Pirate Economics, Somali Edition

(Photo: UK Ministry of Defence)

(Photo: UK Ministry of Defence)

An Economist article looks at a new study by the International Criminal Police Organization, United Nations Office on Drugs and Crime and World Bank on the economics of Somali piracy, including pirate earnings:

The authors interviewed current and former pirates, their financial backers, government officials, middlemen and others. They estimate that between $339m and $413m was paid in ransoms off the Somali coast between 2005 and 2012. The average haul was $2.7m. Ordinary pirates usually get $30,000-75,000 each, with a bonus of up to $10,000 for the first man to board a ship and for those bringing their own weapon or ladder.

The article also explores the financing and profit of pirate expeditions, and how ransom money trickles down:

Financing pirate expeditions can be quite cheap by comparison. The most basic ones cost a few hundred dollars, which may be covered by those taking part. Bigger expeditions, involving several vessels, may cost $30,000 and require professional financing, This comes from former police and military officers or civil servants, qat dealers, fishermen and former pirates. They take anywhere between 30% and 75% of the ransom.

A typical operation has three to five investors. Some provide loans or investment advice to other financiers. Some financiers, especially those in the Somali diaspora who have little cash inside Somalia but large deposits abroad, employ what the report describes as “trade-based money-laundering” to send funds to Somalia. This involves finding legitimate Somali importers willing to use a financier’s foreign money to pay for their shipments and reimburse him at home in cash once the goods are sold.

(HT: Marginal Revolution)

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COMMENTS: 17


  1. Voice of Reason says:

    In my opinion, this article doesn’t address the most important and interesting issues at hand:

    How do we stop or minimize piracy and is it worth it to do so?

    Is it right to allow ransom payments?

    Are we better off by paying off the pirates and moving on, or should the governments of the world crack down on “Pirate Enablers?”

    Should ships be armed to the teeth? Should we hire private security? Should we just assume the risk when sailing?

    I come down on the side of employing the Broken Windows Theory. Have the UN ban all ransom payments to pirates, and capture and punish every pirate caught in the act. They’ll get the picture eventually.

    I’d like to hear other people’s thoughts though.

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    • Pablo says:

      Whos this “we” you speak off? Shipping companies are private entities. Deal with it.

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    • Aaron says:

      Lol @voice of reason, this is an article about the economics of piracy, not solutions. It is not meant to address any issues, but to provide information.

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      • Voice of Reason says:

        LOL @ Aaron. Obviously, when I made this point, I prefaced it by stating that I knew the purpose of the article, but argued that it didn’t address the most important issues. Then, I tried to start an intelligent conversation on the internet. Thank you for not approving of my discussion topic.

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    • Richard Ralph says:

      There is a widely held view that illegal fishing off the coasts of Somalia was a major contributing factor to the increase in Piracy in the region. The local fiserman provide the seamanship required by the armed pirates to hijack vessels. I understand that there are three international naval taskforces currently involved in protecting merchant shipping off the Horn of Africa. I would like to know whether these warships are also attempting to police the Somali fisheries as this instinctively feels like a more cost effective way of combating the problem. I would be interested to hear others thoughts.

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    • Joe J says:

      “armed to the teeth?” Try allowing them to carry any arms. Too many governments forbid them from defending themselves at all.

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    • texagg04 says:

      How do we stop or minimize piracy and is it worth it to do so?

      There was a great solution for it in the 18th century. We stopped believing in being tough and empowering private institutions to be tough on criminals, however.

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      • Enter your name... says:

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      • texagg04 says:

        @Enter

        You meant to say “not really caring about how many pirates* are killed in the process”. No, I don’t care how many pirates are killed in the process. They are the enemy of all mankind and most especially of Commercial Republics that want peaceable trade with other Commercial Republics.

        They may not want the cargo, but they still impede the trade between peaceable people. The 18th century solution still works because just like the old pirates these new ones still drown. (or can be shot).

        Pretending like the threat doesn’t exist doesn’t save lives nor end the piracy. It only siphons more money to ransom and loses more money in lost trade. It disrupts the peaceful people’s lives involved and encourages further piracy.

        Empower the peaceful to make war on the barbarians, so the peaceful can be peaceful the rest of the time. Kill ‘em All (preferably in the act of piracy).

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      • J1 says:

        We could circumvent that problem by killing pirates before they had the chance to take hostages. Normally we’d worry about errors due to misinterpreting the actions of the others, but when somebody’s trying to forcibly board your ship 100 miles offshore, there’s not much question what they’re up to.

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      • texagg04 says:

        @Enter

        J1 answered for me. The problem isn’t a problem when hostages are taken. It’s a problem long before then, and needs to be addressed early on.

        Empowering those who risk their lives is STEP 1.
        Killing the pirates as expeditiously as possible before they take Hostages is Step 2.
        After those steps are reached, and we’ve whittled down the Pirate Population down to a fraction of what used to be successful pirates, then we can start talking ransom as a Step 4.

        (Step 3 of course is see if there is a way to kill the pirates without endangering the hostages)

        Step 5 being, kill the pirates as soon as ransom clears and hostages are freed.

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      • texagg04 says:

        And Of course I don’t mean to leave out the process that parallels killing pirates:

        that is the process that involves converting the Pirate’s home base from wretched hives of scum and villainy into a Commercial Republic that embraces trade, free markets and due process.

        That of course being a harder and longer process must merely be supplemented in the short term by killing pirates. As many as possible.

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  2. Roland says:

    I do not think the point of this article is to address the issue of piracy. It does not intend to say whether this activity is good or bad, neither does it pretend to attempt solving it. It is a mere investigation of the modus operandi of Somali pirates and the numbers involved, that is what “Freakonomics” is all about.

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  3. caleb b says:

    So it must be cheaper to pay the ransom than buying machine guns? What about the economics of the cargo ships? Why don,t they pool their money and hire more protection?

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  4. Answer underlying causes says:

    I feel like there is almost always one side (typically the more lurid and therefore most eye-catching) to a story that receives the loudest platform. Piracy is a major current issue in the Horn of Africa, no doubt about it. However, one must ask oneself why has this only recently become so. Somalia didn’t have a history of piracy in the past.this has only recently ballooned into a serious problem after years of silently being the victim of over-fishing and becoming a common dumping site for nuclear and other hazardous waste from other countries. Yet these are stories never told. I dont agree with vilifying an entire nation and adopting a “killing ‘em all” stance as another commenter posted as being the just and rational things to do. I believe the issues at root need to be addressed and that the bolstering of the Somali coast guard and navy to police their own waters from both pirates and those engaging in illegal activity should be stressed. We need to end these “us” vs “them” paradigms and overgeneralizations of people as evil and barbaric. We need focus our attention to the real culprits, the anomalous few, and not the innocent nation and its populous

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