DiasporaBond

Some quick (and really rough) notes on the #DiasporaBond idea that’s been discussed recently. The notes are based on my 2008 paper  & other sources (see below). The essential reading is Chander (2001). These are draft notes outlining general principles and more certainly can (should) be added.

Aleksandr V. Gevorkyan (July 31, 2018), updated Nov 22, 2020

  • DiasporaBond – a financial security / debt instrument, by which a country borrows from its expatriate (diaspora) community (affiliated by ethnic, religious, cultural, or other characteristics).
  • BENEFIT-1: a small economy with large diaspora is able to tap into international capital markets, otherwise closed off to the country or outcompeted by similar emerging / frontier markets – assumes a foreign currency bond.
  • BENEFIT-2: borrowing at patriotic discount, i.e. borrowing at interest rates lower than would be borrowing in a competitive.
    • Often, the only practical aspect many advocates argue (but must look beyond it).
    • The reason: “diaspora” is assumed to be more altruistic in its intentions towards historical homeland and is willing to buy-in at a discount driven by patriotic motives
  • BENEFIT-3: potentially a substantial economic development booster
  • BENEFIT-4: can be issued as a local currency bond, potentially attracting a new type of foreign (non-resident) investors (the diaspora), opening up the domestic public debt market to the generic foreign investors (“diaspora first mover” argument).
  • BENEFIT-5: issued as a conventional bond but marketed as a diaspora –> motivating  the above — key aspect “potentiality”

And some points to “consider”:

  • As a capital market instrument with longer maturity than short-term loans, DiasporaBonds are best to finance long-term projects
    • infrastructure (for prosaic reasons, roads, sewers, water supplies, energy); education & healthcare (building new facilities, revamping existing); capital financing for new residential development; capital financing for new industrial sectors / techno parks development
  • DiasporaBond is non-inflationary, this means it is not intended as consumer or business credit facility
    • Unless, of course, a host of serious macroeconomic conditionality measures and strict checks/balances system are enforced.
  • On the latter point, conditions are appropriate as DiasporaBond financing would normally go towards areas in the national economy otherwise not appealing to a committed global investor.
  • Regulation: with all the usual players in place (Min Finance, Central Bank, investment bankers, etc), there perhaps should also be a State – Diaspora Supervisory Board in some form – as an oversight, bringing Diaspora expertise, and advisory group – with a clearly defined (and limited) mandate.
  • WHO-1: DiasporaBond cannot  solely target labor migrants (or recent expatriates).
    • Trends in remittances transfers are not indicative of the diaspora’s interest in purchasing a long-term sovereign bond at a discount rate with unspecified risks of repayment
  • WHO-2: Part of the DiasporaBond program’s success would be conditioned on availability of range of options for members of the “old” and the “new” diaspora in a range of denominations
  • ESSENTIAL: work with the diaspora – two sides must take each other seriously
  • WHERE: a DiasporaBond program requires clear identification of the applicable jurisdiction for any disputes and any other obligations to lender/borrower
  • DiasporaBond Exchange Program—may help individual investor to donate their bonds as charitable contributions to school, universities, hospitals, etc as a way of boosting endowments of the latter. Additionally, an exchange mechanism may be created to facilitate further financial market deepening.
  • Reaching beyond altruistic diaspora with the DiasporaBond requires solid presence in the international financial markets, macroeconomic and institutional predictability.
  • DiasporaBond may[!] lead to initiation of more stable large scale capital funding for a small open economy from a more diverse investor pool.
  • DiasporaBond is not a guaranteed success. Promoting and competing for diaspora investment interest requires massive dedicated effort and soft-capital concentration.

READINGS ON THE DIASPORA BOND: