Pirates are the very essence of profit maximising entrepreneurs described in neoclassical economics. Yet, whilst films such as The Pirates of the Caribbean and Butch Cassidy and the Sundance Kid have gone a long way to popularise both pirates and outlaw behaviour, the truth of the matter is that piracy is illegal and it kills.
According to the International Maritime Bureau, in 2010 Somali pirates carried out 219 (49 per cent) of 445 global incidents and were responsible for holding some 1,016 crew-members hostage, eight of whom were killed. Hundreds of pirates were also drowned, killed, imprisoned or are still awaiting trial. With over 150 incidents in 2011 alone and with the income disparity between pirates and non-pirates perhaps as high as 150 times the annual wage, the piracy industry is a highly profitable niche market in its own right — albeit one with considerable risks attached.
Over the course of the past three months, Geopolicity has been undertaking detailed economic research into the cost and benefits of piracy, focusing on incidents off the coast of Somalia in particular. We have looked at piracy to understand the motivation and economic drivers as well as the costs — and even the benefits to the global community. The results of our research have been shared with key members of the international community but have so far not been made public. The results are startling in a number of ways.
Strong linkage
Based on a global economic model we assess the costs and benefits of piracy across what we call the "piracy-value-chain". The value chain exhibits on- and off-shore linkages, as well as strong linkages with the wider international community.
Headlines show, based on cost benefit analysis across the entire piracy value chain, that financiers, sponsors, officials, insurers and security companies are the main beneficiaries of piracy, with ransoms only totalling a small percentage of total costs at around $75-$85 million (Dh275-Dh312 million) in 2010. We calculate, assuming there to be 1,500 pirates operating in and around Somalia, that a pirate is likely to earn between $33,000 and $79,000 a year, with possible lifetime earnings of between $168,000 and $394,000, based on a five year career. With the next best alternative being around $500 each year, there will in all likelihood be many budding Jack Sparrows in line at the local piracy job centre.
Of course it would be far too easy just to blame the pirates themselves, many of whom are simply taking advantage of the most logical alternative livelihood to replace the collapse of the Somali state and dwindling fish stocks due to illegal international fishing, among other factors.
I am reminded of Afghan farmers growing opium whose farm gate prices are only five to ten per cent of the final world market price. While the economic forces that drive men to become pirates in the first place deserves far greater research, so does the tracking of finance flows across the value chain. With anywhere between 12-20 financiers operating increasingly criminal rackets, unless the sources of finance are exposed and the financiers dealt with, the incidents of piracy are set to increase. Based on various pull factors we anticipate a further 200-400 new pirates to join pirate ranks each year, with child soldiers now being trained as child pirates instead.
The simple truth of the matter is that not enough is being done to understand the economic causes of the problem or how to track financial flows across criminal gangs and informal systems. We are not even sure how many pirates there are, how many financiers, what is the real value of ransoms or how many pirates die in the course of doing their business. I believe the lack of information derived from field-based analytical and diagnostic work remains the Achilles heal of the entire international approach. While the model established by Geopolicity goes a long way to establishing a robust framework of analysis in generating evidence to inform policy, deepening this work requires significant financing.
Four-pronged approach
While the need for stronger law enforcement capacities off the coast of Somalia is self evident, I believe a greater understanding of piracy could be developed by: a) regularly costing piracy, using a widely accepted model; b) conducting real value chain analyses and linking this to financial tracking; c) establishing a recognised hub for data collection on various aspects of piracy to aid international consensus; d) and identifying alternative livelihoods and growth futures in communities where pirates originate from.
Deriving an evidence-based policy framework must remain the leading pre-occupation of the international community if the problem is to be tackled with greater certainty. Alongside strengthening regional maritime governance arrangements and encouraging greater transparency in the reporting of ransoms and profits by insurers and private security companies, the economic drivers of piracy will also need to be carefully investigated.
In the long run, with profits from piracy greater than international finance mobilised to solve the problem, we can expect piracy to increase geographically and in sophistication. Moreover, with pirate deaths going wholly unreported, the assumed risks of being a pirate appears nothing when compared with reports of unprecedented wealth and almost film star status.
Dr Peter J. Middlebrook, the Managing Director of Geopolicity, is a former World Bank economist, specialising in economic intelligence.
