Dr Anja Shortland is a Reader in Political Economy at King’s College London.

Anja, your work explores private governance in the most diverse settings– from Somali pirate ships and terrorist organizations to the luxury art trade and banking. What are the main lessons you’ve learned from these case studies about how human beings govern themselves? 

Growing up in a wealthy Western Democracy, I assumed that markets work because governments regulate, monitor and enforce contracts. But many markets work surprisingly well without public intervention. There are thriving financial and telecommunication services in Somalia, there is a roaring trade in recreational drugs, counterfeits, and smuggled luxury goods, and the market for fine art is racing from record to record. Clearly, markets can operate in the complete absence of a state, in opposition to the state, under the radar, and in the shadow of the law. Instead of the state, private governance specialists provide order and enforce contracts. Looking at these markets in detail, I show that there is an explicit market for governance. Often governance providers have monopoly power, so ordering markets can be very profitable. When there is a gap in governance provision and potentially lucrative trades regularly fail because of this, we see a hugely creative process as people with different ideas and capabilities rush to fill it.

Focusing on your latest work on kidnap for ransom, why have ransoms escalated and why do so many hostages die at the hand of terrorists?

In Kidnap for Ransom there are two markets. The first is for “criminal” kidnaps. Here, paying a ransom is legal and so is insuring it. This has created a market for the governance of the hostage trade. Private insurers order and stabilise these transactions – with the help of a whole host of governance specialists who prevent kidnapping, negotiate reasonable ransoms, facilitate payments and safely retrieve hostages. This is done very quietly and effectively. More than 97% of insured hostages return home safely. And the ransoms are bartered down to such an extent that they don’t inspire copycat acts in the wider region. This makes kidnap insurable – and profitable to insure.

In the second market – for “terrorist” hostages – all these specialists are sidelined because it is illegal to fund terrorism through ransom payments. But, unfortunately, this does not prevent governments from negotiating. Public officials make decisions in a completely different institutional framework and with massively higher budgets. Terrorist organisations have exploited the absence of effective governance to drive up ransoms.

Does the same logic apply to Somali piracy?

Yes, Somali piracy has existed for centuries. As long as the owners of hijacked ships were poor, or well-informed enough to avoid the quick payment of premium ransoms, piracy did not really pay. So, pirate attacks were rare. Everyone had insurance, the insurers’ specialists resolved the few arising cases safely and cheaply and the shipping industry (and maritime insurers) lived well with the status quo. Somali piracy only escalated after the payment of a few premium ransoms by impatient ship-owners and inexperienced governments rushing for quick but expensive resolutions. With millions at stake, piracy became a wonderfully profitable business and attacks rose exponentially… Only a massive public/private investment in maritime security changed that calculation – but at a huge cost to consumers and tax-payers.

Is there such a thing as “good governance”? 

As far as the markets I am studying are concerned, “good governance” is whatever makes the market work. There is a competitive market for governance. If someone can solve a problem cheaper or more reliably – i.e. provide better governance – then they get to do more business. But of course – “good governance” is a very odd concept in some of the markets I am looking at. Private governance in the market for hostages is “good” if live hostages are returned safely for the minimum ransom the kidnappers will settle for. But it still means that criminals or terrorists get a payment, which is unlikely to go to charity… Likewise, if an oil or mining company has an effective protection contract with a rebel movement and profitably exploits natural resources, that does not necessarily mean that the rebels generally provide “good governance”, or that the local population benefits from the economic activity. A lot of the extra-legal governance I study has violence or a credible threat of violence at its heart.

You have an unusual interdisciplinary background in economics and engineering. Has your engineering expertise informed your political economy investigations? 

As an interdisciplinary researcher, I can use a range of unusual data sources and communicate with a broad range of scholars. There are usually no comprehensive or reliable statistics on the topics and areas I study. But for example, I was able to use nightlight emissions as a proxy for economic activity in my study of the Somali war economy. The pattern of lights clearly showed that there were interest groups that benefitted from the ongoing violence in South Central Somalia. I have used image analysis and change detection in a range of applications. I am not an expert, but often I spot an interesting method in a different discipline and can usually convince people to co-author with me across disciplinary boundaries.

Why is economics a good lens through which to understand governance? 

Private governance tends to be very complex. I see great specialisation of firms and individuals, operating in intricate polycentric networks, such as those studied by the Ostroms. Documenting how these governance architectures operate and how they change in response to new challenges is exciting. Many illegal trades are conducted under huge psychological pressure and many decision makers have limited formal education. Yet, I find that rational choice theory is a surprisingly robust tool to analyse economic exchanges and institutional design in the extra-legal realm. If we find that certain types of trades regularly fail – for example terrorists murdering hostages – we must ask whether there is a perverse incentive and “murder pays”. Unfortunately, some governments react nervously to hostage deaths and raise their ransom offers rather than imposing a penalty for torture and murder. If you can raise the financial return on a portfolio of hostages by killing some of them, the political cost-benefit analysis becomes less relevant.

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