fundraising. Gradually, as new loans are offered and economic reforms are implemented, the appeal of migration may fade over the longer term in response to local job growth.
Overall, countries considering diaspora bonds must also evaluate their borrower risk profiles. It may be helpful to assess the share of retail foreign investors in local public debt markets. Factors such as general financial openness and ease of access for diaspora and non-diaspora investors alike can affect markets’ relative competitiveness. Even without a specially designed diaspora bond, investors from the diaspora often are able to buy government bonds through domestic markets, although evidence suggests they have limited interest in pre-existing government debt securities.
Certainly, the creation of a diaspora bond program holds some potential to aid development finance, broaden financial markets, and put a country on the international capital map. Yet there are at least five challenges in converting the potential investment instrument into practical reality.
First is the problem of whether a country can raise sufficient funds from the diaspora to justify the effort. As history suggests, financing needs are often greater than what diasporas are willing to offer.
Second is the hurdle of maintaining strict fiscal responsibility while investing in institutional maturity of a diaspora borrowing program. Investors’ altruism may be sufficient for initial fundraising but not for subsequent issues.
The third challenge relates to more practically identifying efficient uses of funds raised through the diaspora bond program. As the first issues in Israel and India suggest, diaspora bonds can be useful in times of crisis. But large-scale assistance is not guaranteed, as the lack of success experienced by Greece and others illustrates. Sustainable funding requires investment to be linked with the country’s long-term development strategy. Furthermore, misalignment of funds and national development needs may exacerbate social and economic woes of a structurally weak economy.
The fourth difficulty is that recent patterns of migration and remittances may not be proof of adequate resources for a successful diaspora bond. Both migration and remittances are highly cyclical and depend on the host country’s economic health. Instead, it may be more practical to introduce innovative financial mechanisms such as a Migration Development Bank to more sustainably channel remittances towards specific economic sectors. Such activity should not be seen as crowding out private incentive, but rather an acknowledgement that coordinating and directing additional funds towards a generous menu of development projects can nurture and foster domestic private entrepreneurial motivations.
The final challenge is often missed in the rising wave of diaspora business studies: deeper analysis is needed into diasporas, their motivations, and how to ensure robust engagement between them and origin governments. Altruism can provide an important extra boost for diasporas’ involvement, yet it is not sufficient for either a successful diaspora bond program or engagement with the homeland more broadly. In short, history between diasporas and their ancestral home matters. Other factors including risk, potential returns, use of diaspora bond money, and internal diaspora-specific divisions may be equally important. To paraphrase what has already been said, the presence of a diaspora does not guarantee a prosperous and sustained relationship with the origin country.
As both diaspora and homeland adapt and learn about and from each other, their mutual trust can evolve. It is that trust that, at the end, determines the success or failure of a diaspora bond or any other relations program.
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