THE ECONOMICS OF "FLAGGING OUT

Abstract

Flagging-out ? the change of a vessel's registry from a national flag to a flag of convenience ? has become a widespread phenomenon, and now afflicts the merchant fleets of more or less all traditional maritime nations. From a little below 4 per cent in 1948, the share of world tonnage under flags of convenience has increased to 18.1 per cent in 1970, 31.9 per cent in 1980 and 29.1 per cent in 1983 (Commission of the European Communities, 1985). The small decrease in the early 1980s is due to the scrapping of tankers after the depression in the oil transport market, and is mainly in ships registered under the Liberian flag (Kindleberger, 1985). The percentage under flags of convenience of tonnage owned by European Community countries is below the world average, but varies considerably between member states, as Table 1 indicates. Greece, which already has a high share in the flag of convenience sector, is experiencing a new wave of flagging-out (Lloyds List, 2 June 1986). The existence of flags of convenience creates a distinct type of dualism in the international maritime transport industry. The market is split into two distinct segments (or sectors) operating under different labour costs and different con ditions for efficiency. The first sector, to be called the established flag sector, comprises tonnage under registries of the traditional maritime nations. The second sector of this dual market, to be referred to as the flag of convenience sector, consists of vessels operating under open registry systems. The two sectors are differentiated in crew costs, labour quality, management costs and tax liabilities. Before we see how these differences affect the choice of the shipowner between an open and a national flag registry, it is essential to examine how they arise in the first instance.

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