Research by Tim Besley, Thiemo Fetzer and Hannes Mueller, presented at the Royal Economic Society’s 2013 annual conference indicates that for every $120 million seized by pirates operating off the coast of Somalia, the cost to the shipping industry and their customers is as high as $3.3 billion. This money is enough to employ well over a million Somalis for a whole year.
The study looks at the effect of pirate attacks on shipping costs, focusing on shipping routes whose shortest path takes them through regions where pirates are known to operate. It finds that the increase in attacks in 2008 led to an increase in shipping costs of around 8%. These extra costs are mostly due to the increased security measures that are needed to repel pirate attacks and risk premiums paid to crew and insurance.
The study develops a model to compare this cost to the shipping industry through pirate attacks to a tax on shipping that would finance the same transfer of funds to pirates. This allows the authors to calculate the ‘welfare loss’ caused by piracy. The main estimate suggests that for every $120 million extorted by pirates, the resource costs incurred by the industry are between $0.9 and $3.3 billion.
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Source: Amanda Wilman, RES Office