Diaspora Finance Powers Global Development

13 December, 2015

Luis Lopez-Ramirez, a 30-year old Honduran immigrant, makes pizza.

He has worked two jobs over 16 hours each day.

He carefully saves his money and rents a small room in Washington, DC.

Customers check exchange rates on Malaysian ringgit at a foreign currency money-changer in Kuala Lumpur, Malaysia on Monday, Aug. 24, 2015. (AP Photo/Vincent Thian)
Customers check exchange rates on Malaysian ringgit at a foreign currency money-changer in Kuala Lumpur, Malaysia on Monday, Aug. 24, 2015. (AP Photo/Vincent Thian)

He sends money back to Honduras to pay for the education of his two sons, whom he talks to every week by phone. He says he hopes to bring them to the U.S. to live with him one day.

The money he sends home also bought a small house in the village of Santa Barbara, Honduras. He will return some day, he says, and start a business.

But he left Honduras because the economy is terrible and wages are very low.

"One pizza with all the toppings is the same price as one or two weeks of pay in Honduras," says Lopez-Ramirez.

The money he sends back to Honduras is an example of remittances. Remittances help build the economies of poor countries. And it can lessen the burden on government aid programs.

Experts say that these remittances, or diaspora finance, can fuel growth and create jobs in the developing world.

Diasporas finance fuels global growth

Diasporas have "not only powered the development of the United States, but also hold the potential for transforming countries around the world," reports the U.S. Agency for International Development (USAID).

That money has a huge impact on global economics. The diaspora sends 16 times more than official U.S. development assistance, or $581 billion in remittances around the world every year.

If the global diaspora were its own country, it would be the world's fourth-largest nation, according to USAID. There are about 230 million people who live outside their country of origin, including legal as well as illegal immigrants.

Here's an example of how diaspora finance works on the local level: Isis Salmerone, a 26-year old Salvadorean immigrant in Maryland, has lived in America for six years. She worked with the Latino Economic Development Center (LEDC) to raise $11,000 from the local Salvadorean community and other local residents.

Last month, she and a group of non-profit leaders and Salvadorean immigrants in Maryland travelled back to El Salvador and donated the money to a hospital in Morazan, El Salvador's poorest region.

One-third of the population is foreign-born where Salmerone lives outside of Washington, D.C. Salvadoreans represent the largest group of those immigrants, according to Maryland's Department of Legislative Services.

Support from the U.S. and World Bank

The U.S. State Department is promoting diaspora finance for international development. "We've gone from an era where power lived almost exclusively in old establishment hierarchies to an era where power lives in networks," says Secretary of State John Kerry.

The World Bank also supports diaspora finance. Mahmoud Mohieldin is the president's special envoy at the World Bank in Washington, D.C. Dilip Ratha is head of the World Bank Migration and Remittances Unit.

They wrote that the remittances and savings of the diaspora are an "under-exploited resource." It could play an important role in global development, they wrote. Throughout history, people have sought opportunity in other countries. And, they send money to family and friends back home.

Those who receive the remittances spend one-third on savings and investment, such as education, buying land or starting a new business. The remainder is spent on basic daily needs.

"The challenge is to channel this income effectively," the authors say. They wrote that remittances tend to be larger in poor and small economies, and "often provide the main lifeline in fragile or conflict-affected countries." Diaspora funds can pay for health care, housing and businesses.

Remittances have reduced poverty in countries like Ghana, Bangladesh and Nepal. They are a major source of funding in many African countries, according to the International Monetary Fund (IMF). African migrants send at least $40 billion in remittances to African nations every year.

Diaspora bonds to promote development

Mohieldin and Ratha advocate the use of diaspora bonds to promote international development. The bonds could be in small amounts, such as $1,000, and carry interest rates of three percent to four percent.

To succeed, diaspora bonds must be linked to development in places "where there is sufficient trust in government," writes the World Bank authors. They should also be available to all investors, not just migrant savers, and be distributed widely.

That would enable large sums to be used for development at "low, stable interest rates," they write.

Some developing countries are already using diaspora bonds. Ethiopia, Kenya, Nigeria, Rwanda and Zimbabwe have issued bonds to their diasporas, according to the IMF.

Costs prevent remittances from reaching their full potential. Kanayo Nwanze is president of the United Nations Fund for Agricultural Development. He writes that "the average cost of sending money home has come down to below eight percent from 15 percent over the last five years."

But in parts of Africa, costs can be above 12 percent. "Reducing these costs to three percent would put more than $20 billion annually in the pockets of migrants and their relatives," according to Nwanze.

India has been a leader in the use of diaspora bonds. The Indian Diaspora Investment Initiative, launched in February this year, seeks to harness the funds of more than two million people in the Indian diaspora in the United States, reported Devex. Devex is a media platform for the global development community.

The Indian Diaspora Investment Initiative is a partnership between USAID and the Calvert Foundation, part of an investment firm in Maryland. Investors can purchase investment notes, sold in amounts as small as $20. Anyone can purchase the notes, although they are marketed to the Indian diaspora community.

The notes will raise up to $10 million this year. The funds will be used to buy debt from Indian financial institutions, which will then lend to businesses in socially beneficial sectors like health, food security and education.

Manpreet Anand is USAID's deputy assistant administrator in the Asia Bureau. He tells Devex that the Indian initiative is the first project of its kind, and represents "a new model of development in the agency."

If the Indian model is successful, he says, "this can pave the way" and "be a model that is utilized in other countries around the world."

I'm Mary Gotschall.

Mary Gotschall wrote this story for Learning English. Kathleen Struck was the editor.

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Words in This Story

remittance – n. the act of sending money as a payment for something

diaspora – n. a group of people who live outside the area in which they had lived for a long time or in which their ancestors lived

potentialn. a quality that something has that can be developed to make it better

transformingv. to change (something) completely and usually in a good way

migrationn. to move from one country or place to live or work in another

exploitedv. to get value or use from (something)

opportunity – n. a place where people have many chances to succeed, achieve things, etc.

savingsn. a bank account in which people keep money that they want to save

channelv. to send (food, money, etc.) to someone or something

incomen. money that is earned from work, investments, business, etc.

bondsn. finance : an official document in which a government or company promises to pay back an amount of money that it has borrowed and to pay interest for the borrowed money

harnessv. to use (something) for a particular purpose