The Economic Impacts of Piracy
According to Anderson 1995, Piracy is the act of attacking a sea vessel to steal cargo as well as other valuable properties. The people who engage in piracy are pirates. The pirates use a dedicated ship known as pirate ships. In the 14th century, the earliest instance of piracy was documented when ocean raiders attacked ships in the Mediterranean civilizations. The existence of Narrow channels that funnel sea vessels into predictable routes has created opportunities for piracy. Examples of geographic structures that have facilitated pirate attacks include the Gulf of Aden and the Strait of Malacca. According to a 2004 report, In the 21st century, seaborne piracy caused losses of over $16 billion. The international waters between the Red Sea and the Indian Ocean, off the Somali Coast, are a hotbed for piracy. Singapore and the Strait of Malacca are also notorious for piracy activities. The present-day pirate is armed with automatic weapons that include assault rifles, machine guns, and rocket-propelled grenades. The pirates use motorboats to attack and commandeer boats. The tactic exploits the small number of crew members on the modern cargo vessels. Mother ships are used to supply the smaller motorboats. The international community is unable to bring the modern pirate to justice. The pirates use international waters to perpetrate the attacks. The following paper explores the economic impact of piracy.
Over the past years, hundreds of seafarers have met their untimely deaths through the hands of pirates. Others have been injured, assaulted, and taken hostage. Some of the attacks limited to Nigerian and Somali waters have extended eastwards across the Indian Ocean. Each day piracy is escalating. There are attacks in Somalia, the Red Sea as well as the Gulf of Aden. Besides, the stakes are getting higher. Pirates are demanding Ransoms of up to $9.5 million. Seafarers are directly affected by piracy problems. Mostly, seafarers transiting the Gulf of Aden are at higher risk of attacks. When pirates take over a ship, the crew are subjected to stress either through direct attacks or being taken, hostage.
This study found it hard to establish the operational details of pirates. First, pirates are criminal organizations and can’t make the details of their operations known to the public. Altogether, there are still a few credible sources that have details of how pirates operate. This study will make use of research by Bahadur (2011). In his study, he interviews people he claims are associated with pirates in Somalia between 2009. According to his interviews, pirates in Somalia are opportunists who hijack vulnerable vessels. Once they identify a potential target, the pirates follow the vessel until they capture it. The pirate crew split into several skiffs. They approach the target ship from all angles. The pirates would then use rope ladders to board the ship. The crew barely resist boarding. Based on Bahadur, the success rate of pirates is 20-30 percent. Once the pirates seize the ship, they steer it to a pirate-controlled port. Once the ship dock, guards and translators board the ship, and ransom negotiation commences. Ransom is managed by insurance companies. Once an agreement is reached upon, the money is delivered using a drop off the parachute and split among the pirates.
The Economic Impacts of Piracy
According to Besley, Fetzer & Mueller (2012), for every $120 million seized by Pirates off the coast of Somalia, the end consumer is charged $0.9 extra while the shipping industry loses $3.3 billion annually. The funds are enough to employ over one million Somalis for a year. For centuries, piracy activities have become a threat to trade at sea. The present-day pirates are organized bandits who thrive in areas that law and order are weak. Piracy has repercussions for worldwide trade. For example, attacks by Somali pirates threaten the petroleum industry in the region. Countries such as Bahrain, Iran, Saudi Arabia, and Yemen provide energy to the world. According to Kraska & Wilson (2009), more than 3.3 million barrels of oil transits through the Gulf of Aden. It represents 4% of the world’s daily production. Approximately 12% of the oil is transported by water across the globe. Based on a report by IMB, more than 91 tankers were attacked in 2008. For example, an attack on the Saudi supertanker Sirius Star translated to a loss of US $47,000 per day. The ship was held for ten days. Thus, Sirius Star lost $470,000. The impacts of piracy affect the maritime industry. Ports, terminals, cargo owners, and seafarers are also affected. For instance, in an effort to deter pirate attacks along the Gulf of Aden, ship owners are altering their fleets to new trading routes such as the Cape of Good Hope. As more ships avoid the area, it impacts on cargo delivery times. The market is placed out of balance, and freight rates are increased.
In countries such as Somalia where piracy has flourished, shipping of products is impossible. Piracy affects the shipping of commercial and humanitarian assistance. For this reason, essential commodities in Somalia are scarce, prompting an increase in their prices. Delivery of humanitarian assistance might also be delayed due to piracy. More than 3.2 million Somalians depend on relief food. International shipping plays a critical role in the supply of these commodities. MV Maersk Alabama is a perfect example of ships contracted to supply food assistance by the World Food Program. Based on a report by the International Expert Group on Piracy off the Somali Coast 2008, the economy of Somalia had been affected by piracy. The group also designated Somalia as a danger zone for international shipping. Piracy activities deter overseas business investors from shipping their products to Somalia. It also denies the country’s port revenues. Communities that depend on the port revenues for their livelihood are also affected.
Piracy affects local fishing economies. According to IMO, pirates attack tuna vessels all year round. For example, in 2009, pirates attacked tuna vessels at least three times. The vessels were shipping 650-800 kilometers beyond Somali territorial waters. When one of the ships was captured, the pirates demanded a ransom of US $1 million. Piracy has prompted vessels to avoid some of the richest fishing grounds in the Indian Ocean. Therefore, countries such as Seychelles and Mauritius could face economic depression. Countries such as Seychelles depend on tourism and fishing for economic survival. Pirates' activities along the Indian ocean are a threat to both. It is argued that the total cost of piracy in Seychelles stood at 4 percent of the country’s GDP. The threat of piracy has deterred cruise ships, which contribute to tourism in Seychelles and Mauritius. Piracy has also affected the Cruise Ship industry in countries such as Kenya and Tanzania. Fishing is the second non-oil export sector in Nigeria. Pirate attacks on the fishing trawlers in Nigeria means that the country will lose US $600 million in export earnings.
On the other hand, the escalating incidences of piracy in the Gulf of Aden are changing the maritime insurance landscape. Piracy has affected insurance premiums and coverage. For instance, Ships that pass through the Gulf of Aden as well as the Suez Canal, must purchase war risk insurance cover. According to a report by the UNCTAD, the insurance premiums for ships have risen from 0.05% to 0.175% of the value of the cargo. The premiums for kidnaps have increased by 1000 percent. The additional charges are passed on to consumers in an attempt by shipping companies to recoup their losses. As a result of piracy, ships are avoiding the Suez Canal and taking longer routes. One of the world’s shipping lines, Moller Maersk, has routed more than 50 oil tankers to the cape of good hope. Taking a long way is expensive and time-consuming.
Piracy has affected the maritime industry. As a result of piracy activities, billions of dollars are lost annually. Countries such as Somalia are denied the shipment of humanitarian assistance due to piracy activities. Ships are forced to take routes that are longer to avoid capture by pirates. Countries such as Seychelles, Kenya, and Mauritius will lose revenues because cruise ships cannot dock to their coasts. The fishing industry in countries such as Nigeria will continue experiencing losses unless something is done to deter pirates from perpetrating attacks on Tuna Vessels. Finally, the international community should join forces and deploy naval ships along the Gulf of Aden and Suez Canal, where piracy flourishes.
- Anderson, John L. 1995. “Piracy and world history: An economic perspective on maritime predation'. Journal of World History: 175-199.
- Bahadur, J. (2011). Deadly Waters: the hidden world of Somalia's pirates. Scribe Publications.
- Besley, T., Fetzer, T., & Mueller, H. (2012). One kind of lawlessness: Estimating the welfare cost of Somali piracy.
- Gabriel, O., Bivbere, G., & Ugwuadu, I. (2008). Renewed piracy attacks: fish scarcity looms, Nigeria may lose $600 m export earnings. Retrieved July 22, 2019.
- Kraska, J., & Wilson, B. (2009). The pirates of the gulf of aden: the coalition is the strategy. Stan. J. Int'l L., 45, 243.
- UNCTAD (2009). Review of Maritime Transport