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Economic Revitalization

Written by Frank Pobutkiewicz

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December 16, 2019


Economic Revitalization


For the past ten to fifteen years, the Nauruan economy has been in serious trouble. The island’s only major natural resource has been phosphate, which results from thousands of years of bird dropping accumulations. Large-scale agriculture is impractical, and as a result Nauru is forced to import most of its necessities, including food and water. The government derives most of its revenue from the continued small- scale mining of phosphate, the licensing of fishing rights in the country’s largely unfished commercial zone, a bed tax at the country’s two hotels, airport landing/takeoff fees, and taxes on items such as cigarettes and sugary foods. There is no income tax in Nauru. However, these sources of revenue are far outstripped by the government’s expenditures; as a result, the country is dependent on foreign aid, mostly from Australia (the currency used on Nauru is the Australian dollar), in order to maintain basic services.36 

The major economic concern facing the country is the extraordinarily high rate of unemployment on the island. Estimates of unemployment range as high as 90%; of the 10% that are employed, it is believed that 95% are employed by the government. As a result, the primary industries on the island are public administration, transport, and education. Phosphate mining is also a (relatively) big employer in Nauru, but current mining operations are now only a tiny fraction of what they were at the peak of phosphate mining. Banking is also a small, yet notable industry in Nauru, a vestige from the 1990s and early 2000s when Nauru was an offshore banking center. Tourism is not a major industry like on other Pacific islands such as Fiji or French Polynesia, primarily due to the fact that there are only two hotels on the island, and environmental devastation caused by phosphate mining has left little to see on the island; however, there are sites left over from World War II that are of some historical significance. 

The Nauru Phosphate Royalties Trust 

The Nauru Phosphate Royalties Trust is the government-owned and managed sovereign wealth fund created in the 1970s to manage Nauru’s phosphate mining profits. The Trust is managed by the Minister for the Nauru Phosphate Royalties Trust, a Cabinet position currently held by Marcus Stephen.  

During the late 1970s and early 1980s it was projected that Nauru’s phosphate reserves would be completely mined by around the year 2000. As a result, the government established the Nauru Phosphate Royalties Trust, which would reinvest profits from phosphate mining and give the island a steady source of income once the phosphate reserves were exhausted. At the height of Nauru’s economic success during the 1980s, the government-owned Nauru Phosphate Corporation had revenues of approximately AUD $110 million; government expenditures averaged AUD $30 million a year, which meant that AUD $80 million was being invested into the Royalty Trust per year. At its peak, the Trust had a value of AUD $1 billion, and owned properties and business investments across the Pacific, which included: 

  • The Grand Pacific Hotel in Fiji 
  • Paradeep Phosphate in India 
  • The Auckland Sheraton and Roturua Sheraton Hotels in New Zealand 
  • Philippines Phosphate & Fertilizers and the Manila Pacific Star Hotel in the Philippines 
  • The Pacific House (Washington), Nauru Hotel (Hawaii), Singer Building Development (Texas), and Hillside Property (Oregon) in the United States 
  • The Pacific Star Hotel in Guam 
  • The Mercure Hotel and the Nauru House skyscraper in Australia 

However, in the 1990s the fund went through a series of poor investments. Among the failed investments included financing 1993’s Leonardo the Musical, which was a failure; a loan to the Fitzroy Football Club, which went into liquidation; and the purchase of the Carlton and United Breweries and the Queen Victoria Village commercial district in Melbourne, Australia, which were sold and repossessed, respectively, undeveloped. 

Additionally, during the height of Nauru’s economic success, government expenditures began to grow out of control, due in part to profligate spending by the government, including, for example, subsidization of the government-owned airline Air Nauru which ran a large network of scheduled flights across the Pacific that often operated with few or no passengers, as well overseas trips by government officials that included wasteful trips such as golf outings to the Bahamas. The resulting budget deficits caused the government to seek out commercial loans. Once large-scale phosphate mining ended, the government found itself unable to meet its loan obligations, and was forced to sell off trust assets or have trust assets pledged to the loans repossessed. The Trust’s assets in Australia, considered the “crown jewel” of the Trust at its height, were sold in 2004; the only remaining Boeing 737 of Air Nauru was repossessed in 2006 – it took a year before scheduled flights were reestablished after Air Nauru reorganized into Our Airline, with financial assistance from Taiwan to purchase a used Boeing 737.37 

Mismanagement and poor investment of Trust assets and the government’s need to dip into the trust to pay its loan obligations have decimated the Trust’s value, which is believed to currently be only a tenth of its former value.38 

Attempts at Economic Diversification 

As Nauru’s phosphate reserves dried up during the 1990s and into the 2000s Nauru supported the rise of several industries in an attempt to revitalize the country’s economy. Among them have included the fostering of an offshore banking industry in the late 1990s, and the operation of a refugee detention center on behalf of Australia during the 2000s. 

In the late 1990s and early 2000s, the government of Nauru encouraged the formation of an offshore banking industry. However, organized crime syndicates, particularly from Russia, who used Nauru’s lax banking rules to set up institutions with which they could launder money, quickly corrupted the industry. Nauru’s lax banking rules also allowed it to become a tax haven for wealthy individuals.39 

At the height of Nauru’s financial industry, it was possible to open a bank in Nauru for approximately USD $50,000 – no questions asked. Reportedly, the government was also selling Nauruan passports for a fee in the tens of thousands of dollars. However, the turn of the millennium and the events of September 11th saw a renewed international effort to crack down on the sources of funding and money laundering for terrorists and organized crime. Under pressure from Australia, New Zealand, and the United States, Nauru ultimately began enacting much tighter banking laws, which caused both illegal money and legal tax haven money to flee the island. 

The next industry that sprung up on the island was the operation of refugee detention centers as part of Australia’s “Pacific Solution”. In 2001, Australia opened up a number of refugee detention centers on islands across the Pacific. Australian authorities interdicted refugees (including those from Vietnam, Myanmar, Sri Lanka, and even as far away as Afghanistan, Iran, and Iraq) attempting to enter Australia by sea before they reached Australia, and transported to detention centers, including one on Nauru, where they would be held while their refugee status was determined and the Australian government would decide to either permit the refugees to enter Australia or deport them back to their home countries. 

Although the Australian government was largely responsible for operating the detention center in Nauru, in exchange for hosting the facility the Nauruan government received millions of dollars in compensation from Australia. In total, close to 1500 asylum seekers were detained in Nauru. However, the program was not without detractors. The Nauruan government closed the centers off from international observers. International human rights watchdog groups criticized the detention centers, for it would often take years for detainees to have their asylum applications processed, while Australia paid millions of dollars to detain said refugees off of the Australian mainland. There were also other allegations of human rights abuses in the Nauru detention center.40 

Due to the increasing criticism of the program, Australia shut down the Pacific Solution in 2008. Refugees became an issue in the 2010 Australian Parliamentary elections and subsequent premiership election crisis, with Liberal Party leader Tony Abbott even going so far as to pledge the reopening of the detention center in Nauru and attempting to open negotiations with the Nauruan government (while Nauru suffers its own leadership crisis). However, Julia Gillard, who ultimately won the premiership, is currently exploring the idea of opening of a refugee detention center in East Timor.41 

Proposals for Economic Revitalization 

At the current time, there are very few prospects for turning around the Nauruan economy. With almost no natural resources, any industry Nauru seeks to develop will almost certainly have to be a service industry, which carries with it difficulties in market entry – without an established industry Nauru will have to aggressively price in order to seize market share, and furthermore building an industry from the ground up, even a service industry, will likely require millions of dollars of investment (millions of dollars that Nauru does not readily have available).

In recent years small-scale phosphate mining has resumed, with the government claiming that at a slow rate of mining, the secondary reserves may last as long as 30 years, although such an estimate is understandably likely highly optimistic.42 There is also exploration of the seabed around the island for precious metals, although nothing has been discovered as of yet. Presently, Australia is proposing to provide development aid to help Nauru foster a regional ship repair industry, to provide a center for repair and refurbishment of fishing or shipping vessels that are in fishing zones or on shipping lanes in the middle of the South Pacific. The benefit to pursuing the development of this industry is the likely easy availability of development funding from Australia, which could be provided in the form of grants as opposed to loans. 

The Parliament could also consider developing a tourism industry in Nauru. The island has comparatively untouched fishing stock, and also has a number of historical sites left over from World War II. However, the country has much to do before it can promote itself as a tourist destination. The relatively small Menen Hotel is the only hotel of any significance on the island, not to mention that the infrastructure of the island is in great need of upgrade, including the island’s airport, roads, electricity grid, and desalination plant. There is also the issue of the environmental devastation caused by the strip mining of phosphate, the repair of which may actually be impossible to fully achieve, and in any case will cost tens if not hundreds of millions of dollars to attempt to repair. 

The government could also examine the possibility of restarting a financial industry in Nauru, albeit one far less likely to be corrupted by criminals. The financial industry can be highly profitable, with potentially lower investment requirements than other proposed industries. However, the draw of the more famous banking and finance industries are the country’s laws that permit banks to provide the security and privacy that the most sought-after clients want. But in recent years, even banking and finance havens such as Switzerland have been passing tougher banking laws in response to international pressure. Given Nauru’s history in the financial industry, any attempt to liberalize the country’s banking laws will likely draw rebuke and pressure from the international community. Should the Parliament decide to go down this path, it must consider how to foster a viable offshore industry while placating international partners who wish to prevent a return to Nauru’s old corrupt financial industry. 

There are virtually a myriad of industries Nauru could choose to develop. The government is not limited to choosing only one industry but is instead limited only by the availability of development funds, which is obviously one of the primary limiting factors in considering plans to revitalize the economy. The Parliament should not feel constrained in considering industries to develop.

Questions to Consider 

1) Where could or should Nauru get funding or developmental aid? The United Nations? The World Bank? Loans from other countries? Private loans? Tap the remainder of the Nauru Phosphate Royalties Trust? 

2) If the government has to leverage national assets in order to fund development, what can it do to prepare for the possibility that its plan may fail, leaving the country with no way to pay back its loans? 

3) What are the options the Parliament could consider in working with its South Pacific neighbors to pool resources and create an economic development plan that could benefit the whole region?

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