TAILIEUCHUNG - DIASPORA BONDS: TAPPING THE DIASPORA DURING DIFFICULT TIMES

India and Israel have raised over US$35 billion by tapping into the wealth of their diaspora communities. These diaspora bonds represent a stable and cheap source of external finance, often when countries lost access to international capital markets. For diaspora investors, these bonds offer the opportunity to help their country of origin while also providing an investment opportunity. The potential for diaspora bonds is significant for many countries with large diasporas abroad. However, diaspora bond issuance from countries with weak governance and high sovereign risk may require support for institutional capacity building and credit enhancement from multilateral or bilateral agencies. Haiti, for instance, could raise several hundred million. | Journal of International Commerce Economics and Policy Vol. 1 No. 2 2010 251-263 World Scientific Publishing Company DOI S1793993310000147 World Scientific DIASPORA BONDS TAPPING THE DIASPORA DURING DIFFICULT TIMES SUHAS L. KETKAR Vanderbilt University DILIP RATHA The World Bank 1818 H Street NW Washington DC dratha@ India and Israel have raised over US 35 billion by tapping into the wealth of their diaspora communities. These diaspora bonds represent a stable and cheap source of external finance often when countries lost access to international capital markets. For diaspora investors these bonds offer the opportunity to help their country of origin while also providing an investment opportunity. The potential for diaspora bonds is significant for many countries with large diasporas abroad. However diaspora bond issuance from countries with weak governance and high sovereign risk may require support for institutional capacity building and credit enhancement from multilateral or bilateral agencies. Haiti for instance could raise several hundred million dollars by issuing diaspora bonds provided a guarantee structure is created to build trust in the country s public institutions. Keywords Capital flows diaspora bonds emerging markets. JEL Classification G15 O10 1. Introduction In the current environment of a crisis of confidence in debt markets many countries are encountering difficulty in obtaining private financing using traditional financial instruments. The scarcity of capital threatens to jeopardize long-term growth and employment generation in developing countries which tend to have limited access to capital even in the best of times. Official aid alone will not be adequate to bridge near-or long-term financing gaps. Ultimately it will be necessary to adopt innovative financing approaches to target previously untapped investors. Diaspora bonds are one such mechanism that can enable developing countries to borrow from

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