Somalia: Pirate Problem Is a Case Study in Inefficiency

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Somalilandsun- Somalia map Say you live in Africa, in a country that is such only in name and not in practice, and it suffers from lawlessness and corruption of the worst kind. You’re just trying to make your way in the world. The one thing that you do have is a boat and happen to be right next to one of the busiest shipping lanes in the world. Maybe piracy doesn’t start to look like a bad option. That’s how we’ve come to see the increase in piracy around the Horn of Africa.

The problem of piracy is not like what we normally think of with pirates (thanks to Disney probably).

These pirates are more interested in ransoms for the crew than they are stealing whatever it is they have on board. With the use of mother-ships, pirates launch small boats from larger ones to surprise tankers that may be much further out to sea than one would expect an attack. The problem has become so bad that the cost to ship in the area has increased substantially.

From paying shippers, to insuring the material, to paying ransoms, the price to move goods is way up. Estimates of the costs vary, but it could be as high as $3.3 billion, just due to piracy.

So how much of the plunder do the pirates take home? Only about $120 million, or about 3.5% of the overall cost. It seems that insurance companies are making a killing though. As attacks increase, these costs go up. Whether the pirates get a proportionate share is up for debate.

Shipping costs of Somali PiracyBut if pirates are only getting such a small cut of the overall cost, this is a most inefficient form of wealth transfer. If you compare it to taxation, taxes seem much more reasonable. With a tax, you can be rest assured that 50-100% of said tax would be distributed to whatever group is supposed to receive it. Not just 3.5%. Though it could never happen this way, the shippers and pirates would be better off if the shippers just sent a check for $10 million each month.

The real solution to this problem is far more difficult to implement. Somalia needs economic aid. This could come from the UN and other world organizations. It would help to develop the country and alleviate the poverty issue. Then there would be less incentive to terrorize the world’s shipping lanes. But Somalia lacks the infrastructure to distribute aid. There are areas of the country that are completely lawless. And Somalia ranks among the top in the world for most corrupt governments.

Solving this problem is going to take time unfortunately. And I am not a huge fan of giving away billions in economic aid to another country. But once we get to the point where that’s cheaper than the shipping costs, and effective, we’ll have a case study of why development aid is useful.

The Weakonomist

Read: The economics of Somali piracy (Washington Post)

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