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Does
Size Matter?
Tuvalu and Nauru Compared
Helen Hughes * and Steven Gosarevski
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Tuvalu and Nauru
are both small Pacific states, but Nauru has been badly misgoverned,
argue Helen Hughes* and Steven Gosarevski
For the majority
of people in the Pacific living standards have stagnated since
independence. For some islanders they have even declined.
Pacific leaders have come to believe a litany of excuses for
this lack of progress. They claim that their countries are
too small, scattered over a vast ocean, mountainous, barely
above high tide, get too much or too little rain, are distant
from markets and lack resources. The multilateral agencies
that make a living out of giving aid to the Pacific endorse
this culture of excuses, arguing that aid will be needed for
a long time or forever. This has reinforced aid dependency
to the point where understanding of, and belief in, the economic
(and hence political) viability of the Pacific has been destroyed.
Yet the Pacific is so rich in natural resources—gardens,
orchards and fish—that early sailors deserted for lifestyles
of plenty and leisure unimaginable in the Europe or America
of that era. In modern times, the Pacific’s ‘rim
of fire’ minerals and hardwood timbers have become valuable
and the fall in freight costs has opened up large and growing
markets for coffee, tea, cocoa, palm oil, spices, fruits,
vegetables and flowers. With access to the internet and open
skies policies for low airfares, even the smallest islands
can translate palms soughing in soft breezes on pristine beaches
into tourist attractions.
All countries that now have high per capita income have had
to establish modern open societies with transparent legal
structures, secure policing and honest governments appropriate
in size to their needs. Pacific islanders want the education,
health, longevity, high income and consumer goods that modern
life offers. Instead of facing up to the policy reforms that
would deliver these benefits, however, Pacific leaders hide
behind tradition to avoid changes that would threaten their
privileges and ignore the lessons from countries that have
adopted policies that led to positive growth and development.
Botswana in sub-Saharan Africa has shown that traditional
tribal societies can grow strongly. In 1970 it had half of
Papua New Guinea’s per capita income; now it is three
times higher.1
Mauritius, a sugar producer with a similar ethnic heritage
to Fiji, used clothing exports and tourism to grow from half
of Fiji’s per capita income in 1970 to three times its
level by 2001. Small size did not prevent Norfolk Island,
with a population of 1,800 compared to Tuvalu’s 11,000
and Nauru’s 13,000 (of whom some 2,000 are foreign phosphate
workers), from enjoying a higher per capita income than Australia.2
W ithin the Pacific, states of similar size
have considerable differences as well as similarities. Tuvalu
and Nauru have roughly the same populations, but Tuvalu consists
of eight small island-villages scattered over a considerable
ocean area, whereas Nauru is one island, 21 square kilometers
in area. Both these island states have been saddled with swollen
political establishments. Tuvalu has a Governor-General representing
Queen Elizabeth, a Prime Minister, a Cabinet of five members
and 15 members of Parliament. Nauru has a President, a cabinet
of seven members and 18 members of Parliament. With almost
half the population under the respective voting ages of 18
and 20 years, this makes for about 350 voters per parliamentary
member in Tuvalu and 300 in Nauru. The costs of parliaments
and cabinets for such small states are thus ridiculously high.
These two states are the smallest members of the United Nations,
each with a vote equal to that of giants like the United States
or China. Each belongs to some 30 UN and other international
agencies and multilateral banks, and each has a representative
office in New York. But there the similarity ends. Tuvalu
is arguably the best governed territory in the Pacific. It
has appreciably raised living standards and at the same time
become fairly independent of ongoing aid. By contrast, Nauru’s
marine phosphate gave it the highest resource wealth per capita
in the Pacific, but it now claims to be bankrupt and is asking
Australia and other donors for more aid.
Tuvalu
Tuvalu’s small islands are densely populated. It is
more seriously constrained geographically than other Pacific
islands. Its coral atoll villages flood when high tides peak
so that that their very existence would be threatened if predictions
about global warming were to eventuate. Tuvalu’s leaders
have made a major issue of this possible danger, seeking drier
territory, possibly in Australia or New Zealand but also on
relatively thinly populated Niue (population 2,000).
Historically Tuvalu was part of the British Gilbert and Ellice
group, but opted first for separation and then for independence
in 1978. Ellice Islanders had mined phosphate on Ocean Island
(now worked out) and on Nauru, where they continue to do so.
They have also become deep water sailors. Tuvalu has turned
its education toward making its young men employable and has
a work culture. Those who find life constraining on a small,
distant Pacific atoll emigrate so that the island has remittances
to supplement its income. Emigrants visit, making inputs into
political and social life. Population growth is a modest 1.4%
per annum.
In 1987 Tuvalu persuaded Australia, New Zealand, the United
Kingdom (and later Japan and the Republic of Korea) to put
their aid into a Trust Fund of US$17 million. With sensible
investment, this had become $US35 million by 1997. Income
from the Trust Fund was reduced as stock markets suffered
in the early 2000s but is now recovering. The United States,
Taiwan and Japan pay considerable sums for fishing rights.
Tuvalu has leased its telephone line and in 1998 it sold the
rights to the ‘tv’ internet domain name to a Californian
company for US$48 million, but retained a 20% share in tv
Corporation International so that it has a continuing income.3
Tuvalu also has an extensive postage stamp business. It has
not, however, made any attempt to sell passports or to start
an off-shore banking laundry.
Past aid paid for the principal infrastructure that is well
maintained out of current income. Tuvalu’s own income
has also paid for recent road construction in the capital,
Fongafale. During the 1990s its administration was slimmed
down. It uses the Australian dollar for currency. Provided
Tuvalu can maintain its modest and pragmatic approach to government,
it deserves the title of the most successful government in
the Pacific.
Nauru
Initially a German colony, Nauru became a United Kingdom,
New Zealand and Australian Trust Territory administered by
Australia in 1918. Farmers in these three countries benefited
from cheap phosphate until World War II when the Japanese
used the island as an aircraft carrier, shipping most of its
5,000 people to Truk in the Marianas, where all but 500 starved
to death. In 1945, Trust status was resumed and in 1963 Nauru
obtained the world price for its phosphate. By independence
in 1968, it had accumulated half a million Australian dollars
(the currency used by the island) for each man, woman and
child in Trust and personal accounts. In 1975, when phosphate
prices peaked at $52 per ton, Nauru’s annual earnings
rose to nearly US$50,000 a head (in 1998 dollars), the second
highest per capita income in the world after Saudi Arabia.
Since 1968, Nauru has exported 43 million tons of phosphate.
This brought it a total income of US$3.3 billion (in 1998
dollars). Assuming generously that the cost of production
was 30% of export income and that another 20% was spent on
private and public consumption, this would have left an income
of US$1.6 billion (in 1998 dollars) for investment. At a conservative
7% a year in long-term financial instruments, this would have
amounted to another US$8 billion or (assuming five persons
per family) nearly US$4 million per family.
Nauru’s economic and business policies, encouraged by
the carpetbaggers that plague the Pacific, quickly moved from
the conservative advice of Sydney consultants, Philip Shrapnel
& Co, to grandiose real estate investment in Australia,
the Pacific and the United States. A shipping business and
an airline ran at a loss, with the airline alone reputedly
losing A$40 million a year. Nauru’s leaders spent millions
on a musical about Leonardo da Vinci in London and chartered
an airplane for the premiere. There were problems with the
flight and by the time the official party reached London the
musical had closed. Egregiously wasteful public expenditures
on the island and high external representation and official
overseas travel (that included golf in the Bahamas) blew out
budgets year after year so that the Government began to borrow
to supplement its huge income. The public service had 1,600
employees at the end of the 1990s when budget deficits were
running at over A$10 million. The use of the Australian dollar
as currency did not prevent real estate and other investments
running off the rails.
Off-shore banking was introduced to replace income from phosphate.
Nauru has registered some 450 foreign bank ‘shells’.
In 1998 alone it was said to have laundered US$70 billion
of Russian Mafioso funds. In 2002, the United States forbade
its banks to have any contact with Nauru, thus defining it
as the first rogue state under the 2001 Patriot Act. The sale
of some 1,000 passports for US$15,000 each was also seen as
being of assistance to money launderers and terrorists. Secretary
of State Colin Powell wrote to Nauru condemning ‘the
indiscriminate sale of Nauru’s passports’ in 2002.
Nevertheless, an internet website specialising in tax havens
still states: ‘Nauru is absolutely the easiest jurisdiction
in the world to get a bank license’.4
This banking ‘industry’ is so weak, however, that
the Bank of Nauru (sic) from time to time limits withdrawals
to $100. Few businesses accept its cheques. Nauru has become
a pariah because of its money laundering and passport sales,
but it continues to play global politics. It is claimed China
gave Nauru US$135 million for ceasing to recognise Taiwan.
Australia paid Nauru $30 million for the ‘Pacific solution’.
In 1991, communal property assets were valued at A$1.26 billion,
then peaked at A$1.7 billion. By 1996 finances were in a ‘critical
state’. The Visionary, a publication produced by a group
of young Nauruans, claimed losses could have amounted to A$2.1
billion by September 2001.5
By late 2003 Nauru could not afford to have its telecommunications
repaired and in March 2004 satellite communications were to
be shut down for non-payment of subscription fees. A month
later it was reported that Nauru House in Melbourne could
receive incoming telephone calls but could not dial out, because
its bills had not been paid.6
With these strains Nauru become so sharply divided that parliament
and government came to a standstill, with deep resentment
against those who have wasted public money while enriching
themselves. Nauru’s President, Renee Harris, visited
Australia in mid-April 2004 to seek assistance in the repayment
of a loan of A$236 million to GE Capital Corporation that
was to fall due in early May,7
but he lacked the support of a majority in the Legislative
Council even though receivers were moving in on Nauru’s
remaining properties in Australia, including Nauru House.
A ustralia responded to Nauru’s woes
early in 2004 with a package of $22.5 million over two years
to sort itself out. An Australian official was to head up
Nauru’s Finance Department to account for Nauru’s
true financial situation. An Australian police commissioner
was to strengthen law and order.8
The Australian government was clearly concerned that Nauru
might fall into the hands of international criminals. But
it is hard to see why Australian taxpayers should foot the
bill for more aid to a country that has wasted billions of
dollars and lacks the political resolve to change its ways.
Nauru’s problems have arisen from the denial of property
rights in the colonial period and the 1960s phosphate settlements
when the then prevalent welfare statism thought communal trust
funds to be superior to individual income and property rights.
The last 30 years’ waste of Nauru’s good fortune
demonstrates the strength of the theory of economic rents
that suggests that windfall returns from natural resources
will result in the waste of public funds and corruption. Had
the income from phosphate been distributed to individual families
instead of being paid into trust funds, some would have been
wasted, but some would have been saved and invested, rewarding
prudent behaviour.
The task of sorting out Nauru’s financial situation
will be formidable. Public expenditures on Nauru have for
years been far above the levels needed for a population of
some 12,000, which will shrink further as phosphate mining
becomes completely uneconomic in 2006 or earlier. A significant
proportion of Nauru’s so-called debts are to predators
who do not deserve a cent in the dollar on funds they have
helped to waste and could not claim them in a court of law.
Another considerable proportion of the money lost by the Trust
Funds has been appropriated by Nauruans who are very rich
indeed with large bank accounts and investments abroad.
Nauruans have worked in the public service over the years
and they have earned income as their land was mined for phosphate.
Some have used these earnings to establish households abroad,
mostly around Melbourne. Many Nauruans have been educated
in Australia and could emigrate on their own initiative under
current Australian immigration laws. Experiencing racial discrimination,
Nauru rejected the offer of moving the entire population to
Queensland’s Fraser Island in the 1950s, and new prospects
for the movement of the entire population to an Australian
location still seem fraught with difficulties.
I nstead of pursuing further uneconomic schemes,
such as mining the remaining deep phosphate (unprofitable
at foreseeable phosphate prices) or building a deep water
harbour at a cost of billions, Nauru’s true financial
situation, including fortunes accumulated in private hands,
has to be established. The funds remaining after debts are
paid off should be distributed to Nauru’s families.
Nauruans typically live in compounds of two to four related
families, so that although there may be some 2,000 nuclear
families, the effective number of family groups among whom
resources have to be divided is likely to be smaller.
Nauruans could even opt to sell their island for a considerable
sum for its fishing and other marine rights and reserves and
its (limited) tourism potential. They could use the proceeds
to live out their lives modestly on the island or emigrate.
Emigrants would lose in terms of their old identity, but they
and their children would gain immeasurably from greater employment,
social and cultural opportunities.
Endnotes
1 Papua New Guinea’s per capita income
stagnated so that in 2001 it was US$2,450, Botswana’s
was US$7,410 (purchasing power parity). Botswana’s per
capita exports (US$3,160) were ten times those of Papua New
Guinea’s (US$350). Fiji’s per capita income is
US$4,920 while that of Mauritius is US$9,860 (purchasing power
parity). Fiji’s per capita exports are US$640 per capita
compared to Mauritius’ US$1,030 per capita. See World
Bank, World Bank Atlas, 2003 (Washington D.C.: World Bank,
2003).
2 M. L.Treadgold, Bounteous Bestowal: The
Economic History of Norfolk Island, Pacific Research Monograph
(Canberra: Australian National University, National Centre
for Development Studies, 1988).
3 Department of Foreign Affairs and Trade,
Tuvalu Country Brief (November 2003), www.dfat.gov.au/geo/Tuvalu/Tuvalu/_brief.html
4 www.taxhavenco.com/osm/BankCharter.html
(accessed 23 April 2004).
5 The last report of the Nauru Insurance
Corporation was dated 1994-95, of the Bank of Nauru 1995-96,
of the Nauru Phosphate Corporation 1995-96, Nauru Air Corporation
1995-96, Public Service Report 1995-96 and the Director of
Audit’s Report 1998-99. Pacific Islands Development
Program/East-West Center, Pacific Islands Report (Honolulu:
University of Hawaii, 25 September 2001).
6 ABC Radio National (20 April 2004).
7 M. Bachelard, ‘Receivers Move on
Nauru Property’, The Australian (20 April 2004).
8 Graeme Dobell, ‘Made on the Run:
Australia’s Pacific Policy', ABC Radio National (21
April 2004).
About the authors
Helen Hughes is an Emeritus Professor at The Australian National
University and a Senior Fellow at The Centre for Independent
Studies (CIS). Steven Gosarevski worked on the economy of
Nauru as a researcher at CIS.
to
top
* Professor Hughes, then a Fellow at the
Australian National University, on a pro bono basis negotiated
the world price for Nauru’s phosphate in 1963 and helped
to mount the constitutional team that enabled Nauru to become
an independent republic in 1968 and to nationalise its phosphate
mine. She assisted in early financial and business planning
(including the building of Nauru House) and in finding Philip
Shrapnel & Co, leading Sydney consultants, to take over
financial and business planning for Nauru on a commercial
basis.
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