By Sashank Rajaram
Starting with the inflationary impacts of the expansionary fiscal and monetary policy followed by the war in Ukraine, 2022 could be largely summarised into four words: war, recession, inflation, and energy crisis. And as we enter another year of uncertainty, fears – particularly those of a slowing global economy – seem unavoidable. As policymakers use their economic toolkit to cushion the economy, this article looks at Nauru—a country that did exactly what everybody is trying to avoid now.
The Republic of Nauru, situated in Micronesia, is the third smallest country in the world behind only Monaco and Vatican City. But what it lacks in size, Nauru makes up for with some important economic and management lessons. From being a resource-rich and wealthy nation, Nauru experienced one of the most devastating economic downturns that left the country scrambling for assistance. As the global economy trods towards a recession, this article aims to revisit the Nauru economic catastrophe through a historical lens and understand the rags to riches to rags story of Nauru.
Nauru was first discovered by Europeans in 1789 when a British ship passed by an island covered with a green central plateau and tall and lush coconut trees flanked by white sand beaches. The island’s natural beauty led the British to call it a ‘pleasant island’. Initially, the island’s resources were thought to be limited to coconuts and fish, until a British geologist discovered high-grade phosphate that could be used in fertilisers, cosmetics, and animal fodder. Around the turn of the 20th century when it was discovered that 80% of the island was rich in phosphate, the mining rights were promptly sold to Germany, the coloniser of Nauru. In the following years, around 80 million metric tonnes of phosphate were exported from the tiny island. Shipping ports, processing facilities, and supporting industries sprung up swiftly to aid the export process. As Germany became occupied during WWI, Australia quickly captured the island and claimed it as its own. By now, Nauru had become an offshore mining site where phosphate was sold at a subsidised rate to Australia, New Zealand, and Great Britain.
Unfortunately, decades of mining had already destroyed much of Nauru’s natural landscape with the topside of the island described in National Geographic as a ‘ghastly tract of land’.
After suffering from a Japanese invasion during WWII, Nauru was handed back to the Australians who continued to exploit the island’s remaining phosphate. Between 1945 and 1968, phosphate mining reached record highs, so when Nauru finally achieved independence, the island lost nearly a third of its area to mining. Ironically, even though it was evident that the natural resource would only last another lifespan or two, Nauru’s unskilled labour and inadequate infrastructure meant that mining phosphate was the only way forward to keep up the country’s economy. As a result, exports continued to rise and soon, Nauru was known as the ‘wealthiest island in the Pacific.’
The export boom resulted in Nauru enjoying a per capita income of $27,000 in 1981 against the USA’s $14,000 per capita income. With its abundant phosphate wealth and political independence, Nauru soon transformed into a retiree’s dream. Yet, as incomes improved, health deteriorated with Nauru becoming the most obese country in the world. The average Nauruan life expectancy was just over 60, as healthy indigenous foods such as coconuts and fish were replaced by imported foods.
Analysing the diet of an average Nauruan, one can notice that it consists of instant noodles, white rice, soda, tobacco, and beer. Amy McLennan, an anthropologist at the University of Oxford, commented ‘I was lucky to find one vegetable a week.’ Interestingly, the Nauruans were aware of the risks associated with poor nutrition and obesity. The problem, therefore, was a lack of access to high-quality food as decades of phosphate mining had destroyed the natural environment to such an extent that the agricultural industry became almost non-existent. Moreover, after independence, the Nauruan government believed that the only way to lift its people out of poverty was to continue mining whatever phosphate was left. As a result, little
attention was paid to manufacturing or agriculture.
However, realising the over-reliance on phosphate mining, the country did try to diversify its exports and ventured into offshore banking which resulted in giving licences to roughly 400 foreign banks at the beginning of the 1990s. Customers did not have to visit the island to open bank accounts here, and Nauru became a haven for money laundering and tax evasion as a result. Though the government earned millions through fees, it was not the solution to diversify its economy after the eventual depletion of phosphate. Nevertheless, in 2005, Nauru banned offshore banking and started requiring a physical presence to obtain a bank licence due to immense international pressure including from the US.
The government also tried to set up a Sovereign Wealth Fund designed to invest natural resource wealth in a way that will generate dividends in the future. Unfortunately, the scheme was not implemented properly such that risky investments and large-scale forgeries led to huge losses on investments, ultimately pushing Nauru to the verge of bankruptcy. Even the discovery of secondary phosphate deposits and the subsequent phosphate rush failed to change the imminent economic collapse. The central bank collapsed, and overseas real estate assets were seized. One disaster thing leads to another and that was exactly the case for Nauru. The island nation infamously became one of the biggest disasters in the history of London theatre. The country had earlier invested in Leonardo, The Musical: Portrait of Love—a musical that depicted a fictional love triangle between Da Vinci, Mona Lisa, and a soldier. The musical failed at the box office and Nauru’s economic woes deepened. By 2001, the country ran out of phosphate and their foreign investments had failed miserably. By this point, Nauru’s GDP was $32 million (adjusted for inflation) and unemployment skyrocketed to 90%.
Unfortunately, this was only the beginning of darker chapters of the economic misery faced at the turn of the century. In 2001, the local freighter MV Tampa – whose crew rescued more than 400 mostly Afghan refugees from a sinking boat – wanted to dock in Australia. However, they were refused access to Australian waters and instead found Nauru as an offshore detention camp. Following the economic collapse, Nauru was not in a position to wave off millions of dollars in return for housing immigrants. Nauru, therefore, continues to receive payments from Australia despite fierce opposition from some of its citizens to detention centres. This, along with foreign aid, has kept the island’s economy barely afloat.
James Aingimea, former Minister of the Nauru Congressional Church, lamented, “I wish we’d never discovered that phosphate. I wish Nauru could look like it was before when I was a boy, it was so beautiful. There were trees; it was green everywhere and we can eat fresh coconuts and breadfruit. Now, I see what’s happened here and I want to cry!”
The economic history of Nauru is interesting for the reason that the mismanagement of a country’s resources can have devastating consequences. Since the reasons for Nauru’s fall are well documented, it provides significant insights and lessons for leaders and policymakers from other countries regarding what not to do—something that is especially pertinent in 2023.
About the Author
Sashank Rajaram is a second-year student at Ashoka University, pursuing Economics and Finance.
Image Source: Sean Kelleher,https://www.britannica.com/place/Nauru