Diaspora Financing can Help Fund Asia’s Infrastructure Needs
Asia’s vast global diaspora – which includes many skilled, highly educated and prosperous people – is a strong potential source of financing for the region’s infrastructure and other development needs.
Developing countries in Asia need massive infrastructure investment of $1.2 trillion annually, and the need jumps to $2.1 trillion if we also consider other factors needed to make the economies more competitive and resilient, and to attain a higher and more inclusive growth trajectory.
However, governments have very limited budgets to finance these investments. Their tax revenue is in many cases less than 15% of gross domestic product (GDP). In 2022, the share for India is about 12%, the Philippines 14%, and Pakistan 10%.
Moreover, many already face unprecedented public debt levels, leading to debt sustainability concerns. The total external debt of low- and middle-income countries doubled over the last decade, reaching $9 trillion or 26% of gross national income in 2021, according to the World Bank.
Governments cannot rely on international, bilateral and multilateral donors to fill the financing gaps for they also have limited resources with competing needs. Therefore, more innovative and comprehensive financing is urgently needed, including promoting private sector infrastructure investments through public-private partnerships.
One solution is to tap the countries’ vast global diaspora for financing. Available information on people from Asia living outside their home countries, especially those in the United States, United Kingdom, and the Middle East, indicates that much of the population is skilled and well-educated, and earns a good income. This strongly suggests that they can provide talent and capital to help infrastructure development in their home countries.
Diaspora investment potential for Commonwealth countries is approximately $73.2 billion annually, while for Pakistan, Bangladesh, India, and Sri Lanka, the potential amounts are estimated at $4.4 billion, $3.7 billion, $18.4 billion and $1.5 billion per year, respectively (Commonwealth Secretariat 2017). These huge numbers cannot be ignored.
Diaspora financing is an innovative market-based financing mechanism to finance income-generating projects.
Migrant workers and diaspora have consistently sent remittances home to support their families, economic growth, poverty reduction, and human capital development. During 2017-2021, the Asian diaspora’s average contribution to global GDP was around 0.5%, mainly through remittances. They can also foster investment and trade, stimulate business, and transfer new knowledge and skills.
The significance of remittances to the global economy is also evident because they have consistently dwarfed the amount of official development aid over the last four decades. Moreover, remittance inflows are also the most stable, providing a countercyclical buffer during crises.
Some migrant-sending countries including India, Israel, Sri Lanka, and Kenya have successfully developed financial instruments to tap into the wealth of their respective diaspora through the issuance of diaspora bonds. Israel annually since 1951 and India on three separate occasions since 1991 have raised over $35 billion of capital through diaspora bonds.
Diaspora bonds can be tailored to specific needs. They may involve a patriotic discount that would be attractive to governments and other investors when diaspora investors are willing to receive a lower return.
Diaspora financing is an innovative market-based financing mechanism to finance income-generating projects in some countries. This can be done through public and private sector investments and other methods in line with the nature of the infrastructure investment.
Going forward, governments in Asia’s developing countries, especially the migrant-sending economies, must take this opportunity to invest more in infrastructure while strengthening their fiscal position at the same time. To do this, the governments must put the right policies in place.
They must also bring along trustworthy intermediaries, such as multilateral development banks, to overcome the problems of the diaspora’s lack of trust in institutions, and regulatory challenges. The diaspora financing scheme will facilitate more productive engagement with the private sector to improve the much-needed human and financial capital and expand access to the global market and overall production capacity.
Proactive and productive engagements will also make the development process more transparent and inclusive, in line with the diaspora’s aspirations.