Remittances are a fascinating and oft neglected slither of global capital markets.
Flows are inherently difficult to measure but the World Bank estimates ‘developing’ countries received in excess of $300bn in 2009 and 2010 — around three times more than official aid flows.
In a report out Thursday the CBO estimates that in 2009 $48bn of these remittances came from the US.
Behind the numbers, texts and wire transfers are millions of untold human stories, too.
And as a post on the People Move blog from earlier in February points out, migrant savings represent a store of untapped wealth that exists aside global debt markets.
On the back of an (air-mailed) envelope Dilip Ratha and Sanket Mohapatra estimate the stock of migrant saving and thus, ‘the potential market for diaspora bonds.’
Making assumptions for migrant incomes (one-fifth to one-third of native income for the low skilled) and propensity to save (one-fifth of income) the authors tentatively conclude there is a nearly $400bn potential market. A conservative call given that only first generation migrants are included.
Diaspora bonds are not new, of course. Israel and India have raised money this way since 1951 and 1991, respectively (table from the paper described below, click to expand):
In December, Greece said it would turn to its diaspora in 2011.
A 2010 paper from Ratha and Suhas Ketkar looks at why these bonds are bought and sold. In short, the issuer gets crisis-resilient external financing (factoid: purchase of Israeli bonds increased during the 1967 six-day war), a favourable look from credit rating agencies, and the option to take advantage of a “patriotic discount”.
The buyer receives patriotic pride (at a ballpark cost of 280 basis points for 1980s Israeli bonds), risk management (having assets in local currency can be handy for migrants with investments back home) and, potentially, influence on policies. There’s also a big home bias at play in portfolios.
However, actual issuance is tiny. Obviously, patriotism or no patriotism, taking a hefty discount isn’t ideal. But there are other reasons, according to Ratha and Ketka: limited awareness of diaspora bonds, poor knowledge of diasporas’ wealth, regulatory requirements (Israeli bonds are registered with the SEC but not India’s), and poor planning.
We’d also add that many migrants would be less than keen to buy bonds issued by states they opposed.
Which brings us, tangentially and ignorantly, to a couple of questions:
(1) Given the size of its remittances, would, say, an Egyptian disapora bond be a good idea? (Not that Egypt is short of unsolicited advice these days.)
(2) (More cheekily) Would Pimco’s Mohamed El-Erian buy them?
Related links:
People Move blog – World Bank
Remittances to Egypt – FT Alphaville