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Could Diaspora Bonds Potentially Offset Drop in Foreign Direct Investment?

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Could Diaspora Bonds Potentially Offset Drop in Foreign Direct Investment?

The economic slowdown in consequence to the Covid-19 pandemic has been a particularly hard hit in developing nations in a two-fold manner.

Firstly, many developing nations were already experience issues with healthcare availability and sanitation, leaving them scrambling to hand the new influx of critical patients as the pandemic hit. Secondly, less economically developed countries tend to have large agricultural and manufacturing sectors; meaning that they greatly rely on exports and foreign investment (FDI).

With the increased difficulty of transportation due to lockdowns and the increased exposure and safety risks that it entails, a new propensity to be self-sufficient and buy local goods has evolved. Hence, foreign direct investment is expected to drop significantly.

According to the World Bank’s lead economist on migration and remittances, Dilip Ratha, foreign direct investment is slated to fall by 37% this year.

This entails catastrophic consequences for the already struggling global south who are dependent on this influx of capital and who are already struggling with their dollar denoted debt as the dollar has remained strong throughout the pandemic.

Diaspora bonds are issues by a country to its expatriated members, offering a migrant discount on government debt to encourage greater collaboration between the private and public sectors. While diaspora bonds are typically used to finance large scale infrastructure development projects, the capital can be redirected towards projects focusing on healthcare and housing.

This type of bonds greatly relies on the continued sense of patriotism of expatriated members, and their willingness to assist their home country and families. However, the same nations benefit from immense cash flow in the form of remittances—money sent back to families by ex-pats, indicating that the sense of patriotism and belonging is still strong.

Dilip Ratha of World Bank thinks diaspora bonds are a possible beacon of hope for these nations. According to Ratha, “diaspora bonds could generate about $50 billion a year in total for developing countries…”(Reuters). However, the same migrants that developing nations would be counting on most likely have been experiencing the negative effects of the pandemic as well, like job loss and technical unemployment. Thus, they are less likely to contribute to their countries, as highlighted by the Wolrd Bank’s prediction that remittances to low and middle-income countries are to decline by 20% in 2020.

To have a more feasible investment scheme, the diaspora bonds should also be available for smaller sums, encouraging a greater amount of people to invest in them. This could be further reinforced by subsidies from organizations like the IMF.

Do you think that a focus on diaspora bonds is a lifeline to counter the sharp fall in FDI?

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Tags assigned to this article:
diaspora bondsForeign Direct Investment

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