Pirates Give World Markets a Lesson in EconomicsCommentary by Matthew Lynn
Dec. 2 The hijackings of a Saudi Arabian oil tanker and a Yemeni cargo ship by Somali pirates last month would seem to have little to do with the financial crisis.
In fact, the pirates aren’t so different from the bankers who caused the credit crunch and put the global economy on edge.
The pirates only want money, just like the bankers.
They don’t like regulation, just like the bankers.
And they hold the world to ransom, just like the bankers.
Piracy is a serious matter. The world’s most important shipping lanes are faced with virtual closure. Ships and sailors can’t be expected to travel through waters where they are likely to be taken hostage.
The last thing the world needs right now is a threat that slows down world trade even further. Nor can it afford to see an increase in the cost of insuring vessels and freight rates.
And yet, we also must understand that piracy is an economic problem, just like the credit crunch. Political and military solutions alone won’t fix it.
It is turning into a major headache for global trade. The capture of the Saudi tanker Sirius Star on Nov. 15 with a cargo worth an estimated $100 million was the most dramatic example so far of the range and ambition of the pirates. It highlighted a growing threat: At least 581 crew members were taken hostage from January to September this year, compared with 172 in the same period last year, according to the International Maritime Bureau.
Brute Force
The world’s oceans are too big to be effectively policed by overstretched military forces. European naval ships of the 18th and 19th centuries may have successfully defeated earlier generations of pirates, but only by using brute force. It is hard to believe that in the 21st century we will feel comfortable with U.S., Japanese or Russian warships sailing around capturing and executing pirates or raiding their bases.
“There are 2.2 million square miles of sea to police,” says Liam Morrissey, a partner at London-based consulting firm BGN Risk. “It is very hard to protect all of it.”
Ships can always have security guards on board, though they aren’t trained fighters. They are watchmen. Their main job is to call the police, who can usually be there in minutes. At sea, it could take days for naval help to arrive. We can’t expect every vessel to have a platoon of soldiers on board. The costs would be prohibitive.
It isn’t hard to understand the economics of how the pirates operate. Capturing a ship poses no great challenge. They are lightly crewed, and the sailors can hardly be expected to get into gunfights with armed pirates. If the cargo is worth, say, $100 million, it makes sense to pay $10 million in ransom to get it back. It would be madness to refuse. For the pirates, it is a pretty easy living.
Protection Money
At the moment, we seem to be approaching the worst of all possible worlds. Shipping companies either avoid the African coastline. Or else they agree to pay what amounts to protection money for safe passage. Neither is satisfactory in the long term. Over time, the pirates will just grow stronger, the attacks will cover a wider area, and the ransom demands will get even bigger.
The reality is that piracy can’t be fixed at sea. It needs to be fixed on land.
It is the existence of failed states such as Somalia that is allowing piracy to flourish. The pirates need somewhere to launch attacks. They need a base for the ships. They need somewhere to live, and a way of processing ransom payments.
No Government
Any stable government would have cracked down on the pirates operating from its shores, yet Somalia doesn’t have a functioning government. Its gross domestic product per capita is just $600, according to the U.S. Central Intelligence Agency. Life expectancy is less than 50 years. It has “no permanent national government,” according to the CIA Factbook. Those are the conditions in which piracy flourishes.
For the last decade, developed nations have largely ignored the failed states of Africa and elsewhere. They have sent aid, and not worried about restoring proper government. The rise of modern-day pirates shows why that isn’t good enough. You can’t forget poverty and lawlessness in distant countries, imagining it doesn’t have an impact on you. Eventually, it will.
The developed nations need to come up with plans to rebuild the economies of countries such as Somalia, so that they can establish the rule of law. So far, there doesn’t appear to be any will to tackle either the pirates or the failed states in which they have their bases. Yet if we carry on ignoring it, the whole world economy will eventually suffer.
