THE PRICE OF MODERN MARITIME PIRACY

Abstract

A growing body of literature has recently focused on the economic origins and consequences of modern maritime piracy and on the perception that the international community has failed to control it. This paper aims to investigate maritime transport costs as one of the channels through which modern maritime piracy could have a major impact on the global economy. A transport-cost equation is estimated using a newly released data-set on maritime transport costs from the Organization for Economic Cooperation and Development together with data on maritime piracy from the International Maritime Bureau. Our results show that maritime piracy significantly increases trade costs between Europe and Asia.

Keywords:

• Maritime piracy
• Transport costs
• Maritime trade
• Panel data

JEL Classification:

• F51

Acknowledgments

The financial support from the Spanish Ministry of Science and Technology is gratefully acknowledged (ECO 2010-15863) by Inmaculada Martínez-Zarzoso.

Notes

¹The most important shipping companies, CMA-CGM, MSC, and Maersk have announced in 2009 they would divert some of their lines through the Cape route (Port Strategy, 2009). The Indian shipping association has declared that depending on the size, the war risk premium for merchant vessels sailing in the Indian Ocean has risen from $500 per ship and per voyage to as much as $150,000 per ship and per voyage (Financial Express, 2011). Shipping companies such as Interoient Line Services have considered hiring private security service companies, costing US$60,000 per trip (Miller, 2008).

²See Ploch et al. (2010) for more information on the problems linked to insurance, notably the fact that US ship-owners do not have to insure themselves against the risk of war.

³Hastings (2009) reports anecdotal evidence suggesting that may be the case in the Malacca Strait.

⁴According to the iceberg transport cost assumption, some of the goods to be delivered are consumed by the very act of transporting.

⁵We also used alternative variables, namely road infrastructure and a linear shipping connectivity index as proxies for infrastructure. The results concerning our target variable remained unchanged and are available upon request from the authors.

⁶For the European Union, the maritime transport cost database considers the EU15 as a single emitter of data. Data for Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, and Slovenia are also available. The Asian countries in our data-set are Bangladesh, China, Indonesia, India, Japan, South Korea, Malaysia, The Philippines, Singapore, Thailand, and Vietnam. Australia was added to this group.

⁷Attempted attacks were also originally considered, but the variable was not statistically significant and as a result is not included in the final estimations.

⁸The authors thank an anonymous referee for this suggestion. Similar results obtained with the variable lagged one period are available upon request.

⁹These results are available upon request from the authors.

¹⁰The successful attack on the Sirius Star, a new launch Saudi Arabian super tanker, made headlines for several weeks in 2008. It is still the largest ship captured by Somali pirates to date.

¹¹The authors thank an anonymous referee for this suggestion.

¹²Our transport cost data are only available for the period (1999–2007), whereas the operation Atlanta started in 2008.