The emerging and developing countries started to build programmes to institutionalise remittances from their diasporas when USAID (United States Agency for International Development) acknowledged remittances as a source for development in its 2002 report. Today, many countries like Nigeria, Greece, and Kenya have tapped into diaspora bonds to create financial resources to use during their economic crises.
The first example of diaspora bonds appeared in Israel in the 1950s. The disastrous effects of the Nazi genocide on Jewish people led Jewish communities to engage with Jews who had fled to the United States to initiate the development of Israel. They started to issue bonds specifically to the Jews living in the US.
These bonds were in different values, varying from USD 100 to USD 100,000 and maturities. The monies raised from these bonds were used for development purposes as the infrastructure and desalination projects were financed. From this perspective, the diaspora bonds are aligned with SDG-9 from the UN’s Sustainable Development Goals. SDG-9 underscores the importance of industrialisation and infrastructure in economic development. The Israeli case shows how the monies raised from these bonds can be used in accordance with the SDGs.
Today, diaspora bonds are considered a sustainable revenue stream for the Israeli budget in the eyes of the Israeli government. A development resource which was born due to an emergency in the aftermath of genocide has become a trusted foreign currency inflow resource over the years. Until 2007, more than 25 billion dollars were raised thanks to these bonds.
India used diaspora bonds to create a foreign currency inflow to the economy during the 1998 Nuclear Programme Crisis. Different to the Israeli example, here the monies raised from the bonds were used to cover the budget deficit instead of funding infrastructure projects. Tapping onto diaspora bonds during economic crises can be named opportunistic issuance. Here, the process is called opportunistic as the Indian government relied on diaspora bonds to ease the economic and political pressure on themselves. In total, the Indian government has raised more than 11 billion dollars over the years from different issuances.
Even though diaspora bonds were started to be used for different purposes in these two examples, they had similar effects on the economies. First of all, the monies raised were used in a Keynesian understanding. The diaspora bonds helped the governments to embrace counter-cyclical economic management in environments where the lack of preparedness of the private sector to undertake infrastructure projects in Israel and the lack of foreign funds inflow due to the US embargo in India. Additionally, in the case of India, the counter-cyclical programme improved the credibility of the country and helped the country to borrow at lower interest rates in the post-diaspora-bonds era.
The Indian case is directly related to SDG-10. Given the public debt was acquired due to the social policies and the diaspora bonds were used to finance these policies, SDG-10 can be mapped out in this example. The policies to reduce inequalities can reduce economic migration and subsequently work towards SDG-1 and SDG-8 as well.
Even though the diaspora bonds supported the normalisation of the economy and the infrastructure development, they have a technical challenge. The main reason behind this is the fact that there is a grey area between the governments and the investors when it comes to defining the relationship of these actors based on diaspora bonds. In both examples, we can understand the great interest in diaspora bonds through a patriotic lens. This patriotism can create a charity mindset among the investors and relaxation for the governments. In other words, the government may overlook the rules and liabilities of diaspora bonds if they think that incoming money is charity.
Acknowledging the diaspora funds as a charity on both investor and government sides would not necessarily create a problem. However, if there is an expectational mismatch between these two, the counterpart should take necessary legal steps to ensure they match the expectations. For example, while dealing with an investor who sees diaspora bonds as an investing tool, the government should repay the investor fully and on time and set the conditionalities and legal bindings straight.
In the Israeli example, this situation has been observed through conditionalities on the bonds. Right after issuing the bonds, the Israeli government introduced conditionalities that have restricted the resale of the bonds on markets for three years. This ensured the stability of yields for the bonds and reduced the financial liability for the treasury.
This example sets the scene for financialization in diaspora bonds. A quest for funding which had relied on patriotism evolved into a financial tool controlled by national and international rules. On the one side, this financialization rasped the patriotism effect on these bonds. On the other, diaspora bonds have become a viable option for non-diaspora investors. From this financialization perspective, diaspora bonds can be analysed under SDG-8. One of the sub-goals of this SDG is to strengthen the substructure of the financial organisations. The issuance of these bonds and the subsequent sales of these on the market require a strong and operational financial market. Therefore, diaspora bond issuance can work along with SDG-8 in emerging and developing markets.
The discussion on financialization brings this question into mind: How would they be different from Eurobonds after financialization? The answer will be observed in upcoming bond issuances during the post-Covid era.
Can Diaspora Bonds be an Option for Turkey?
The current economic climate in Turkey makes the foreign currency inflow more than relevant. According to the most recent data from the Ministry of Foreign Affairs, there are 6.5 million Turkish citizens living abroad. Additionally, each year around 330 thousand people move abroad (TUIK, 2019). The increasing levels of financial hardships experienced by people can increase this number and trigger brain drain.
The concentration of brain drain and the diaspora in European countries can benefit the issuance of Turkish diaspora bonds. Instead of focusing on multiple markets with different rules, the common EU market can be faster and relatively easier. Additionally, this concentration can be used for promotional purposes where the members of the diaspora can promote these bonds to their neighbourhoods and families. Lastly, the citizens of the Turkic Republics can demand these bonds if they feel emotionally attached to Turkey. This requires the predominance of the patriotic value of the bonds.
Technically, the developed banking sector, the use of technology, and previous experiences in Eurobond issuance can benefit the operational procedures of the diaspora bonds issuance. Recently, the Turkish diaspora has been offered to open up YUVAM accounts in Turkish banks where they can receive a higher interest rate than the market if they deposit foreign currency. This highlights the existing material ties between the diaspora and the government.
Taking all these factors into account, the diaspora bonds can provide a unique opportunity for a country like Turkey which has strong emotional and material ties with its diaspora. However, the use of funds should be clearly defined and conveyed to the investors.
