Home > economics > Applying Economics to Piracy in Somalia

Applying Economics to Piracy in Somalia

Somalia is a unique real case study to learn how economy works under anarchy. It appears we have to learn a lot about self-organization.

But this case study is somewhat costly to the rest of the world and the main reason is piracy. This article came to my attention recently. While I found their business model interesting, I wanted to look at this problem and see if it has any economic solutions. And I see two.

Let us say, it costs X dollars to go through the Suez Canal if you go from the Mediterranean Sea to the Indian Ocean, it costs Z dollars if you go around Africa, and it costs Y dollars to go through the Gulf of Aden (including insurance costs) with some variance in the amount of the ransom to pay pirates. Clearly, if ships still prefer the short route, for them X + Y < Z. This is typical arbitrage. If the cost to go through the Suez Canal (X) is close to Z, pirates will be left with nothing and the business will become unprofitable (they also deal with high risk) and eventually die. On the other hand, money will get to the right hands. This is true, that if the cost to go through the Suez Canal rises, the rest of the world will feel the difference from the oil price to consumer goods.

The other solution is to increase uncertainty and costs for pirates. While it will be hard to raise costs, more needs to be done to increase risk for them. Right now they have just established a stock market to mitigate risks.

One amusing fact from the article I mentioned. Pirates prefer US dollars, not euros.

Categories: economics
  1. Alexander Glazkov
    January 25, 2010 at 00:45

    I have to take my suggestion back based on a recently published paper at arxiv.org mapping the global cargo shipping network. http://bit.ly/7yxOfd

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