Need a strong counter to pirate economy

This article appeared originally  in Gulf News: link to original article

There is nothing new about piracy in terms of concept. Yet, everything is new in the ways that it is being done in this millennium.

This will probably change if it persisted as a business to extend its reach into new methods, new techniques, and onto a much wider scale. What caught my attention a couple of weeks ago is the increased mentioning of piracy in articles published in different online journals.

All based their findings on a paper published by the World Bank. The purpose of the paper, as well as the consequent articles, is to simply emphasise on how piracy and everything that is associated with it in any way has grown into its own economy, and how there are way too many people that piracy affects — and would affect — in future.

Before listing the problem and a possible solution, a few facts should be listed here:

* The total amount of ransom paid between 2005 and 2012, for 179 hijacked ships, amounted to $400 million.

* The pirates doing the day-to-day hard work receive an average of $30,000-75,000 per person. This is little considering the ransom and the few number of pirates per operation as these can be carried out by a couple of small fishing boats with four pirates on each.

Just like any business venture, the expeditions must be financed. These can be split into two: the first is a modest expedition that could be covered by whoever is participating, while a bigger expedition is the one that requires financing. The latter involves a couple of vessels, and so financing comes from anyone, literally, but banks and proper financial institutions.

And the reward can be anything between 30 per cent to 75 per cent of the ransom value. The cycle itself, or let’s say the pirate economy, works this way.

The investors have their cash as deposits or invested elsewhere outside of Somalia, and they use the cash or proceeds from their investments to finance the purchases of legitimate Somali importers. Once the goods are sold, Somali importers pay back the money to these investors, in Somalia, after which the money is used to finance the expeditions.

Once an expedition is carried out and is successful — once the ransom, basically insurance money, is received — everyone benefits. The pirates make a few months living, financiers make huge profits on their investments, and Somali merchants probably received a premium to facilitate the initial money laundering operations.

A study by the International Criminal Police Organisation, the UN Office on Drug and Crime and World Bank provides more insight into the entire scenario, listing key findings that implicitly describe the flow of money. After the money has been made, pirates spend part of the income fuelling consumption in the local community, buying mostly goods for daily use.

Financiers on the other hand use their rewards to either invest in Somalia itself by recycling the money internally — and I am not talking about infrastructure and public projects here — as well as building up on their existing investment portfolio abroad. One example of these is actually investments made in the “qat” (fresh leaves of Catha edulis shrub, which when masticated and chewed produced an affect similar to a mild drug and is highly addictive) trade in countries such as Kenya.

Here is the catch; pirates get “qat” allowances on each expedition which is then deducted from the money paid to pirates. In one way or another, it’s a win-win situation for financiers. And the tolerance towards such criminal acts in the local community is because these guys create jobs and provide a living, directly for pirates and indirectly in the local community.

People want to have secure jobs and steady salaries. If these are indeed available, financiers will find no one to carry on their risky endeavours. And this is the main direction that should be undertaken to ensure such activities will not take place in Somalian waters, or any other.

There are no more trends in piracy around the Horn of Africa; in fact there’s a decrease of 70 per cent from a few years back. A new observation states that it’s now happening on the other side of the continent, in the Gulf of Guinea. True or not, the solution will always remain within the parameters of fixing one’s economy that not only provides jobs but one capable of absorbing the increase in the numbers of job seekers, especially among the youth.

In cases like that of Somalia, a way forward is to push for micro-finance within different communities, supporting what people do best and would have a comparative advantage in producing. If piracy can fuel consumption, surely small businesses definitely can.

Now the last thought that I want to leave you with is this: why can’t the IMF establish an umbrella that sets up and oversees micro-finance funds?

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