The island of Nauru is located in Oceania, northeast of Australia, and has an area of 21 square kilometers, with an estimated population of 10,670 inhabitants (according to Wikipedia). Understanding the location and size of Nauru Island, let's now delve into the economic aspect, where we can gain some insights into what happened, what could have been done, and some suggestions that can be applied to everyone's daily life.
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The Dutch Disease x Nauru Island
Nauru was an island with a considerable phosphate reserve, with phosphate extraction and export being the main economic activity since 1907. With this brief history of Nauru's economy, we can already draw a parallel with the Dutch Disease, which tells us that when there is a large influx of money from a single resource, a curse comes along with that capital.
The curse, or Dutch disease as it's called, occurs because when a large resource reserve is discovered, or when a country has a valuable natural resource, it ends up no longer financially compensating the local population and workers to pursue other professions not directly or indirectly linked to the extraction of the natural resource, which in Nauru's case was phosphate.
In this situation, imagine a worker weighing the options: Is it more worthwhile for me to work on a plantation or extracting phosphate? The answer is that they will choose what yields the highest return, causing all the labor to go to phosphate extraction, resulting in a migration of industries, companies, and agribusiness, all shifting to a single area. And in this scenario, since the owners of other businesses cannot afford similar wages, they end up being forced to close.
The first consequence of focusing on a single natural resource is that the island loses innovation in other areas, development in other sectors, and becomes completely dependent on a single resource. The problem is that natural resource reserves are finite, meaning they have a limit, and if extraction is not well managed, the country will be without revenue stream as soon as the resource runs out.
Nauru isn't a very large island, and with the entire population focused exclusively on extracting a single resource, its fate couldn't have been any different... The phosphate reserves were depleted, and worse, because the economic activity was mineral extraction, the island's environment became severely degraded. The population and the country found themselves without a source of income, and after a while, they began accepting support from the Australian government, offering the region as a place for those seeking asylum in Australia.
The Dutch disease, or the resource curse, has a rather "simple" solution. Focusing on production and resource extraction is unavoidable; it will always happen. However, what to do with the resource is where many end up getting it wrong, because there's inefficiency in managing the revenue obtained from exporting the resource.
Insights from Nauru Island
The best path forward is to create a so-called Sovereign Wealth Fund for the country, which will manage the capital from the sale of resources. This fund is responsible for diversifying revenues, investing in other areas and businesses, so that there is a better distribution of the nation's resources and ensures that even after the reserves are depleted, there are investments that guarantee revenue for the country.
The insight that can be drawn from this story for people is that, just like countries that discover a reserve and don't know what to do with the money, people often manage to get extra money by doing extra work, selling something, and end up spending it without thinking since it was "extra." But just as countries have sovereign wealth funds, they could save at least a portion to invest in other sources of income or even in professional development, specializing, or taking a course.
