Diaspora Communities

How Economic Incentives Can Stimulate Diaspora Capital Flows into the Developing World

June 9, 2015  • Alexander Dixon and Pooja Virani, Guest Bloggers

(Photo Credit: istockphoto)

In the aftermath of Typhoon Haiyan, Filipino-Americans donated millions of dollars to disaster relief and reconstruction efforts in the Philippines. Diasporas, or people who live outside the country in which they or their ancestors historically lived, are increasingly garnering attention as contributors to economic and social development in their countries of origin. Remittances — transfers of money from individuals in a foreign country to their home communities — from international migrants to developing countries alone are three times the amount of official development assistance.

Diasporas have both the desire and capacity to invest in their countries of origin, but there are several barriers to diaspora capital flows, including lack of information, widespread legal challenges, and the growing need for financial intermediaries. US diasporas value transparency, tax deductions, and the ability to invest in entrepreneurship, but they are often restricted from investing due to strict investor regulations. Perhaps the solution is a well-established IRS philanthropic vehicle called a donor-advised fund (DAF), which can be tailored to appeal to the diaspora. 

Donor-advised funds are charitable giving accounts administered by public charities into which donors can make tax-deductible donations. A portion of the assets leave the DAF in the form of grants to qualified nonprofits when donors make grant recommendations; the remainder of the assets are reinvested in securities until they are recommended for grants. 

DAFs in the US hold nearly $54 billion in assets. The largest DAFs are managed by the charitable trusts of Schwab, Vanguard, and Fidelity, with the majority of their grants going to domestic nonprofits and their assets being invested in US securities. 

Given their tax-effectiveness, flexibility, and convenience, donor-advised funds may represent an untapped international giving vehicle for the diaspora. DAFs will especially appeal to diasporas with institutionalized cultures of philanthropy, such as the Filipino diaspora. The US Filipino diaspora has a history of sending tax-deductible donations to Philippine NGOs through partner intermediaries and sister organizations which serve as conduits for donations. For this reason, the Aspen Institute Diaspora Investment Alliance (DIA) is partnering with Charities Aid Foundation (CAF) America and the Commission on Filipinos Overseas (CFO) to launch the Philippine Philanthropic Fund (PPF), a donor-advised fund targeting the Filipino diaspora.

Key advantages the PPF will provide for the Filipino community include:

  • Enabling the diaspora to engage in both strategic grant making and indirect investing by making grants to local NGOs and investing PPF assets in the Philippines.
  • Enabling diaspora members, regardless of income level, to donate to the fund.
  • Allowing the diaspora to contribute to economic growth and development in the Philippines. For instance, PPF could support a humanitarian fund, which would immediately disburse money to local NGOs in the event of a future typhoon or earthquake.

DIA is creating a NGO Transparency Portal, a central database with ratings and information about Philippine NGOs, to support the PPF. DIA envisions creating a network of country-specific NGO Transparency Portals which stimulate donations to local NGOs by making pertinent information transparent and readily available. 

There is a tremendous opportunity to expand diaspora capital flows beyond remittances to investment and philanthropy back home. Diaspora Advised Funds, donor advised funds targeting specific diaspora groups, can be an effective solution in mobilizing diaspora capital for economic and social development in countries of origin. 

DIA is in the process of developing Diaspora Advised Funds and NGO Transparency Portals for India, Kenya, and the Philippines. Visit our webpage to learn more.

Alexander Dixon is the director of the Aspen Institute Diaspora Investment Alliance. Pooja Virani is a senior program associate.