The economics of Somalian pirate gangs

Jay Bahadur has a fascinating piece in the Financial Times on the economics of Somalian pirate gangs.   Based on interviews with members of a pirate gang, led by a person called “Computer”, Jay has pieced together an organisation and C&B structure for Somalian pirates.  The legend of “Computer” is straight from Bollywood:

The organisation’s commander-in-chief and lone financial backer, according to Hersi, was a local businessman from Garowe. “His name is Abdulkhadar,” Hersi said, “but everyone calls him ‘Computer’.”

Once a police lieutenant in Mogadishu, Computer returned to Puntland in the wake of the civil war in 1991, where he gained a local reputation as a psychic. Disturbed by his claims, a group of Sufis – Muslim holy men – confronted him. “Only God can see the future, not people like you,” they said. “If you’re a psychic, prove it to us.”

To test him, they bundled some money and buried it in the desert, far outside Garowe. “Now go find it, if you can,” they told him. As spectators looked on, Computer made a beeline into the bush, right to the spot where the Sufis had hidden their treasure. Combining their ascetic mysticism with a dubious understanding of the capabilities of modern technology, the Sufis reached a startling conclusion. “This man knows everything,” they proclaimed. “He is a computer.”

Computer, however, is an armchair guy.  Delegating on-field ops to his # 2 Loyanne – 30 yrs old (2nd oldest), veteran of 3 campaigns and capable of communicating with the crew in English.  Loyanne apparently gets no rest between campaigns.  Sounds familiar – done three projects, good communication skills – hmmm…

More on the organisation structure.  Note the division of labour and the use of incentives

Like most Somali pirate gangs, the Victoria outfit was organised into “attackers” – those who carry out the hijacking – and “holders” , or guards taken on board to watch over the ship once it had arrived in Eyl

“The first one to jump on the ship, his name was Abdi,” said Hersi. “Computer bought him a $15,000 Land Cruiser as a gift.” The bestowing of such gifts – the pirate equivalent of performance-linked bonuses – is commonplace across many pirate groups, and Land Cruisers are a typical choice. It is likely a necessary incentive to encourage understandably hesitant men to climb up several feet of hull on a flimsy ladder while carrying out the seaborne equivalent of a high-speed chase.

How much did they make?  Ah, well that depends on who you are in the hierarchy. This is what Jay put together:

Any surprises?  Guys at the top make all the money.

The figures debunk the myth that piracy turns the average Somali teenager into a millionaire overnight. Those at the bottom of the pyramid barely made what is considered a living wage in the western world.

Even the higher payout earned by the attackers seems much less appealing when one considers the risks involved: the moment he stepped into a pirate skiff, an attacker accepted a 1-2 per cent chance of being killed, a 0.5-1 per cent chance of being wounded and a 5-6 per cent chance of being captured and jailed abroad.

As in any pyramid scheme, the clear winner was the man on the top. After subtracting the operating expenses of $230,000 that the group incurred during the Victoria’s captivity in Eyl, Computer’s return on investment would have been an enviable 1,600 per cent.

Many similarities with the economics of drug runners, so wonderfully described by Sudhir Venkatesh and Steven Levitt.  (TED talk here, and the full research publication here)

Some notable features on the whole pirate business:

• “Hero” leader – “Computer knows everything” – who acts as a financier and doesn’t put his neck on the line
• Communication skills are critical, not just with the team, but with the hijacked crew.  A gun-battle doesn’t really help anybody
• Division of labour: People who get on board and acquire business, people who hold the status quo
• Incentives for the door opener
• Larger share of profits to the attackers, differential treatment within the organisation.  General acceptance that it is their right to be different
• People at the bottom of the pyramid and “status quo people” get pretty much nothing except the risks – a bad economic trade-off, unless you have aspirations to get to the top

I’m sure we can all find at least one organisation each that looks similar!