The Republic of Nauru, formerly known as Pleasant Island, is a remote, 8.1 square mile island nation that is located in the Micronesian archipelago. Approximately 200 miles East of Kiribati, the island was originally settled around 1000 BC by the Micronesian and Polynesian people. They remained isolated on the island for nearly 3000 years until in the late 1700’s a British whaling ship, captained by John Fearn, discovered the island and gave it its original name, Pleasant Island. It wouldn’t be until 1888 that the island would see its next visitors when Germany annexed the island nation, as part of the Marshall Islands. This allowed easy access for European nations, particularly with the discovery of Phosphate in 1900. It was only six years later that the British corporation, the Pacific Phosphate Company began to mine the reserves, with permission from the Germans. Following World War l, the island was captured by Australian troops and placed under the jurisdiction of the newly founded League of Nations.
The emergence into the global economy led to major social changes for the Nauruan people. Not only did they encounter European traders who introduced them to guns, gin, pigs, and other European goods, they also began to break down the traditional system of tribal organization, familial structures, and traditional customs that had characterized the Micronesians for thousands of years. This is partially resultant of the clash between native ways and a neoliberal social space but also was motivated by the German/British bureaucratic system that had begun to govern the island.
The mining was clearly the key source of wealth on the island. Contractually, the British and Pacific Phosphate Corporations were legally entitled to give the Nauruans a certain percentage of the wealth gained from the Phosphate. While they certainly received a good deal of wealth in the neoliberal sense of the word, traditional Micronesian conventions of wealth were sorely lacking. Much of the arable land on the island was destroyed, leaving only ancient coral pinnacles, where the Phosphate once was. Naura’s wealth of beauty had gone away, in favor of resource exploitation for purposes of the agricultural industries. Worse off, it was discovered nearly 40 years later, that the British Phosphate Commission was not giving the Nauruans the share of the profit that was originally promised in the Nauru Island Agreement.
The Pacific Phosphate Company continued mining on the island for the next several decades, when in 1952, the Nauruans, fed up with the control that the British had over the island, formed the Nauru Local Government Council, as a way to seek representation in the governance of the island. Seeking sovereignty from the restrictive Nauru Island Agreement, the Nauruans became self-governing in 1966 and finally achieved complete independence in 1968. During this time period, they were able to purchase the Phosphate rights from the British Phosphate Company that owned them at the time, leading to the formation of the Nauru Phosphate Corporation. The wealth gained from the mines gave Nauruans the highest GDP per capita in the Pacific.
This abundance of wealth was promised not to last. Not only was Phosphate quickly running out, the Nauru Phosphate Corporation was placing a percentage of the earnings from the mines in the Nauru Phosphate Royalties Trust. This trust placed money into a supposedly low-risk real estate portfolio, with the intent that it would provide long-term income after Phosphate reserves were depleted. The management fees for the trust were exceedingly high and the abundance of wealth lead to excessive spending by the Nauru government. In fact, at one point the government employed over 15% of the island and top-level officials spending far beyond the allocated budgets. This lead to several large international bailouts, though the Phosphate reserves eventually became depleted, at which point the government realized they wouldn’t be able to pay back the nearly $200 million in their deficit.
Today, things aren’t much better. In fact, they are far worse then they were back when the deficits reached their peak. The nation has a 90% unemployment rate and WHO estimates that 94.5% of Nauruans are obese, resulting from the diet switch from island and ocean based fish and vegetables to imported process foods. In order to make up for the lack of income, the Australian government set up the Nauru Regional Processing Center, an offshore immigration detention facility. This particular facility houses refugees rom the Middle East, East Africa, and other unstable places of origin. Since its founding, the Center has faced numerous reports of human rights abuses, in addition to criticism for its lack of media access. Most significantly however, the Phosphate is so depleted that it is useless as a major resource to support the economy. Without any source of regular income, the future of Nauru is bleak.
There are multiple economic theories to explain the phenomenon that has occurred on Nauru however, they can all largely be reduced down to property rights and how best to allocate and manage them. For the majority of its life span, the Nauru Phosphate industry allocated the majority of its property rights to the Western nations i.e. Germany, UK, Australia, and New Zealand that controlled the industry. For them, the social cost of complete exploitation of the Phosphate was little to none. For the Nauruans, the social cost of the high rate of Phosphate extraction was irreparably damaging. Unfortunately, the property rights were allocated to the Western nations whose present discount rate was low relative to the future utility of the Phosphate for the Nauruans. This made the marginal benefit of exploitation high, as they knew that when the Phosphate ran out, they could pack up and leave. The Nauruans should have seen a high marginal cost for high levels of exploitation in the present however, because they lacked any substantive rights over the Phosphate, there was little they could do. Thus, on a macro-level, the Western nations were unable to see the social costs of the Phosphate extraction because it didn’t interact with their own well-being.
Understanding the issue of property rights, the question now becomes the underlying issues regarding how the firm treats the private and social costs. In the case of Nauru, the Laissez Faire attitude of the British and German governments and their jurisdiction over the firms source of the problem. Without intervention, the firms focus on the private costs of Phosphate extraction rather than the social costs. This means that with no consideration to the production of negative externalities, the marginal cost of production was far lower under the Laissez-Faire system, while the marginal benefit remained the same for the Western nations. Lacking any incentive to internalize the externalities, the rate of exploitation was such that long-run scarcity of Phosphate and more importantly, the Nauru economy, was never an issue to be considered.
If firms only incur the private costs of production rather than the social costs, how are we to establish a pricing system to solve for the externalities related to the extraction of Phosphate. Traditional theories would dictate that we should assign property rights to one party and under the assumption of zero transaction costs, the two parties will bargain down until they reach an optimum point of property right allocation. Things change however when you consider just how finite the Phosphate is on Nauru. Though not formally measured, the degree of scarcity of the Phosphate means that the marginal benefit of extraction is low while the marginal costs are high. Thus, the optimal rate of exploitation precludes the possibility of a worth-while long-run investment in Phosphate mining, given the substantial negative externalities that have occurred
due to lack of consideration of the present social costs of Phosphate extraction.
We have lead ourselves to the point of questioning not how to create a pricing system for Phosphate on Nauru but instead whether the marginal benefits outweigh the marginal costs for Phosphate extraction. Given the current status of the island as one of complete disrepair, we can safely conclude that the costs have indeed outweighed the benefits. The current state of dependency on Western nations is not just exemplary of the historical failures of capitalism on developing nations but also shows the failure of consideration to long-run scarcity. Though you won’t find a copy of the Communist Manifesto on my book shelf, Nauru certainly is an instance in which the drive for material expansion led to the inevitable collapse of the capitalist system due to unchecked economic growth.
Works Cited:
Clark, Colin, W, et al. “The Optimal Exploitation of Renewable Resource Stocks: Problems of Irreversible Investment.” Econometrica, vol. 47, no. 1, Jan. 1979, pp. 25-47. JSTOR.
Coase, Ronald H. “The Problem of Social Cost.” The Journal of Law and Economics, vol. 3, no. 1, Oct. 1960, pp. 1-44. JSTOR
Doherty, Ben. “A short history of Nauru, Australia’s dumping ground for refugees.” The Guardian UK, 9 Aug. 2016.
Hardin, Garrett. “The Tragedy of Commons.” Science, vol. 162, no. 3859, 13 Dec. 1968, pp. 1243-1248.
Pollock, Nancy J. “Nauru Phosphate History and the Resource Curse Narrative.” Journal de la Society Société des Océanistes, vol. 168, no. 2, Jan. 2014, pp. 107-120. Cairn International.
Reports of the United Nations Visiting Mission to the Trust Territories of Nauru, New Guinea, and the Pacific Islands, 1959. United Nations. 1959
Very interesting and detailed piece!