The Tortuga Disease: The Perverse Effects of Illicit Foreign Capital

Transnational crime brings substantial foreign capital into a number of fragile and developing states. Yet the economic and political impacts of such capital have rarely been studied, due to the challenges of obtaining accurate data on illicit activities. We overcome this challenge by compiling a dataset on the amount and disbursement dates of ransom payments made by ship owners and insurers to Somali pirates from 2005 to 2012, along with sub-national commodity prices and trade flows in Somalia. Using a difference-in-differences strategy, we find that ransoms have effects similar to those associated with the Dutch Disease. These effects include appreciating the local currency, decreasing export competitiveness, and increasing import dependence. Our results illuminate a new and distinct channel through which illicit capital can undermine long-term economic development and foster an economic and political dependency on illicit sectors.