Pirates, Inc.
Cosmetic solutions to modern day piracy are not the answer
A Somali, part armed militia, part pirate, carries his high-caliber weapon on a beach in the central Somali town of Hobyo on 20 August 2010. Hobyo has no schools, no clinics and bad drinking water sources. Fighting a losing battle against the sand that has already completely covered the old Italian port, Hobyo's scattering of rundown houses and shacks looks anything but the nerve centre of an activity threatening global shipping.
When the media talks about pirates, most people still think about black beards, parrots, wooden legs and perhaps even Captain Jack Sparrow (aka Johnny Depp). Only after further information is divulged does the realization kick in that the moniker “pirate” references the private militias that have begun to occupy shipping lanes and terrorize cargo ships. A similar parallel of misunderstanding can be applied to the way in which London-based insurers and shipping companies have recently proposed to solve the problem. The flaw is not in the proactive effort to contain piracy but rather in the lack of a more coherent global response to solve the real problems that led to piracy in the first place. Cosmetic solutions only temporarily mask deeper problems that are either poorly understood or ignored because of their complexity.
Piracy in the Gulf of Aden and surrounding regions has become big business. The frequency, scale and sophistication of attacks have all increased. Kidnapping is at the core of the business, with average ransoms having steadily climbed to reach $4 million per deal. As a business model, piracy makes a lot of sense. The risk to reward ratio is quite favorable. With minimal investment, a small crew can pocket unimaginable wealth. The pirates have no other real economy to turn to, and experience has taught them that if they remain shore-bound, others will take advantage of their coastal resources.
In an ironic twist, shipping companies and insurers find themselves in a similarly awkward predicament. If no action is taken, the pirates will continue to collect ransoms, yet taking action is an expensive gamble that may not reap many rewards. The frequency of attacks means that firms must now factor in pirates as a contingent liability. The cost of insuring cargo ships travelling in pirate infested waters ranges between $75,000 and $500,000 per voyage. In reaction to the threats (and costs), insurers and their clients have decided to propose a plan that would create a private naval force to patrol the region. The suggestion comes after efforts of more traditional, state-based military cooperative patrols have been deemed insufficient (although it should be noted that multiple sources point out that recent ships succumbing to attack did not follow standard protocols). The creation of a private naval force would, in theory, lower insurance premiums by mitigating piracy risk.
Sidestepping the debate about the legitimacy and jurisdiction of private military organizations for a moment, numerous practical obstacles remain firmly fixed in the path of any such adventure. Firstly, the costs of organizing a naval fleet are high. Initial estimates, as proposed by representatives, are $16 million, but that figure only includes set up costs; operating costs will also need to be considered. Secondly, the size of the fleet would have to be much larger than is currently proposed. A military expert in a recent Al-Jazeera interview estimated that 83 ships would be required to adequately patrol the entire region. The estimate contrasts sharply with the 20-ship fleet that is included in the existing proposal.
Simple economics provides a third reason why the proposed private military solution is doubtful to work. Consideration of the principles of supply and demand demonstrates the futility of the plan. The pirate market in stateless international waters that are surrounded by Somalia, a failed state, and Yemen, a state with sovereignty troubles of its own, would be as close to an approximation of a fully free market as the modern world might allow. If there is anywhere that economic theory might hold, this could be the place. Added surveillance may reduce the number of ships seized by pirates, but then, certainly, the market reaction will be for each successful seizure to solicit a higher ransom since the value of a seizure must increase in a model where supply is reduced but demand is inelastic.
The logical question that arises is how to control demand (i.e. how to disincentivize piracy)? Unfortunately, the answer is embedded in greater complexities, and multiple aspects of the problem must be considered.
A first step would be to identify and address the root cause of the problem. Piracy off the East Coast of Africa began when Somali fishermen decided to take matters into their own hands and fight against exploitation. Many international actors took advantage of the regional anarchy. Without a Navy to protect local waters, large, foreign fishing boats began to steal fish from the Somali coast for sale elsewhere. Furthermore, unacceptable volumes of toxic waste washed up on the Somali coast; much of that waste has been linked to continental Europe through the Italian mafia. The initial formalization of “pirate” brigades began as a defensive impulse.
Obviously the situation has evolved considerably since, and it is doubtful that the pirates, who are currently terrorizing ships, would be mistaken for fisherman any more. Piracy is an attractive and lucrative business for young men (and fishermen) who have no other economic prospects. The pace of expansion of the piracy business is not surprising.
The lawlessness of East Africa is merely a symptom of a larger malady, and that is when globalization fails. Somalia was left to its own devices after the fateful Battle of Mogadishu (also known as Black Hawk Down). The specter of dealing with a failed state is not an easy one, so it was conveniently ignored. At minimum, however, the world should not have permitted the transgressions that incited the fishermen/pirates in the first place. Now the challenge is finding an equitable solution. The more cosmetic fixes we apply, like creating a private navy, the longer we are distracted from the real problems.
The solution proposed by insurers and shipping companies is not an appropriate answer to the problem. The publicity around the proposal may have been its sole intent, enticing media coverage by discussing issues that hit closer to home in the West, such as private militarization (and potential illicit links between pirates and terrorists). Much needed attention is being brought to a failed state whose shattered economy continues to destroy millions of lives. The situation shows how the plight of a few can have broader implications. In the modern era of globalization, we sometimes forget that even those who are seemingly far removed from the global network are, in fact, critical to the smooth operation of the global system and, therefore, should not be ignored.
Rajeev Sibal – London based economist and consultant with Fenrix, as well as a Global Governance 2020 Fellow.
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