The Economics of Illegal Fishing

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The Economics of Illegal Fishing Incentives for
Investment in IUU Fishing Capacity
Aaron Hatcher University of Portsmouth, UK
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Is IUU fishing likely to be driven by a
spillover of excess capacity from regulated
(EEZ) fisheries?
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Focus of the paper
FAO definition of IUU as Illegal, Unreported
and Unregulated is inclusive Focus on
vessels with no access rights, operating outside
any normal regulatory environment, e.g., FONC
vessels in international waters In the
absence of management, fishing effort is (only)
determined by market forces, e.g, the supply of
fishing capacity
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What do we mean by capacity?
Capacity is a measure of output, not capital
stock Fishery managers generally use
capacity to refer to physical capital and its
output All else equal (technology, prices,
etc.), physical capital and (unconstrained)
output are closely related Capacity
physical capital
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Analysis of the question
Consider investment in IUU fishing as a normal
investment decision The decision to invest
depends upon (expected) benefits and
costs Assume, e.g., no non-pecuniary
motivation against (or for) illegal fishing
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A simple investment model
at t 0, where total operating costs ct are
given by
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where the cost categories are denoted r normal
running costs (fuel, ice, etc.) c crew
costs m routine maintenance costs (repairs,
safety equipment) a administrative costs
(registration, insurance, etc.) p permit and
quota (management) costs
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The total expected return (ER) is
where CT is the value of the capacity at time T
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Taking account of the inherent riskiness of
investing in fishing, the value of fishing
capacity is given by ER less a risk premium R
C0 is equivalent to the willingness to pay
(WTP) for an investment in capacity K In a
perfect market at equilibrium, C0 will be the
(purchase) cost of capacity K For those
already in the fishery, C0 is the opportunity
cost of capacity K
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Benefits and costs of IUU fishing
high-value species, therefore high revenues if
there is access to markets? running costs
fuel, ice, etc., at normal prices? crew costs
mostly low cost labour? maintenance lower
(weak flag requirements)? administrative costs
lower (weak flag requirements)? management
costs zero?
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Benefits and costs of IUU fishing
Revenues the same or higher than in a legal
fishery? Operating costs the same or lower
than in a legal fishery? Assume the end value
of capacity is independent of its mode of
use Difference in WTP for legal and IUU
capacity depends on costly enforcement
events an excess risk premium RE
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Expected returns from IUU fishing are only
lower than in a similar legal fishery if RE is
high If expected returns are high, WTP for
capacity is high Unless RE is high, IUU
investors WTP for capacity will match normal
market prices availability of cheap
capacity is not necessary for investments in IUU
fishing
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C0
Cost of capacity
DN
DS
SN
SS 1
SS 2
K1
K2
0
K
Quantity of capacity
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IUU capacity demand and supply scenario 1
Secondhand capacity prices are not determined
by demand from IUU investors (why?) Demand for
capacity by IUU investors is price
inelastic Availability of cheap capacity has
only marginal impact on total IUU capacity
but delivers a windfall gain to IUU operators
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C0
Cost of capacity
SN
SS 1
DS
SS 2
K1
K2
0
K
Quantity of capacity
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IUU capacity demand and supply scenario 2
Secondhand capacity prices might be determined
(in part) by demand from IUU investors Demand
for capacity by IUU investors is price
elastic Availability of cheap capacity has a
significant impact on total IUU capacity
and so is a key driver of IUU fishing
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Conclusions
Available evidence suggests that IUU fishing is
profitable A spillover effect from
overcapacity in regulated fisheries is
unlikely Key to reducing profitability of IUU
fishing is increased likelihood of costly
enforcement events and/or denial of access to
markets Only then would cheap capacity be a
significant driver of IUU fishing