How the World's Richest Country Lost 90% of its GDP

Summary

The Republic of Nauru, once the richest country per capita, offers a cautionary tale of economic mismanagement. After discovering phosphate ore, the island experienced a boom, only to face a bust as resources dwindled. The nation's failure to diversify led to dependence on phosphate mining, which devastated the environment and left Nauru in economic turmoil. Today, Nauru relies on refugee detention centers and foreign aid, highlighting the importance of sustainable economic strategies.

Takeaways

• 🗺️ Nauru, located in the South Pacific, is the third smallest nation in the world by land area.
• 🌱 The island's economy initially thrived due to the discovery of high-grade phosphate ore, which was primarily used in fertilizers.
• 🔎 The phosphate wealth led to a boom period where Nauru became the richest country per capita globally, surpassing the US in the 1980s.
• 💸 Despite its wealth, Nauru faced economic mismanagement, leading to a rapid depletion of its phosphate reserves and subsequent economic decline.
• 🏥 Health issues, including an obesity epidemic, arose due to the wealth-driven lifestyle changes and poor food choices.
• 🏙️ The island's environment was severely degraded by phosphate mining, making traditional agriculture nearly impossible.
• 💼 Nauru attempted to diversify its economy through offshore banking, which later faced international scrutiny and was shut down.
• 💡 The country's leaders also tried to establish a sovereign wealth fund, but it was poorly managed, leading to significant losses.
• 📉 After the phosphate reserves were depleted, Nauru's GDP plummeted, and unemployment rates soared.
• 🏛️ In recent years, Nauru has relied on running offshore detention centers and receiving foreign aid, primarily from Australia, to sustain its economy.

Q & A

What is Nauru known for being the third smallest?

Nauru is the third smallest nation in the world in terms of land mass, only larger than Monaco and Vatican City.

What natural resource wealth did Nauru possess that led to its economic boom?

Nauru possessed high-grade phosphate ore, which is a valuable resource used primarily in fertilizers, cosmetics, and animal fodder.

How did the phosphate mining impact Nauru's landscape and environment?

Decades of phosphate mining destroyed much of Nauru's natural landscape, leaving it with a barren and degraded environment.

What was the economic situation of Nauru after achieving independence?

After independence, Nauru's economy was heavily reliant on phosphate exports, and the country had lost one third of its land to the mines.

Why did Nauru become the richest country in the world at one point?

Nauru became the richest country in the world due to the high demand and value of its phosphate exports, which led to a high GDP per capita.

What health crisis emerged in Nauru as a result of increased wealth and poor food choices?

Nauru faced an obesity epidemic, with high consumption of junk food and a decline in traditional healthy diets, leading to poor health outcomes.

How did Nauru's offshore banking industry contribute to its economic issues?

Nauru's offshore banking industry was initially successful but was associated with money laundering and tax evasion, leading to international pressure and the eventual collapse of the industry.

What was the role of the sovereign wealth fund in Nauru's economic decline?

Nauru's sovereign wealth fund was intended to invest the phosphate wealth for future generations, but it was poorly managed with risky investments and fraud, leading to significant losses.

Why did Nauru establish a detention center for refugees, and what was the impact on its economy?

Nauru established a detention center for refugees as part of the 'Pacific Solution' by Australia, which paid Nauru for keeping immigrants away from Australian shores. This provided a source of revenue and employment for the island.

How does the script summarize Nauru's economic situation today?

Today, Nauru's main industry is operating refugee detention centers, and its economy is kept afloat primarily by foreign aid, mainly from Australia.

Outlines

00:00

🏝️ The Rise and Fall of Nauru's Economy

Nauru, the third smallest nation in the world, experienced a dramatic economic boom and bust due to its phosphate resources. Initially discovered by the British and later colonized by Germany, the island's phosphate reserves were a valuable commodity used in fertilizers and other products. After World War I, Australia took control and continued mining, which led to environmental degradation. Nauru achieved independence in the 1960s, but its economy was heavily reliant on phosphate exports. Despite briefly becoming the richest country per capita, mismanagement and depletion of resources led to an economic collapse. The country's small size, limited population, and lack of diversification contributed to its vulnerability.

05:00

💸 Nauru's Wealth and Its Aftermath

During the phosphate mining boom, Nauru's GDP per capita reached unprecedented heights, surpassing that of the United States. However, this wealth led to a lifestyle of luxury and poor health choices, resulting in an obesity epidemic. The country's health crisis was exacerbated by a shift from traditional diets to processed foods, partly due to the environmental damage caused by mining. Nauru's leaders attempted to diversify the economy through offshore banking, which initially brought success but eventually led to international scrutiny and the cessation of the practice. The country also established a sovereign wealth fund, but poor investment decisions and fraud led to significant losses. By the early 2000s, Nauru's phosphate reserves were depleted, and the economy was in shambles.

10:02

📉 Nauru's Economic Downturn and Current State

After the phosphate reserves were exhausted, Nauru faced severe economic challenges, including bankruptcy and high unemployment. The country's attempts to secure financial stability included investing in a failed musical and operating a national airline. Nauru has since relied on foreign aid, primarily from Australia, and hosting offshore detention centers for asylum seekers as its main sources of revenue. These measures have kept the economy afloat but have not fostered sustainable growth or industry development. The country's current main industry is the operation of refugee detention centers, which, while profitable, does not contribute to long-term economic resilience. Nauru's economic story serves as a cautionary tale about the pitfalls of over-reliance on a single resource and the importance of economic diversification.

Keywords

💡Nauru

Nauru is a small island country located in the South Pacific Ocean. It is the third smallest nation in the world by area and was once the richest country per capita due to its phosphate mining industry. The video script discusses how Nauru's economy rose and fell dramatically, serving as a case study in economic booms and busts. The country's history, from its discovery to its economic highs and lows, is central to the video's exploration of resource management and economic sustainability.

💡Natural Resource Curse

The term 'Natural Resource Curse' refers to the paradox that countries with an abundance of natural resources often experience slower economic growth and other socio-economic and political problems when compared to countries with fewer natural resources. In the context of the video, Nauru's vast phosphate reserves initially led to wealth but eventually resulted in economic decline due to over-reliance on this single resource without diversification or sustainable management.

💡Phosphate Mining

Phosphate mining is the process of extracting phosphate rock from the ground. Phosphate is a crucial ingredient in fertilizers, cosmetics, and animal feed. The video script highlights how Nauru's phosphate deposits were a significant source of wealth, leading to a boom in the 1970s and 80s. However, the mining also led to environmental degradation and an over-reliance on this non-renewable resource, which contributed to Nauru's economic challenges.

💡Dutch Disease

Dutch Disease is an economic phenomenon where a sudden influx of foreign currency, often from the export of natural resources, causes the currency to appreciate, making other industries less competitive. In the video, Nauru's phosphate mining led to an economic boom, which in turn led to Dutch Disease, as the focus on mining made other industries less viable, and the economy became overly dependent on phosphate exports.

💡Offshore Banking

Offshore banking refers to banking activities conducted in jurisdictions with low tax rates and light regulation. In the video, Nauru attempted to diversify its economy by offering offshore banking services, which initially brought in significant revenue. However, the lack of regulation led to Nauru becoming a hub for money laundering and tax evasion, which ultimately resulted in the industry's collapse under international pressure.

💡Sovereign Wealth Fund

A Sovereign Wealth Fund is a state-owned investment fund that invests in real and financial assets. The video discusses how Nauru attempted to create a sovereign wealth fund by investing its phosphate earnings abroad. Unfortunately, poor investment decisions and fraud led to significant losses, contributing to the country's economic decline.

💡Economic Diversification

Economic diversification is the process of developing a variety of industries within an economy to reduce reliance on a single sector. The video script uses Nauru as an example of what can happen when a country fails to diversify its economy. Despite phosphate mining's initial success, Nauru's lack of diversification left it vulnerable when the phosphate reserves were depleted.

💡Obesity Epidemic

An obesity epidemic refers to a widespread and rapid increase in the number of people with obesity within a population. The video script describes how Nauru's wealth from phosphate mining led to a surge in junk food consumption and a subsequent obesity epidemic, which had severe health and economic consequences for the country.

💡Refugee Detention Centers

Refugee detention centers are facilities where asylum seekers are held while their claims for refugee status are processed. In the video, Nauru's economic struggles led the country to establish detention centers for refugees and migrants as part of Australia's 'Pacific Solution.' This controversial arrangement provided a source of income for Nauru but has been criticized for human rights concerns.

💡Economic Collapse

Economic collapse refers to a rapid and severe decline in a country's economic output and financial stability. The video script details how Nauru's economy collapsed after the phosphate reserves were depleted, leading to high unemployment, a decline in living standards, and the bankruptcy of the central bank.

💡GDP Per Capita

GDP per capita is a measure of a country's economic output per person, calculated by dividing the country's GDP by its population. The video uses Nauru's high GDP per capita during the phosphate boom to illustrate its status as one of the richest countries in the world at that time. However, it also points out the limitations of GDP per capita as a measure of well-being, given the subsequent economic and social challenges Nauru faced.

Highlights

Nauru is the third smallest nation in the world, with a land mass of just eight square miles and a population of around 11,000.

Nauru experienced an extreme economic downturn, going from rags-to-riches and back again.

Natural resource wealth, if not managed correctly, can lead to the 'natural resource curse', as seen in Nauru's case.

Nauru's economy was heavily dependent on phosphate mining, a resource derived from accumulated seabird excrement.

Germany was the first to exploit Nauru's phosphate resources, followed by Australia during World War I.

Decades of mining destroyed much of Nauru's natural landscape, leaving it with a 'ghastly tract of land'.

Japan's invasion during World War II brought terror to Nauru, including forced labor camps and mass drownings.

Post-independence, Nauru's economy was entirely dependent on phosphate exports, leading to overexploitation.

Nauru became the richest country in the world on a per capita basis in the 1980s, with a GDP per capita of $27,000.

Wealth led to an obesity epidemic in Nauru, with poor food choices and a reliance on imported, processed foods.

Nauru's attempts at economic diversification, such as offshore banking, were plagued with issues like money laundering and fraud.

Nauru's sovereign wealth fund investments were largely unsuccessful, leading to financial losses and bankruptcy.

The collapse of the phosphate industry left Nauru with a severely diminished GDP and high unemployment rates.

Nauru's current main industry is operating refugee detention centers, funded by foreign aid, primarily from Australia.

Nauru's economic growth has been driven by the detention centers and foreign aid, with an average annualized growth rate of 7%.

Nauru's economic stability and confidence have been negatively impacted by its history of mishandling phosphate wealth and controversial policies.

Transcripts

- [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.