NB Financial Health
Engaging Diasporas in Development Through Investment – Part 1: Calvert explores ways to facilitate migrant investment flows
Over the past few years there has been increasing interest among development organizations and aid agencies in harnessing the financial resources of various global migrants to fund development needs in their countries of origin or heritage. As Calvert Foundation has one of the few investment products available to retail investors that want to invest in international development, we have been forming partnerships to investigate how we can use our investment platform to facilitate diaspora or migrant investment flows.
Over the past year, we have been exploring potential investment initiatives targeting diasporas from Mexico, Colombia, the Caribbean, the Middle East, India and the Philippines. Our partners in this work include the W.K. Kellogg Foundation, the U.S. Department of State’s Office of Global Partnerships, and USAID. As a result of our research, Calvert Foundation became the new managing member of a public-private partnership, IdEA, the International Diaspora Engagement Alliance. IdEA was launched by the State Department in 2010 as a platform to harness the energy and resources of diaspora communities for a wide range of development and diplomatic purposes.
Calvert Foundation approached the diaspora investment initiative without a development agenda, but from the perspective of a fund with expertise in raising and deploying capital from individual investors. We understand the complexity involved in creating such an initiative and that a diaspora initiative will only be successful by working with strong partners with expertise in the areas where we are lacking. This post is the first in a series in which we will share some of our lessons learned to date on the complex issue of engaging U.S.-based diasporas to invest in development agendas in their identified homelands or countries of heritage. Here we cover some of the key issues to consider when creating a strategy to engage diasporas in international development.
Among many lessons learned in our explorations to date, we now know that engaging diasporas in both investment and development requires consideration of several complexities. Each of the subjects below has deep implications for diaspora work.
Define your audience
Diaspora means “to scatter” in Greek, but today we use the term to describe a community of people who live outside their shared country or community of origin or ancestry but maintain active connections with it. Human mobility is a key point, in that our common understanding of diaspora involves movement across international boundaries (e.g., not including internally displaced persons). There are other nuanced levels of understanding around what makes someone a member of a defined diaspora, including the level of awareness around the need or desire for a link with the homeland; the homeland’s own definition and treatment of its emigrants; and the ongoing cultivation of relationships between the source and destination communities. For example, a group of American citizens identify as members of the Persian diaspora that fled the shah’s kingdom at the time of massive upheaval in that nation – they do not necessarily identify fully with the Islamic Republic of Iran if they feel a disconnect between their memories of their secular homeland and the Islamic state that Iran is today. Lack of diplomatic relations between their country of origin and their new home in the U.S. might further complicate this identity dilemma.
We recognize the challenges of discussing diasporas writ large, as “diaspora” is often used as a catch-all term for an incredibly diverse group of people, including migrants, refugees, expatriates, immigrants and their descendants. Diasporas are not monolithic, but nuanced, complex and constantly changing.
Arguably, here in the U.S. we are all members of at least one diaspora. In the context of the development agenda, however, the prevailing definition of “diasporas” includes: diasporas who maintain home country engagement; who identify with transnational communities; and whose interests overlap with those of development agencies and agendas, which are both politically and morally driven.
Importantly, many diasporas do not identify first and foremost with their “country” of origin or heritage. While Development Financial Institutions (DFIs) and bilaterals craft their development strategies at a national level, nationalism is a relatively new concept for much of the globe. It’s been a necessary construct in the U.S. because we are a constantly evolving mix of hundreds of “nations,” but in many countries such as Kenya, India, the U.A.E. or Mexico, national identity is not necessarily a person’s first and foremost identity. Their most emotive or meaningful identity might be their religious affiliation; it might be their provincial origin; it might be tribal or based on ethnicity. Crafting a call to action based on emotional ties to a home country could fall on deaf ears if the diversity of diaspora identities is not addressed.
In the bank or under the mattress?
In order to engage diasporas in a financial way, you have to understand how they currently manage their resources, capacities and interactions with the financial sector(s) in both their present contexts and those of their present investment targets. Income levels play a role, but savings levels are more distinctive – one possibility is that recent diasporas to the U.S. with closer ties to home save at much higher rates than the general population in order to transmit these savings to relatives in their international communities. Use of savings – and investment approach – is determined in part by income as well as financial access (both in the U.S. and in the home country) as well as familiarity/education with financial investment products. The latter we know to be a significant lack throughout the U.S. population, given our general failure to provide basic financial literacy training; this challenge in feeling empowered to manage one’s finances is not limited to recent émigrés.
Some diasporas in the U.S. are unbanked or under-banked – particularly those without legal documentation. These people primarily utilize check cashers and trusted remittance intermediaries like Western Union and Viamericas. Some have distrust or suspicion of formal financial services, particularly if they have had bad experiences in the U.S. due to racial or ethnic profiling. This speaks generally to the challenge of access to the formal financial system at both ends of the transaction. For example, the recently released report Economic Status and Remittance Behavior among Latin American and Caribbean Migrants in the Post-Recession Period documents the challenges of channeling remittances into the formal banking sector. For the Latin American and Caribbean populations surveyed in the report, 60 percent of migrants reported having bank accounts in the U.S., but only approximately 30 percent of remittance recipients had bank accounts. According to the report’s lead author, Manuel Orozco, “there are many barriers that make it difficult for migrants and remittance recipients to open bank accounts, including residency requirements, legal documentation and even outdated requirements such as having a telephone landline.” Orozco told us that the opportunity cost for getting into the system is extremely high, noting that banks are not typically in the areas where migrants live. Our hometown of Washington, D.C., holds an example of financial disenfranchisement: as you move southeast and northeast across the city into lower income neighborhoods, the number of bank branches drops drastically.
Meanwhile, mobile banking is far more advanced in developing nations than in the U.S., and there may be a leapfrog opportunity for it to gain traction among diasporas as a means of investment due to their familiarity with such platforms in other countries – although to date mobile banking largely remains constricted within national boundaries (and has not universally proven to be profitable for the intermediaries). For example, the Kenyan mobile money transfer system M-PESA is used by more than 17 million Kenyans, equivalent to more than two-thirds of the adult population; it’s estimated that around 25 percent of the country’s gross national product flows through it. Recent diasporas may rely upon mobile channels for investment options rather than traditional financial advisers or brokerages, or through remittance companies such as Boom Financial.
While transaction fees on remittance platforms have, through competition, been lowered to reasonable levels, transactions costs on other types of investments can be quite high. For example, brokerage accounts where a person can individually buy and sell shares in, say, the nascent Jamaican stock exchange, are even more challenging – many require minimum deposits of $1,000 or more; getting low-volume, international financial products on the platform can be nearly impossible. Especially in the current global interest rate environment, there might not be a suitable investment product if transaction costs outpace the rate of return.
In Calvert Foundation’s case, as we think about the different channels through which an investor typically participates in our Community Investment Note – such as online, through their financial adviser or directly through a brokerage account on a platform like Charles Schwab – it is critical for us to understand how a diaspora member might invest and the barriers they might encounter along the way, as well as where and why.
Trust, different habits around managing finances and legal/administrative barriers to participation are significant issues to consider when creating a strategy to link diasporas in the U.S. to financial channels of investment – issues that most investment platforms now do not tend to consider outside of remittance firms.
Remittances: a complicated story
Mapping and measuring remittance flows has been a large part of defining a potential role diasporas could play in supporting broad economic development in places where aid money goes only so far. Global remittance flows are estimated to reach $581 billion in 2014 – their highest levels ever. According to the World Bank’s data on country-level remittance transfers in 2013, India received the most remittances with $70 billion; “other large recipients were China ($60 billion), the Philippines ($25 billion) and Mexico ($22 billion). In terms of remittances as a share of GDP, the top recipients were Tajikistan (52 percent), Kyrgyz Republic (31 percent), Nepal and Moldova (both 25 percent), Samoa and Lesotho (both 23 percent), Armenia and Haiti (both 21 percent).”
This paints a compelling picture, but it is only part of the picture. According to Orozco, while the largest proportion of migrants engage in remittances (80 percent+), there are other measurable investments happening, such as capital investment (estimated to be 5-15 percent of the economic transfers to homeland); philanthropy (5-20 percent); and consumption of home country or nostalgic goods (80-90 percent).
While remittances are often characterized as “unproductive” investments, the reasons and motivations behind remittances are complicated and do not necessarily translate into a willingness among diasporas or migrants to invest in more productive means of economic development. Many remittances are simply household to household transfers to support costs of living, education, etc. Michael Clemens and Timothy Ogden of the Financial Access Initiative argue that remittances have been inaccurately framed and that remittances are in fact a return on investment; the cost of moving a family member to access a different labor market. They describe migration as “one of many financial tools (families) juggle to smooth income and consumption.”
Some remittances certainly represent informal “peer-to-peer” lending or business investment, where there is no legal protection or obligation between the parties, but a personal understanding. Some remittances are donations to support local development projects: schools, wells or other public goods that a hometown association or local development group is organizing.
Some remittances are legacy accounts, where second and third generations living in the U.S. feel a distant obligation to remote family connections but have little interest in identifying with those relatives and their local contexts.
Because the vast majority of remittances are household to household, they speak to diaspora interest in investing in their specific family, hometown or community. In other words, they speak to the importance of a hyperlocal context to diasporas. They do not necessarily point the way to interest investing in an impersonal, indirect proposition or along national development agendas.
Certain countries have put programs in place in attempts to leverage and formalize the power of remittances, most notably Mexico’s Tres por Uno program in which for every dollar raised by a Hometown Association in the U.S. for a specific project, each of the three levels of Mexican government (municipal, state and federal) will match it dollar for dollar. However, similar to remittances, this program has been criticized as “unproductive” in that it doesn’t address the reasons for migration in the first place (e.g. job creation), bringing into question the utility of remittance platforms when striving to meet development objectives.
Editor’s note: Part 2 of this post will discuss four more key issues in engaging diasporas in both investment and development. The post was originally published on Calvert Foundation’s blog. It is modified and republished with permission.