Channelling remittances into investment

Kosovo received about 457 million euros in remittances from emigrants in 2012. The sum, from the Kosovo Statistics Agency, amounted to over 9 per cent of the country’s gross domestic product, GDP, and the largest form of foreign financing. Despite the critical role that these flows have played over the years for almost 25 per cent of Kosovo households, business investment from the diaspora in productive industries, such as manufacturing, remains low or non-existent. Reasons for this vary, but all point to the government’s inability to convince investors that Kosovo is an attractive, safe place to invest capital.

To find out more about this subject, in 2013, the International Organization Migration, IOM, conducted a study with focus groups of members of the Kosovo diaspora in several European countries. The purpose was to understand the challenges that people in the diaspora face in investing in Kosovo. Unsurprisingly, participants talked about well-known problems with corruption, bureaucracy, lack of information, an unfavourable business environment, unfair competition, high business failure rates, and more.

These are some of the most commonly cited issues that keep prospective investors from committing their capital to struggling economies like Kosovo’s. And, while poor countries may move up and down in their business environment ranking in terms of introducing new laws and streamlining rules and regulations, they continue to struggle with corruption, which remains the most intractable problem of all.

Reducing the incidence of corruption and red tape is difficult. It requires systemic reform and heroic efforts on the part of politicians and public officials. As corruption is never a short-term problem, a long-term, incremental approach is required. Kosovo politicians need first to accept that these problems as perceived by prospective investors do indeed exist, and are not just figments of their imagination. It takes bold leadership to be cognizant of this and then move on to introducing the kind of reforms that send signals to investors that the government is serious about making the country more attractive for foreign capital.

The government cannot eliminate corruption – that would be impossible. But, many countries struggling with political graft work hard to curtail it. Kosovo should adopt a similar philosophy and take measured, incremental steps towards limiting the opportunities for corruption wherever and whenever possible. Implementing a systematic campaign of policy outreach on limiting corruption would send a strong positive message to members of the diaspora who have the capital to invest in Kosovo and are eager to do so.

After this, the big question remains: how can government find ways to lure capital from the diaspora into Kosovo? It is hard to organize and transform private remittances into an official channel of business investment. No country, in any significant way, has been successful in rechanneling these forms of finance. Indeed, they do not have to be put to new purposes as long as they serve the basic needs of alleviating immediate poverty in recipient families.

But in the case of Kosovo, there is plenty of capital left among members of the diaspora that could be invested in the country if the government were to provide a clean, attractive environment. Emigrants from Kosovo save about up to 42 per cent of their net income, before sending home remittances. Almost 50 per cent of emigrants plan to invest in a business enterprise in Kosovo in the near future. The problem is that more than 56 per cent of these emigrants have no information about investment opportunities and where to commit their capital.

One potential way to lure this capital into productive economic use would be to issue diaspora bonds. Investors would buy debt issued by the government, which could use the funds to improve education, healthcare, infrastructure and other important sectors. Sovereign bonds are debt securities that allow governments to raise money from investors by agreeing to pay an interest rate and principal upon maturity. Diaspora bond investors would be able to negotiate with government on goals, driving their investments toward sectors that have the highest societal returns such as education, healthcare, and infrastructure.

At a time when Kosovo is struggling to raise funds from international capital markets, diaspora bonds would be an attractive alternative. To date, no study has been conducted on the subject. A report from the Diaspora Engagement in Economic Development, DEED, a project funded by the Finnish government, looked only at municipal bonds.
Whether introducing diaspora bonds would be effective or not in convincing emigrants to invest their money in Kosovo depends on many factors. Almost all of them depend on the government and on how it structures such instruments, provides safeguards and information, and ensures transparency and a return on the investment.

Countries that have issued diaspora bonds include Turkey, Israel, Ethiopia, India, Nigeria, and Ghana. Combined with decent financial returns, these governments have also employed the strategy of “emotional attachment” or “patriotic connection” to structure these instruments. While the results were mixed and varied from country to country, case studies show that success is contextual and dependent on country-specific factors.

Would Kosovo be able to use “emotional attachment”, for example, as a strategy to raise money from members of the diaspora? The answer is unclear, as investors first and foremost expect a solid financial return on their investment. Having said that, Kosovo emigrants, more than emigrants from other Balkan countries, have a history of patriotic generosity, as was evident in the 1990s, when they voluntarily invested 3 per cent of their income in health care, education, and charities in Kosovo. Whether that generosity still exists today is an open question. But, as surveys and recent studies have shown, most Kosovo emigrants remain very willing to invest their money in Kosovo. Nothing is more patriotic than that.