Harnessing the Diaspora’s Resources to Boost African Development

June 16, 2011

  • Africa's diaspora accumulates an estimated US$53 billion in savings every year.
  • Much work must be done on both sides before this resource can reach its potential for development.
  • The "diaspora bond" concept creates a win-win scenario for diaspora members and homeland governments.

WASHINGTON, DC, June 16, 2011 -- What if every African nation suddenly learned of a new, untapped benefactor – a frugal individual with keen entrepreneurial sensibilities, who has managed to accumulate billions of U.S. dollars' worth in savings, and has strong cultural ties to the ancestral homeland?

It would seem like a perfect opportunity to find new funding for development projects – but what if no one knew exactly where that mysterious person lived, or where the money is kept, or what concerns the donor might have about how the funding would be used?

This is the situation faced by governments of developing nations in Africa and elsewhere that hope to solicit fiscal relief from their own emigrant communities – large numbers of people living and working in what are usually higher-income countries. Most diaspora members' incomes are modest by the standards of rich nations, and their savings might seem meager in the world of development funding, but – as recounted in Diaspora for Development in Africa, edited by World Bank economists Sonia Plaza and Dilip Ratha – collectively they can add up to staggering amounts of money.

Worldwide, African diaspora members have accumulated an estimated US$53 billion in savings annually, including more than US$30 billion saved by people from sub-Saharan Africa.

The development potential for Africa's diaspora is about "more than remittances," says Plaza, senior economist in the Bank's Development Economic Prospects Group. Ratha, manager of the Bank's Migrations and Remittances unit, says a government should view its diaspora like "an untapped pool of oil." This is not a reference merely to liquid wealth, but also to the "human capital" of knowledge and expertise gained while working abroad.

The 'Widget Phase'

Links between the African diaspora and African development are already happening informally or on a small scale. Diaspora members already invest in real estate, entrepreneurial businesses, and capital markets. Sometimes they pool their money with friends or form an investment consortium. But without formal financial instruments to organize and focus that investment, it will remain a piecemeal endeavor that can only affect development indirectly.

"The African diaspora is … organized and raring to go," says Chukwu-Emeka Chikezie, cofounder of the London-based African Foundation for Development (AFFORD) and now a diaspora returnee in Sierra Leone, consulting on diaspora-related development.

Chikezie believes that African diaspora communities are just now entering a "widget phase, where people are building tools that the diaspora can use to channel their resources." One example is the African Diaspora Marketplace, a joint Western Union-USAID service that helps U.S.-based diaspora entrepreneurs to capitalize promising ventures in sub-Saharan Africa. But much more is needed.

Emotional Bonds

The World Bank's goal is to put a formal structure around these relationships so that countries can harness them directly to their development goals. One of the most promising ideas is the "diaspora bond" – a retail savings instrument issued in relatively small denominations for sale to that segment of the diaspora that has some money socked away but lacks the capital-organizing power of an entrepreneur.

The bond creates a "win-win" situation for sellers and buyers, Ratha says. Unlike high-net-worth investors who tend to be more cold-blooded about where they put their money, typical diaspora members might invest with their hearts or not at all. A government "can tap into that emotion to actually get a discount" on interest rates, perhaps as low as 4 percent, Ratha said -- substantially less than, say, the double-digit rate recently posted for a one-year Ghanaian treasury note.

For the buyer – since the bonds are specifically created for and marketed to diaspora members – a 4 percent return would be much better than a typical bank savings account or cash hoard. And since the bonds are formal instruments sold in the destination country's securities market, they would have to conform to local financial regulations, with all of the reliability those rules supply.

Beyond the financial advantages are more intangible benefits – and the best diaspora bond programs would make the most of these by involving the emigrant community in choosing and designing the projects being funded. In fact, many experts stress, any government attempting to engage its diaspora absolutely must do so on the diaspora's terms – avoiding the pitfalls of identity politics, clearly defining development outcomes, knowing and listening to the emigrant community, and bolstering trust through accountability.

Governments should avoid the appearance, Chikezie says, that they are "like the brother who drinks, smokes, gambles and never holds down a decent job for more than a few months [who] thinks he can always tap his more focused, hardworking sibling for a dollar, playing on … sentiment and a little guilt-tripping."

In other words, they should remember that many diaspora members, or their parents or grandparents, left in the first place because of poor governance, and the memory of those problems still looms large as a counterweight to any warm feelings of patriotism. Ratha cites a recent attempt by Ethiopia to issue a diaspora bond for electricity generation – a very popular issue with émigrés – that fell flat because of a perception of high political risks.

Reversing the Brain Drain

Of course, a diaspora has the potential to contribute more than funding. There is also human capital, which can begin with knowledge transfer from the diaspora back to the home country through collaboration, mentoring and training.

But many of the issues around diaspora funding also apply here, including additional concerns such as voting rights, or citizenship rules that force diaspora members to make tough and often irrevocable choices. "People will not return unless the [home] government improves working conditions," Plaza said. On the other hand, giving too much to entice the return of high-skilled emigrants could cause resentment from those who never left their country.

To get around this, some countries will offer high-prestige job titles in the government – in some cases even enlisting management consultants and "headhunters" to find candidates – appealing instead to diaspora members' "good will and emotional ties" to the homeland., Ratha said. "They tell them, ‘We really need you here.'"

China, for instance, has set up well-funded research centers to draw high-skilled individuals back home.,. While individual African nations cannot match China's ability to concentrate national resources, they can establish larger research institutions through regional cooperation, something Plaza says is already starting to happen.

Building Momentum

To put these ideas into practice, the World Bank is moving forward with a number of initiatives to set up projects co-funded by diaspora bonds, aimed at infrastructure financing, bank capitalization and debt management. With Greece's recent filing of a prospectus with the SEC for a diaspora bond, the building momentum could soon reach a tipping point for other nations to follow suit.

The few bond projects that have made it to the U.S. market so far have mostly disappointed for one reason or another - with the notable exceptions of Israel and India. Israel a nation whose unique characteristics around the "reverse diaspora" perhaps make its model a difficult one to follow; but India's model complemented with a clear link to an infrastructure project (say, a "bullet train between Mumbai and Ahmedabad") may be a good one.

"We need some new cases so that Africa can draw from [their experience]," Ratha said. "The Greece case will sensitize U.S. authorities to the benefits," allowing both sides to develop expertise in dealing with the regulatory process as it pertains to diaspora financing.