- [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.
