Free Markets and Somali Pirates – Qualitative Aspects of Economic Growth

According to Reuters, a new stock exchange is at the center of booming economic growth in the Somalian coastal town of Haradheere. Lack of government interference in the region has allowed a highly profitable piracy sector to appear as an engine of economic development, turning the former fishing village into a bustling boomtown. A local ex-pirate named Mohammed, tells Reuters that “Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said.”The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

The mention of weapons is of particular interest. Although Somalia is a one of the poorest countries in the world, it is awash with weapons – and these weapons are often the by far most valuable assets many Somalians possess. Through the piracy exchange, poor Somalians can make a return on these assets – without raiding their own countryside. For example, the Reuters article mentions a young woman who invested a rocket-propelled grenade launcher she received in alimony when she divorced her ex-husband – and made a $75 000 return on that investment in a little over a month. In a strange way, piracy is contributing to capital flows from rich to poor countries, as well as increased internal stability in Somalia.

The exchange also claims to be attracting foreign investments – FDI, if you will – in particular from the Somalian diaspora community. This is ironic. If true, it is not unlikely that western governments such as that of my native Norway indirectly are contributing to piracy financing through a.o. welfare payments – while at the same time paying for naval forces to fight the same very same pirates that are attracting investments.

The economic growth surrounding the Somalian piracy sector is extremely interesting for several reasons. Firstly, it is an example of how self-organizing economic systems coupled with rapid economic growth can appear under conditions of extreme laissez-faire in a basically ungoverned area. With little “external” interference, quasi-free markets allow productive resources to efficiently flow to sectors where returns are highest, and institutional mechanisms – such as the Haradheere stock exchange – “spontaneously” develop to grease the wheels of economic growth.

The Somalian Piracy sector is also interesting because it shows so clearly that the kind of growth described above can be – qualitatively speaking – utterly perverted and hollow. In particular, it can be totally unrelated to production. In the case of the pirates mentioned here, the high returns on investment and the resulting economic growth is actually a result of sabotage of production.

These qualitative features are obvious in the Somalian case because they are so extreme. However, there is little reason to believe that economic growth fueled by piracy is the only type which may be qualitatively undesirable. Speculative housing bubbles, for instance, come to mind. Perhaps qualitative aspects of economic growth should be paid more attention to in general, both in rich and poor countries.