Sovereign Equity: A Paradigm Shift

A core premise of investment migration is to enhance a country’s economy in exchange for residence or citizenship rights for individual investors. This is a good description of a classic ‘win-win’ formula. However, it is clear that the benefits of residence-and citizenship-by-investment programs for host nations go far beyond extra funding for the national treasury or increased foreign direct investment (FDI). One of the industry’s unique and most positive attributes is its ability to endow nations with a considerable source of sustainable revenue without them having to increase debt and thereby burden future generations. This capacity to expand a state’s ‘sovereign equity’ by increasing the number of citizens who actively contribute to its future wellbeing also has the invaluable capacity to reduce a key aspect of inequality within as well as between states – a phenomenon that is uniquely facilitated by investment migration.

Sovereign Equity in Practice
Sovereign equity is a means for governments to improve public finances and support economic growth and employment creation without increasing their debt – meaningfully addressing the growing imbalances and inequalities inherent in traditional sovereign debt financing by engaging with the global community of high-net-worth investors.

There are many sovereign states around the world that lack the traditional capacity to raise sufficient revenue and that may even at times be locked out of financing through capital markets or international lenders.1 Countries can thus find themselves trapped in a pattern of negative debt and short of discovering natural resources such as hydrocarbons or minerals, their ability to reduce debt, increase revenue, and attract investment is extremely limited.2

Debt financing is helpful and often critical in times of crises. But as Dominica showed in the aftermath of two consecutive hurricanes in 2017 and 2018 that destroyed large parts of the country’s infrastructure and devastated entire villages, citizenship-by-investment was a lifeline that enabled the government to rebuild infrastructure and provide support to those affected.3

Outside of a crisis, when countries find themselves lacking fiscal autonomy they lose the ability to operate as truly sovereign states, forfeiting the gains from their economies to pay off creditors.4

Countries also lose the ability to invest sufficiently in core infrastructure, education, and health services that enhance the lives of their citizens.5 This can lead to a scenario in which society’s best and brightest leave to pursue opportunities elsewhere, depriving the country of their skills, which in turn diminishes the prospects and quality of life of the general population.6

Investment migration is arguably the single most effective means of addressing this dilemma. As a direct injection of liquidity into a country’s economy, it relieves stress on the national treasury without tying the country into debt-based obligations. Moreover, it is not only a source of income, but also a proven driver of FDI streams. This twin dynamic is extremely effective in mitigating the problems brought about by sovereign debt and limited inbound investment – ultimately providing greater national autonomy and prosperity for all citizens.

Investment Migration, Fiscal Autonomy, And Freedom
Prudently managed residence and citizenship programs with stringent due diligence on applicants and transparent structures are able to drive investment that meets the needs of countries without adding to the burden of debt. Such funding can be used either to pay off existing debt or to create societal value through strategically targeted government spending. This provides governments with significantly increased fiscal autonomy – a key factor in how sovereign a country can be.

Investment migration programs also act as remarkably successful FDI platforms to attract capital and skills to an economy far beyond the specific investment requirements of each residence or citizenship program. The numerous material benefits of FDI are clear7, but it is in the beneficial social impact created by this type of investment that real human value is found. Increased investment drives employment opportunities for citizens at all levels, from architects and construction workers, to manufacturing and technology companies, and to the tourism sector and other service industries. The result is more business activity and new employment, leading to an overall more dynamic and positive socio-economic environment.8 The natural consequence of this is to alleviate pressure on government spending, further increasing fiscal autonomy and ultimately establishing greater prosperity.

Proven Socio-Economic Benefits
In the aftermath of the 2008 financial crisis, Malta’s economy, for example, like all of Europe’s, was weak. Just years after the launch of the citizenship program in 2014, the country had one of the highest growth rates and one of the lowest unemployment levels of any EU member state. It is now the best performing economy in the EU by almost any measure.9 Furthermore, since 2017, Malta has been able to report an annual budget surplus for the first time in decades.10

By the end of 2018, Malta had raised almost EUR 600 million in direct revenue, seen property sales exceed EUR 110 million, earned EUR 70 million in rentals, and received investments of over EUR 120 million in government bonds.11 Results like these are virtually impossible to achieve using traditional ways and means of public finance.

In the Caribbean, a similar success story has been unfolding over the past ten years. Since the reform and relaunch of the St. Kitts and Nevis Citizenship-by-Investment Program in 2007, the subsequent investment boom in this country, and in several other Caribbean countries that launched or enhanced programs, is remarkable and unprecedented in the region’s history.12

Following independence from Britain, the Federation of St. Kitts and Nevis witnessed a decline of its sugar industry. It simply became unsustainable to produce sugar in the country and to compete on world markets. This resulted in a massive annual deficit, threatening to undermine the entire economy.13 It is thanks to its citizenship-by-investment program that the country was able to restructure its economy away from loss-making sugar production and raise hundreds of millions of dollars in FDI geared towards providing a sustainable transition and laying the foundations for future growth and development.14 Today constituting 30% of national annual revenue, investment migration is, according to Prime Minister Timothy Harris, “a pillar in the foundation of the country’s unique future and prosperity.”15

In Antigua and Barbuda, the country’s citizenship program, created in 2013, now constitutes approximately 15% of the government’s annual revenue and is responsible for substantial investments in the construction sector that have helped to create a sustainable tourism and leisure industry. In addition, investment migration has been a major driver in the country’s transition to renewable energy. Thousands of solar panels have been successfully installed on government buildings and land throughout Antigua to produce electricity, in significant part paid for by the citizenship-by-investment program. The program was also essential in providing the necessary capital to support recent efforts to rebuild Barbuda after a recent tropical storm devastated the island, forcing the evacuation of the entire population. On the macro level, the liquidity injected onto the sovereign balance sheet, combined with the long-term income streams created by new businesses and their associated tax revenues, has helped the island nation to pay off its entire external debt to the International Monetary Fund (IMF) — over USD 320 million — built up after the economy shrunk by one quarter during the global financial crisis. Overall debt is down from a challenging 104% of GDP to a more sustainable 72%. When the IMF conducted a review of the Antigua and Barbuda economy, it found that the inflows of capital provided by investment migration had significantly helped to boost public and private sector construction, improving economic growth and pulling the country out of a deep recession.1

In Moldova and Montenegro, where the two most recent European citizenship programs were launched in 2018, the positive impact can be expected to be similar. In addition to boosting fiscal health and economic growth, the enhanced inflow of much needed investment will enable both countries to become more competitive and their economies to become more sustainable, which will result in their greater autonomy and being better able to steer their own futures. This sovereign equity will result in them being less dependent on foreign lending and able to drive national resources to where they are needed most. For ordinary Montenegrin and Moldovan individuals, the benefits of a new debt-free revenue stream will be felt directly in economic growth, employment opportunities, better social services, and improved infrastructure and education.17

Sovereign Equity Represents the Beginning Of a Global Trend
The concept of sovereign equity is both self-evident and revolutionary. It has the potential to bring about a paradigm shift in how sovereign states approach sovereign funding, attracting investment from abroad, and public finance. Sovereign equity is also a means of addressing persistent global inequality. FDI has already shown to be essential for developing, transitional or recovering economies, but it can also be critical for regional development in large and advanced economies.18 Sovereign equity, made possible through investment migration, will support ongoing economic growth and prosperity.

The benefits of sovereign equity enable countries to turn away from debt and dependency towards fiscal autonomy, stability, and independence. Investment migration represents one of the most important opportunities for growth and economic development for those countries able to offer it — creating considerable societal value and persuading productive members of the community to stay and contribute to their country rather than to emigrate. In short, investment migration is a long-term positive solution, one that injects new liquidity into an economy, creates sustainable income streams that can support public financial needs, and attracts much-needed FDI.

Endnotes
1 Stephen Park and Tim Samples, “Towards Sovereign Equity” (2016) Stanford Journal of Law, Business, and Finance 21 (No. 2)
2 International Monetary Fund, “Global Debt Database” (IMF.org) imf.org/external/datamapper/datasets/GDD accessed 13 February 2019
3 Government of the Commonwealth of Dominica, “Hurricane-Proof Dominica: Investors Join Forces and See the Caribbean Country Flourish” 22 October 2018, cbiu.gov.dm/2527/
4 Martin Guzman, José Antonio Ocampo, and Joseph E. Stiglitz (eds) Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises (New York: Columbia University Press, 2016)
5 Ibid.
6 Prachi Mishra, “Emigration and Brain Drain: Evidence from the Caribbean,” IMF Working Paper WP/06/25 (January 2006)
7 OECD, “Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs” (2002) 5
8 Theodore Moran, Holger Gorg, Adnan Seric, and Christine Krieger-Boden, “Attracting Quality Foreign Direct Investment in Developing Countries” International Growth Centre (October 2017)
9 “Fourth Annual Report on the Individual Investor Programme of the Government of Malta” Office of the Regulator, Individual Investor Programme (November 2017)
10 Government of Malta, Finance Department, Budget 2019. 22 October 2018. mfin.gov.mt/en/The-Budget/Pages/The-Budget-2019-G5J3D1.aspx
11 ‘Fifth Annual Report on the Individual Investor Programme of the Government of Malta’, Office of the Regulator, Individual Investor Program (October 2018)
12 X Xu, A El-Ashram, J Gold, ‘Too Much of a Good Thing?: Prudent Management of Inflows Under Economic Citizenship Programs’ IMF Working Paper WP/15/93 (May 2015) 7
13 JC Okwuokei and B van Selm, ‘Debt Restructuring in the Caribbean: The Recent Experience’ in, (ed) Trevor Alleyne, Inci Otker, Uma Ramakrishnan, and Krishna Srinivasan (Washington DC: International Monetary Fund, 2017) 165
14 J Gold, A Myrvoda, ‘Managing Economic Citizenship Program Inflows: Reducing Risk and Maximizing Benefits’, 131
15 ‘PM: CIP could make up 25 per cent of govt’s revenue’, Antigua Observer (Antigua and Barbuda), 18 June 2015, antiguaobserver.com/pm-cip-could-make-up-25-per-cent-ofgovts- revenue/
16 J Gold, A Myrvoda, ‘Managing Economic Citizenship Program Inflows’, in Unleashing Growth and Strengthening Resilience, 132
17 J Gold, A El-Ashram, ‘A Passport of Convenience’, 52 no 4, (December 2015) 48
18 Bipartisan Policy Center, ‘EB-5 Program: Successes, Challenges and Opportunities for States and Localities’, (September 2015)

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