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People's IDA: Leveraging Migration for Development Financing

Dilip Ratha's picture

(In observance of the International Migrants Day)

We have just received the good news that IDA17 has received a record $52 billion in financing over the next three years. Securing these donor commitments has not been easy because of the weak and uncertain economic environment in many donor countries.

Considering the difficulties of increasing aid commitments in the future, there is a need to look for alternative or innovative sources of financing for development. Can migration provide some help?

In the early stages of our work on remittances, sometime in early 2004 I think, Business Week carried an editorial titled “Aid That Works”. It advocated the view that remittances were unilateral transfers from migrants to their families, these flows were targeted well to the needs of the recipients, and they avoided intermediaries and the associated costs of intermediation. By now, remittance flows to developing countries are well in excess of $400 billion a year, they flow disproportionately to poorer countries, and they tend to be countercyclical, like an insurance scheme. If remittance costs could be reduced by 5 percentage points – and indications are that they can be, an additional $20 billion per year could potentially remain in the hands of migrants and largely translate into additional remittances to developing countries.

A second direct way in which migration can be leveraged for development financing is via diaspora bonds. A typical migrant saves a larger amount than the amount of remittances. Such migrant savings are also estimated to exceed over $400 billion annually. Most of these savings are kept in bank deposits earning nearly zero interest these days. If a country (of origin of the migrant) were to issue a diaspora bond and offer 3-4 percent interest rate (say), it is likely to attract huge amounts of financing. There are several reasons why diaspora bonds would be attractive to a borrowing country: these bonds would be priced off the retail deposit rate as benchmark (currently 0%) rather than the LIBOR; and the spread would also be lower because the diaspora investors have a lower risk perception toward their country of origin than foreign institutional investors. Diaspora bonds have been issued by India and Israel successfully to raise over $40 billion in financing. There is a potential for raising $100 billion per year in development financing via diaspora bonds.

A third way in which migration can help is in improving the sovereign risk rating. Because remittances are large, foreign-currency and counter-cyclical inflows, properly accounting for them in risk analysis can improve sovereign ratings. Future remittances can be used as collateral for overseas bond issuance to mitigate expropriation risks, lower borrowing costs and lengthen maturities. Finally access to diaspora bonds and in general the support of the diasporas can diversity sources of funding and improve sovereign ratings.

More on these topics can be found in this article and this paper.
 

Comments

Submitted by V.K.Chetty on

Hi Dilip,
You are doing very well. I am very proud of you! Keep it up and let me know if I can be of help anytime.
Thanks.
Chetty

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