- [Narrator] This is the Republic of Nauru.
With a land mass of just eight square miles
and a little under 11,000 inhabitants,
it is the third smallest nation in the world,
behind only Monaco and Vatican City.
But what it lacks in size,
it more than makes up for
in economic lessons,
because this small little island in the South Pacific
was home to the most extreme downturn, ever.
In the past, we've talked a lot
about how natural resources can have a huge impact
on many countries' economies.
Think of the immense oil wealth
enjoyed by many of the Persian Gulf states.
But when not managed correctly,
natural resource wealth
can sometimes do more harm than good in the long run,
which is why many economists even go so far
as to speak of the natural resource curse.
This tiny Pacific Island nation
is perhaps the best single case study
of what can go wrong.
The country went from rags-to-riches,
only to go back to somehow being worse
than it started before it struck it rich.
The lesson of Nauru is one
that all economists can learn from
because it is one of the rare times in history
that we have been able
to clearly explore the economic mechanisms
that drive these booms and busts on such a clear scale.
So how did Nauru become the richest country in the world?
What mistakes did they make
that led to them squandering this wealth?
And finally, how did this tiny country
actually end up worse off in the long run?
Nauru was first discovered by Europeans in 1789,
when a British ship passed by a piece of land
covered with a green central plateau,
overgrown with swaying palms
and framed with white sand beaches.
The island's natural beauty
led the British to call it Pleasant Island.
A few decades later,
the first outsiders settled on Nauru,
which is just one third of the size of Manhattan.
Initially, the island's resources
were thought to just be coconuts and pigs.
Until a British geologist
discovered high-grade phosphate ore.
In simple words, the country didn't get oil rich.
Instead, the scientists found dried up bird poop and algae,
which was somehow more valuable
because it could be used mostly in fertilizers,
but also in cosmetics and animal fodder.
Around the turn of the 20th century,
when it was discovered,
80% of the Pleasant Island was rich in this mineral.
A treasure of accumulated seabird excrement,
mixed with marine microorganisms,
undiscovered up until that time.
It might sound disgusting,
but it was the key to feeding a growing global population
so it was extremely valuable.
Mining rights were quickly sold to Germany
who was the colonizer of Nauru at the time.
In the following years,
around 80 million metric tons
of this valuable substance
got exported from the tiny island,
as shipping ports, processing facilities
and supporting industries sprung up on a spit of land
barely bigger than Central Park,
Germany became busy fighting the first World War
during which time Australia seized the opportunity
and snatched Nauru for itself.
The island had, by this point,
just become an offshore mining site.
Phosphate was mostly sold at a subsidized rate,
which we here in Australia call mates rates,
to farmers in Australia, New Zealand, and Great Britain.
Unfortunately, by this time,
decades of mining had already destroyed
much of Nauru's natural landscape.
The top side of the island
was back then described
in National Geographic as "A ghastly tract of land."
Quite a nose dive from Pleasant Island.
From here on it gets even worse.
During World War II,
Japan invaded the island
and spread terror on Nauru,
including forced labor camps and mass drownings.
At the end of World War II,
only 600 Naurusians survived.
Once the war was over and Japan surrendered,
the island was once again handed back to the Australians
and their exploitation of the island's
stinky treasures continued.
In the years between 1945 and 1968,
phosphate mining activities
reached new record highs.
When the Naurusians finally achieved their independence,
nobody was forcing them to mine phosphate anymore
but by this point,
their entire economy
already revolved around exporting this natural resource.
Independent Nauru had lost
one third of its islands to the mines,
and the inhabitants lived around
to a, by now,
even ghastly attractive land,
a barren moon land.
All economies are limited
by the factors of production,
land, labor, and capital,
it's just in the case of Nauru
these limitations were extreme.
This island has a tiny population
that wasn't skilled in doing anything
other than digging smelly rocks outta the ground.
The size of their nation
and its isolated position in the world,
meant that many industries just weren't feasible.
And while phosphorous mining
had made the island a lot of money,
most of it at this point had been claimed by the nations
that held the island as their colony.
They didn't have the infrastructure
or expertise to develop any other industries,
so phosphate experts were further increased
to milk the cow whilst she was still alive.
They really had no way of competitively doing anything else.
It was already apparent
that the supply of phosphate
would run out within a lifespan or two
but that did not stop the Naurusians
from rightfully demanding their share of the pie.
This initiated an epoch of Nauru's history
where some called it
the wealthiest little island in the Pacific.
A little more than a decade after their independence,
Nauru became internationally hailed
as the single richest country in the world
on a per capita basis.
In 1981, they had a GDP per capita of $27,000.
which translates to $88,000 today.
For comparison, the US GDP per capita
was $14,000 at the time.
This means the average Nauruan was twice as rich
as the average American.
Of course, GDP per capita
is far from a perfect measure
of how well the average citizen is doing.
And if you wanna learn more about GDP,
check out this video on our second channel,
Economics Explained Essentials,
but GDP per capita is still
the easiest measure to compare economies against each other
and it gives us at least a crude approximation
of living standards.
With their abundant phosphate wealth
and political independence,
Nauru was finally doing quite well for itself.
Sports stars are told to retire at their peak of success
and many people in Nauru followed this advice.
After all, they could easily rely on free education
and healthcare by the government
and royalties from the phosphate earnings by landowners.
Many inhabitants were able to be unemployed by choice.
At the same time,
all sorts of crazy stories happened in Nauru.
Sports cars were the accessory to possess,
despite the country's small size.
You can drive around the entire perimeter of the island
at a leisurely pace in one hour,
hardly the ideal place for drag racing.
One police chief
decided to bring a Lamborghini to the island
only to realize he did not fit behind the wheel.
The reason he was unable to drive his new toy
was part of a looming health crisis on the island.
By 1980, an epidemiologist declared Nauru
to have an obesity epidemic.
The underlying factors were increased wealth
and poor food choices.
Junk food consumption skyrocketed,
and still in 2002,
the country was ranked the worst
of 170 nations by the World Health Organization,
in terms of average body mass index,
a Naurusian's life expectancy is only slightly above 60.
The healthy indigenous foods,
such as coconuts and fish,
got replaced by imported foods.
Another consequence of mining.
The poor health of the workforce
can have severe economic consequences as well.
Not fitting behind the wheel of your new Lamborghini
suddenly becomes a very small issue
considering the overall implications
of this obesity crisis.
Let's dive a little bit deeper
into the health situation of Nauru.
Back then and now.
Most meals consist of instant noodles, white rice,
anything out of a can, and soda.
Tobacco and binge drinking are also common.
Amy McLennan, an anthropologist
at the University of Oxford
commented on her stay with the words,
"I was lucky to find one vegetable a week."
Interestingly enough,
Naurusians are quite educated
and aware of the risks associated
with bad nutrition and obesity.
There is no lack of school programs
advocating proper nutrition.
Rather, the problem was a lack of access
to high quality food.
The decades of phosphate mining
destroyed the natural environment
to such a great extent
that the agricultural industry
became almost non-existent.
And, spoiler alert,
but the economic downturn after the phosphate ran out
meant that most Naurusians
could only afford cheap processed foods.
During the colonial days,
the Naurusian people only received a small fraction
of the wealth generated by the phosphate mining.
Given this background,
it was rather economic necessity
which prompted them to continue mining after independence,
rather than greed.
Having to import all goods,
including food and water,
is not a sustainable way of living.
Since all the attention went to phosphate mining,
nobody bothered to waste time
on manufacturing or agriculture.
For agriculture the land was too exploited anyway
after all the top soil got removed for mining activities.
This is just a classic case of Dutch disease,
but taken to an extreme degree
given the otherwise limited resources
of the Naurusian economy.
One strategy to avoid Dutch disease
is diversification of the economy.
This approach could be seen amongst middle-eastern nations
which try to diversify their economies actively.
You can learn more about this
in our recent video about the economies
of the Gulf States' big, dumb mega projects.
To what extent these projects will be successful
is still a matter of serious debate,
but at least they are trying.
The necessity to diversify was no news
to the country's leaders
and they did try to venture into different industries.
One was offshore banking,
resulting in licenses for roughly 400 foreign banks
at the beginning of the 1990s.
These Nauruan bank branches were initially a huge success
but the strategy behind the success
was, let's say, dubious at best.
Customers did not need to visit the island
to open a bank account.
With so-called economic citizenship,
one could could easily get a Naurusian passport
through which the country becomes a paradise
for money laundering and tax evasion.
The government earned millions through fees
but it was not the solution to fix Nauru's economy
after running out all of its phosphate treasure.
In 2005, Nauru stopped the offshore banking business
and it started requiring a physical presence
to obtain a bank license.
This was not due to a change of heart
but rather due to immense international pressure,
the US even categorizing Nauru
as a rogue state under the 2001 Patriot Act.
Now, another way to deal with Dutch disease,
is to take the Norwegian approach
which is to set up a sovereign wealth fund,
designed to invest the natural resource wealth
in a way that will generate dividends
for generations to come.
A lot of earnings from the phosphate boom
had been invested abroad,
meant for a time when their treasure would dwindle.
This is a great idea
that was unfortunately not implemented well at all.
Risky investments and plain old fraud
made the country lose a lot of its investments,
ultimately pushing Nauru to the verge of bankruptcy.
Not even the discovery of secondary phosphate deposits
and the subsequent second phosphate rush
changed the imminent economic collapse.
The country went so broke,
even the Central Bank went bankrupt.
Their overseas real estate assets were repossessed
and their airplanes were seized.
Oh yes, planes,
Nauru had launched a national airline in the 1970s.
There was, however,
one more glorious attempt to secure financial wellbeing.
Nauru infamously became
one of the biggest disasters
in the history of London Theater.
Nauru had earlier invested in Leonardo The Musical,
A Portrait of Love.
The musical depicted a fictional love triangle
between Da Vinci, Mona Lisa, and a soldier.
Needless to say,
the musical became a huge flop
at a time when Nauru
could not afford any kind of financial loss.
By 2001, they were completely out of phosphate
and their foreign investments
had almost all ended up in failure.
By this point, the country was completely broke
and had a poultry GDP of $32 million,
adjusted for inflation,
unemployment skyrocketed to 90%
and the school system mostly collapsed.
Just a reminder, we are talking about
the richest country in the world just years earlier.
Unfortunately, this is only the beginning
of one of the darker chapters
as a result of the economic misery Nauru faced
at the turn of the century.
In 2001, the large Norwegian freighter,
MV Tampa, wanted to dock in Australia.
Earlier, the crew rescued more than 400,
mostly Afghan, refugees from a sinking boat.
Australia refused the MV Tampa to enter Australian waters
and instead found the so-called Pacific solution,
an offshore detention camp on Nauru.
Australia paid Nauru for their efforts
of keeping immigrants away from their shores.
It also created employment for the island
and led to some bizarre situations.
Nauru was still in no position
to wave off millions of dollars in return for cooperation.
The client state was far too intertwined
with their large neighbor to refuse the new proposal.
Even the fierce hostility
of many Naurusians did not change this policy.
Over the past two decades,
Australia has employed Nauru's Detention Services
on and off, and they continue to house migrants to this day.
This along with foreign aid,
mostly from Australia,
has kept the island economy afloat.
Barely.
James Aingimea,
an old minister of the Nauru Congregational Church
was born in 1911
and practically saw it all, even the musical.
Aingimea lamented to a New York Times reporter saying,
"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 could eat fresh coconuts and breadfruit.
Now I see what's happened here and I want to cry."
Now it's time to put Nauru
on the Economics Explained national leaderboard.
Starting as always with size,
Nauru has a GDP of $133 million
making it the third smallest economy in the world,
ahead of Montserrat and Tuvalu, two other micro nations.
Based on its small size,
we can't give Nauru anything better than a one out of 10.
The small GDP is spread out across a small population
of a little over 10,000 citizens.
As of 2021, they had a GDP per capita of $12,000.
Putting it almost exactly in line
with the global average,
so, Nauru gets a five out of 10.
Stability and confidence has been negatively impacted
by the country's poor track record
of handling its phosphate wealth.
Their brief venture with unregulated banking
and their controversial policies
of providing outsourced detention centers.
Given this history,
we can only give Nauru a three out of 10.
Growth is perhaps the most interesting metric.
Growth was obviously very strong in the 1970s and 80s
as their phosphate exports allowed them
to become the richest country in the world.
But after running outta phosphate in the 1990s,
their GDP fell by more than 90%.
However, the economy has exhibited
strong growth since then,
growing in an average annualized rate of 7% per year.
The growth has been almost entirely driven
by the detention centers in foreign aid.
Nevertheless, 7% per year is incredibly impressive
no matter the circumstances.
So Nauru gets a score of nine out of 10.
And finally, industry.
Today Nauru's main industry
is outsource refugee detention centers.
While this remains a lucrative source
of revenue for the country,
it does not build the technological capabilities
needed to create more advanced industries down the line
should this singular revenue stream ever dry up.
Because of this,
Nauru gets a two out of 10.
Altogether, this gives Nauru
an average score of four out of 10,
which puts it down here
on the Economics Explained national leaderboard.
Thanks for watching, mate.
Bye.