An Economic Analysis of the Somali Pirate Business Model

Not much attention has been paid to the Somali pirates of late probably due to the lull in hijackings caused by the seasonal monsoon weather that is almost over.
Expect the lull to be over.


So I thought I will start the ball rolling with an insight into the Somali Pirate Economy:

It flourishes by exploiting the incentives that drive international maritime trade. The other parties involved — shippers, insurers, private security contractors, and numerous national navies — stand to gain more (or at least lose less) by tolerating it than by putting up a serious fight. As for the pirates, their escalating demands are a method of price discovery, a way of gauging how much the market will bear

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I think the market has tolerated the hijacking until last year when the pirates became more brazen and far-ranging.
Fun Fact: A low-ranking Somali pirate may earn up to 17 times more for one hijacking than the average Somali does in a year.

This article does a good job in describing why shipping companies are not routing their traffic via the Cape of Good Hope despite the possibility of having to pay a huge ransom for a captured ship.

The fact is, their ships and crews are getting released once the ransom is paid, and only 0.2% of ships travelling these waters are successfully attacked.

Like convenience-store clerks, crews are trained not to resist.

Taskforce Chief warns of hike in Piracy

MANAMA — The multinational anti-piracy force operating off the coast of Somalia warned on Monday of an increase in attacks when the monsoon season ends in the next few weeks. "The Combined Maritime Forces are warning mariners of an anticipated increase in piracy incidents when the southwest monsoon ends in the coming weeks, and are reiterating that merchant mariners must continue to take proactive action to help prevent piracy attacks," said the US Fifth Fleet based in Bahrain.

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I, for one, am very interested to see what this season will bring for the pirates. Will it be bounty, or will it be death?

Like any business, Somali piracy can be explained in purely economic terms. It flourishes by exploiting the incentives that drive international maritime trade.

That part made me laugh!

It sounds like these kids could have gone to Harvard Business School. I don't see how they are much different than Wall St. speculators or Goldman Sachs.

reply to post by kosmicjack


True, I am one of those people that believe that the average joe is being exploited by financial pirates every single day of our lives. The banks, multi-national corporations and government taxation policies are all a form of piracy - where we are forced to pay some form of compensation against our will and for reasons not always clear to us.

Taxation is necessary for a government to be able to run the basic function of government (police, army, infrastructure), however, I pay 30 to 40% of my income to the government, and I know I am not getting any return on my investment.
It's mostly a scam.