The Economics of a Career in Piracy
If asked to offer parental career advice to teenagers on the Horn of Africa, most economists would probably recommend becoming a pirate. As a profession, piracy enjoys numerous standard economic advantages:
- Low Barriers to Entry: education and certification prerequisites limited to rudimentary seamanship, no need for student loans or entrance exams. Initial capital requirements are low: a small boat, hooks, rope, some small arms, and perhaps a handheld GPS.
- Low Costs of Compliance: no government regulatory restrictions, legal constraints, or administrative obligations (including taxes).1 Professional codes of conduct for pirates are unencumbering. A few simple rules, like treating hostages well, not destroying captured ships, sharing spoils, keep you out of trouble with other pirates.
- Lax Government Enforcement: From your "failed state" base of operations, you operate outside the territorial waters claimed by any nation. Given the vastness of the ocean, your chances of being captured are slim. If caught, problems of jurisdiction and the reluctance of nations to pay for your incarceration make it likely for you to be set free in a matter of days.
- High Performance Related Wages: Wage levels far exceed those in alternative employment options in the local community. As is the case in investment banks, which pay "once the deal is sealed," bonuses are payable "once the ship has been seized."
Market mechanisms would further dictate that the high profit margins for pirates in the Gulf of Aden and the Horn of Africa will not undermine future growth. Assuming that pirates refrain from harming captured crew and vandalizing commandeered ships, the costs to ship owners or operators of ransom payments are unlikely to exceed the costs of rerouting ships. The extra cost of fuel and other amenities from a longer route, say around Cape Horn, will certainly be higher.
Moreover, ship owners or operators can pass the expense of piracy on to their customers and consumers as a general increase in the cost of doing business. Absent new government intervention, the market equilibrium is that piracy simply continues with a business plan in which the gains are personalized and losses socialized.
What can cash-strapped governments facing record deficits do differently to change the market equilibrium and undermine the economic case for careers in piracy?
Drying up the supply of pirates is one option. However, salvaging failed states and nation building is extremely expensive. Restoring functioning governments in the Horn of Africa is a worthy objective but seems prohibitively costly and an uneconomical way of ending piracy.
Sending naval ships to the region has been the preferred international government policy response.2 Compared to nation building, sending naval forces is less costly, but it is not clear that stepped-up antipiracy enforcement through fleets of warships off the coast of Africa is an economically sensible strategy either. The reason is simple: The expected return from a career in piracy is not seriously diminished by the marginal increase in the chance of getting caught or serving more than a light sentence.3 The fixed costs and barriers to entry of the piracy profession may go up slightly (prices for boats and weapons might increase a little as more are confiscated), but not enough to reduce incentives for would-be pirates.
In the end, the only way to reduce the expected rate of return from piracy is to increase the punishment meted out to captured pirates. As in all instances of limited government resources, the law must rely on deterrence. It is not a coincidence that piracy was historically a capital offence, and that the corpses of executed pirates were frequently displayed in harbors as a warning.
Less draconian punishments are surely warranted today. But swift, predictable, and sizable sanctioning for acts of piracy will nonetheless be required for careers in piracy to no longer make economic sense. The option to simply return to your pirate career even after capture must be ended.
The same economic logic suggests that any international legal framework for trying and sanctioning captured pirates must be complemented by armed rescue operations in which at least some pirates are killed rather than captured.4 President Obama's order to use force if given the opportunity, followed by the swift execution of that order, made economic sense while serving the cause of justice and the interests of the hostages.
1. However, you do face the constraint that you will be forced to operate only in areas where government structures do not exist, i.e., in the territory of "failed states."
2. 15-20 nations have so far sent naval forces to the region, including the United States, a dozen EU countries, Russia, China, India and Malaysia. See Reuters, "Factbox: Foreign navies combat Somali pirates," January 19, 2009.
4. The real problem is not so much the absence of a legal framework for trying high-sea pirates, as piracy under international law is a crime against all nations and any nation (i.e., any of the participating naval forces) could claim jurisdiction and try Somali pirates in their own home-country courts. However, countries have so far been reluctant to do so, principally due to the costs involved in setting up a maritime pirate court and in holding convicted pirates in domestic jails.