The New York Times published an opinion piece on diaspora bonds over the weekend. In this piece, Ngozi and I highlight the potential for mobilizing diaspora wealth for financing infrastructure investments in Africa and other developing regions.
At a time when donor countries are facing fiscal difficulties, new sources of funding and innovative ways to leverage available donor funding are required for meeting the financing needs in developing countries. Indeed, innovative mechanisms for channeling investments to dynamic developing countries may even provide a way out of weak demand and excess capacity prevailing currently in the developed countries. As highlighted by Justin Lin, "a global push for investment along the line of Keynesian stimulus is the key for a sustained global recovery; however, the stimulus needs to go beyond the traditional Keynesian investment....By far the greatest opportunities for productivity-enhancing investments are in developing countries..." (see here ).
Even if we were out of the crisis situation, standard official aid, plain vanilla bonds, or relationship-based bank lending cannot meet the investment needs of developing countries which to-date are perceived as high-risk by institutional investors. For long-term and low-cost financing, innovative mechanisms that mitigate credit default risks and operational risks of projects in developing countries must be found. Such innovative mechanisms would involve credit enhancements in the form of credit and political risk guarantees, creative use of collateral (future flows if existing assets are not available), and explicit linking of debt service to performance of projects (via performance-indexed bonds). I have outlined some such ideas in another article "New Paths to Funding".