Paying the Pirate's Price

Do the economics of piracy demand the privatization of the sea?

At the beginning of April, after a vessel was captured off the Somali coast, the military liberated the crew by storming the boat and killing two of the pirates. While the crew was saved, the ship's captain was killed in the attack, leaving behind a wife and a 3-year old son.

That's not the story you heard? That's because you're not French. While the story of the Maersk Alabama and the Navy SEAL operation that freed its captain were gripping American attention, the French were focused on the drama unfolding upon the Tanit, a 40-foot sailboat on an around-the-world voyage. When it became clear that negotiations for the crew's release had come to an impasse, French commandos moved in.

The French government had warned the skipper not to proceed into the Gulf of Aden, where piracy has increased dramatically during the last four years. But the captain chose to ignore the advice. He apparently was chasing a dream to drop out of commercial society and would not be dissuaded.

Most piracy, by contrast, stems from very material dreams, on the part of both the pirates and the plundered. All affected parties are looking to make a living and constantly calculating the most efficient means to do so.

While tourists occasionally have fallen victim to piracy, most hostages are crew members on commercial ships. This is no surprise. According to a 2008 RAND study, the main factor behind the re-emergence of old-style piracy has been a massive increase in commercial maritime traffic. Combined with the large number of ports around the world, this growth has provided pirates with a wide range of tempting, high-payoff targets. And as more seaborne commercial traffic passes through narrow and congested maritime chokepoints, the ships must reduce their speed to ensure safe passage, heightening their exposure to interception and attack.

No one has bested the 18th-century pirate Bartholomew Roberts' pithy summation of why piracy exists: "In an honest Service, there is thin Commons, low Wages, and hard Labour; in this, Plenty and Satiety, Pleasure and Ease, Liberty and Power; and who would not balance Creditor on this Side, when all the Hazard that is run for it, at worst, is only a sower Look or two at choaking. No, a merry Life and a short one shall be my Motto."

The time and place may have changed, but Roberts' reasoning still holds true. Like Roberts in the 18th century, Somali pirates have little to lose in the 21st. Their country is wracked by chaos and poverty. It is also adjacent to one of the most heavily traveled shipping lanes in the world; 20,000 ships a year pass through the Gulf of Aden. Ransoms for crews can be as high as $3 million. The International Maritime Bureau counted 111 pirate attacks off Somalia in 2008, a threefold increase over the previous year.

For Somalia, piracy is an economic boon, benefiting both the pirates and the economies of the areas in which they live. Somali pirates made an estimated $30 million to $150 million in ransom in 2008 alone. Through purchases of homes, cars, clothes, food, and other amenities, this money ends up boosting the regional economy as well. Just as certain Caribbean ports of call catered to the needs of 17th- and 18th-century pirates, so do certain spots in Somalia cater to the needs of contemporary pirates. The port of Eyl, the Tortuga of Somalia, is booming. It's even rumored to have restaurants dedicated to feeding hostages.

While it's pretty clear why some Somalis would become pirates, it might not be as obvious why shipping companies respond the way they do to the pirate threat. Despite increased piracy, the shippers seem to carry on heedless of the danger and without exploring alternative possibilities.

For instance, commercial ships don't have to go through the Gulf of Aden and around the Horn of Africa. They could avoid the area entirely by going round the Cape of Good Hope. But this route adds 20 days to the trip and brings on many new expenses, which are particularly problematic if competitors keep taking the old short cut.

Even in known pirate waters, commercial crews are rarely armed. Some say the reason is that the varying port laws make it difficult to carry weapons aboard ships. Others argue that pirates are more merciful to unarmed crews than they would be to those packing heat. There's some truth to both arguments, but the chief rationale for remaining unarmed appears to be more economic than legal.

Overall, the International Maritime Bureau estimates the cost of piracy to the shipping industry to be anywhere from $1 billion to $16 billion per year. That is hardly prohibitive when measured against the annual value of maritime commerce, which in 2005 (the most recent year for which we have reliable figures) totaled $7.8 trillion.

Interestingly, as piracy has become more profitable in recent years, its overall lethality has dropped. That too makes economic sense. George Mason University economist Peter Leeson, author of The Invisible Hook: The Hidden Economics of Piracy, explains in an email: "Since wantonly brutalizing captives would have undermined their ability to make profits, 18th-century pirates typically refrained from doing so. Some crews went as far as to enshrine rules prohibiting prisoner mistreatment in their articles. The Somali pirates seem to have realized the benefits of such rules for their bottom line as well. At least one Somali pirate 'code' regulating the treatment of prisoners has been found, and several Somali pirates have claimed that it's a universal rule among them not to harm innocent sailors they overtake."

So while piracy may be on the rise, it still falls under the standard costs of doing business that have existed since man first started shipping goods by water. The world's navies have effectively been tasked with protecting cargo and rescuing crew members.

But should the world's navies be responsible for protecting shipping? It's not clear they even can. As Michael Mullen, the chairman of the Joint Chiefs of Staff, told Good Morning America in April, "There are actually 16 nations who have naval vessels out there, and it is a tough area. It's a tough problem. It's a big area, over 1.1 million square miles, four times the size of the state of Texas. And it's a going business for the pirates."

There are deeper reasons why companies should secure their own ships. After all, their boats, their crews, and their profits are at stake.

In an ideal world, we would leave protection up to the owner of the water in question. But today no one really owns the waters where pirates operate. And if no one owns them, no one protects them. Usually governments exercise an implicit ownership of the waters off their coast, but the absence of credible government in Somalia bars that possibility. What's more, today's pirates also operate far from any coasts, in water that nobody claims.

If possible, it would be productive to find ways to privatize those pirate-infested seas. There are obvious difficulties, though not insurmountable ones, in the Somali case, where there's no central government capable of conducting an auction. The alternative, a bottom-up homesteading approach, might end up granting the waters to the pirates themselves, but the best way to pacify the pirates may be to allow them formal ownership rights. In the long run, privately controlled waters would generate new solutions to the piracy problems. Former pirates, for example, could serve as escorts to commercial ships, not unlike the way retired hackers often emerge as computer security consultants.

No matter what solution emerges, shipping companies, not taxpayers, would bear the costs of their own protection. That in itself is enough reason to start thinking creatively about privatization.

Veronique De Rugy is a senior research fellow at the Mercatus Center at George Mason University.