The Microeconomics of Somali Piracy 

By Brandon Scott

Originally Written in 2010

Crime Pays, and piracy pays very well these days. Piracy is by far not a new issue.  In the first few years of the 19th century the United States had to send Marines to the shores of Tripoli to combat an enduring piracy problem. However, the last few years the world has been seeing a drastic increase in piracy off the East African coast. In increase to such an extent it has brought global adversaries together to combat the threat. Since 2007, the number of successful pirate attacks has increased nearly fourfold. There were a total of 293 pirate attacks worldwide in 2008, of which 38% occurred within the Gulf of Aden or off the coast of Somalia (Leader).

The Somali pirate industry is a dynamic one with flexibility and a learning curve. Those who have opted to participate in this international enterprise have made a cold calculated decision with regards to what’s best for them. Often thought of as terrorists and thugs, the decisions of those involved in the piracy are more apt to make rational decisions based off available observable data, following the patterns predicted by traditional economic models.

With a country in shambles and an economy disheveled, it is no wonder why Somali male youth turn towards piracy as a viable option for income. With a national literacy rate of 37 percent, few skilled workers and few industries, the average Somali male has no prospects for upward mobility in the socio-economic sphere (CIA). Individuals then choose to balance the dangers of entering the pirate lifestyle (risk) and the possible beneficial return on his ‘investment’ in the lifestyle (reward).

The opportunity costs of staying in Mogadishu are low, thus increasing the incentive for individuals to take on the role of a pirate despite its dangers. There is nothing for them to gain if for example they stay in Mogadishu. They are aware of the estimated value of the average wage (if any) and they are aware of the estimated value of the pirate wage. Somalia is a nation of about 9 million people and a GDP/capita of $600 which is what the average Somali earns annually (CIA). Many of the low ranking pirates make almost $10,000 in one successful hijacking. At that reward, what is risk? “Never mind the risk; it’s less dangerous than living in war-torn Mogadishu” (Carney).

The pirates have weighted the opportunity cost of the venture. The payoff these days is 100 times that which it was in 2005 and with the volume of potential victims increasing, so does the attacks on them. Between 2003 and 2005 the number of ships that passed through the Suez Canal grew approximately 1,000 a year for five years (Carney). It’s a growth market; and one that was highly untapped prior to the Somali piracy situation, and potentially with increasing returns.

Robbery never was much of a stranger to modern day Somalia, however the pirates have learned how much more profitable ransom extortion is instead. It’s all about choosing the option with a higher return, and with a 12 man operation costing a little over $30,000, despite needing to often conduct 3-4 attacks before you “get lucky once” (Carney). However, it is believed that most pirate cartels are financed by wealthy third country nationals, so startup capital is limited and either way at average rate of $1 million – $3 million per ransom payment, what does it matter if it takes 3 attempts at $30,000 before completing a successful one (Hunter) (Carney). The pirates have no way of knowing – at least in the beginning – how much ransom would be paid. So they follow the logical capitalist move and merely inflate the cost of ransom to see what is willing to be paid. This can be viewed as “price discovery” or “gauging how much the market will bear” (Carney).

Observing the pattern of pirate attacks chronologically you will see the arrival of Somali piracy on the global stage in early to mid-2007 when attacks increased enough to draw international media attention. The piracy continued increasingly so relatively unscathed until a year later in 2008 when European and US Naval forces began to patrol the waters along the shipping lanes. At this point there was little to no Western intervention, leaving the opportunity cost of continuing the piracy the same. This occurred as pirates were economical enough to re-invest their profits into future operations making them more successful and in turn letting them take on larger vessels and demand higher ransoms.

In the spring of 2009 however, an externality – and highly symbolic one at that –entered the picture as the response elicited from the US after pirates attacked the first of our ships and took a US hostage leading to the involvement of US Navy SEAL commandos and ending with three pirates dead and one detained (CNN). Some analysts may see the piracy boom coming to a bust shortly after incorporating the international pressure on ending the piracy situation. If pirates continue to get killed or captured as a consequence of the supply of Navy SEALs then the opportunity cost will surely be changed for the Somali pirate.

According to the statistical data however, this is not the case exactly. Pirate attack attempts have continued to increase in the Gulf of Aden region off the coast of Somalia; however the number of successful attacks has decreased. Coinciding with this behavior, statistics show us that pirate attacks have shifted their geographical market to as far as 1,000 nautical miles east of Somalia; and further south down the Somali coast. This tells us that the piracy simply could not stay in the market in the Gulf of Aden region and had to move elsewhere. There was also an observable price change from 2007 until 2009. The average ransom amount increased from $2-3 million to $4 million, respectively (Ahmed). This reflects the new scarcity of successful attacks.

For those willing to participate, however, there has been little change. The kill or capture of pirates for the purpose of neutralizing the piracy problem is feeble minded as the supply of able-bodied potential pirates is nearly limitless as the country’s demographic majority resides in the youth. Not to mention the porous state borders where refugees flow back and forth and often end up in refugee camps withering away from hunger and disease. These camps are ripe grounds for pirate recruitment. Often the pirates will even pay for the potential recruits travel from their hometown to the pirate ridden coastal towns.” A police chief of one of the pirate haven stated “Whenever 10 guys get paid ransom money, 20 more pirates are created.” Upon arrival to these pirate havens what impoverished Somali is not impressed with the flashy lifestyle of “shiny new cars” and “the millions of dollars worth of ransom money that have flooded ashore” (Harding).

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