Contents
When people talk about valuable, rare resources, they usually think of success stories. Nauru is the opposite. The island had what Jay B. Barney describes as the basis of a lead: a resource that was valuable and rare. But it was finite, and the wealth was not turned into anything lasting. The story is therefore a warning that companies, families and churches will recognize too – a counterexample of Valuable, Rare Resources.
An island made of phosphate
Situation
Nauru is an island of about 21 square kilometers in the Pacific. In 1900, the prospector Albert Fuller Ellis discovers high-grade phosphate there, an important raw material for fertilizer. In 1906, the Pacific Phosphate Company begins mining, and in 1907 the first cargo is shipped. After World War I, Britain, Australia and New Zealand take over the mining through a joint commission.
Link to the principle
The resource is valuable because agriculture all over the world needs fertilizer. It is rare because there are only a few deposits this rich. But as long as others mine it, the benefit does not flow to the people on the island. Owning a resource does not yet mean controlling it.
Independence and wealth
Situation
On January 31, 1968, Nauru becomes independent, and Hammer DeRoburt becomes its first president. In 1970, the locally owned Nauru Phosphate Corporation takes over mining. Revenue from the mines makes Nauruans among the richest people in the world in the 1970s and 1980s. Part of the earnings goes into a trust fund, the Nauru Phosphate Royalties Trust.
Link to the principle
Now all the conditions are in place. The island owns and controls a valuable, rare resource. For a while, it does indeed have an enormous lead.
Where the money went
Situation
The earnings flow mainly into consumption and high salaries in the public sector. Many investments turn out badly. The trust fund shrinks from about 1.3 billion Australian dollars in the early 1990s to a fraction of that in the early 2000s. Among the well-known bad investments is the financing of a musical about Leonardo da Vinci in London in 1993. Around 2000, the phosphate reserves are largely exhausted.
Link to the principle
Barney’s model says when a resource can sustain a lead. But it also says that the resource has to be used and organized to do so. In 1995, Barney explicitly added the question of whether an organization is able to reap the value of a resource. Nauru reaped but did not sow.
The collapse
Situation
In the 1990s, Nauru tries to earn money as a tax haven and by selling passports. In 2004, it largely abolishes offshore banking. By 2004, the state is deeply in debt, and buildings abroad such as Nauru House in Melbourne are sold. Unemployment is close to 90%. In 2006, the Bank of Nauru is closed. About 80% of the island’s land has been devastated by mining. As early as 1989, Nauru had sued Australia before the International Court of Justice; a settlement was meant to support the rehabilitation of mined land.
Link to the principle
The resource was valuable and rare, but not lasting. It ran out, and the lead ran out with it. An advantage that rests on a finite resource lasts only if it is converted in time into capabilities, education or new sources.
A new dependence
Situation
Since 2001, with an interruption, Nauru has hosted a processing center for asylum seekers in return for payments from Australia. In 2020, the income from this center and the sale of fishing rights are among the country’s most important sources of revenue.
Link to the principle
Nauru has recovered, but once again depends heavily on a few outside sources. The lesson is not that rare resources are bad. It is that a lead lasts only as long as you renew it.
Key takeaways
Key lessons
- A rare resource is a beginning, not a permanent lead.
- Ask how much longer your most important source will last.
- Convert earnings into capabilities and new sources in good time.
- Ownership is not control, and control is not wise use.
- Have more than one pillar.
Summary
With its phosphate, Nauru owned a valuable, rare resource and in the 1970s was one of the richest countries in the world. But the earnings flowed into consumption and bad investments, and the raw material was finite. By around 2004, the state was in debt and the island largely devastated. The counterexample shows the limit of the principle: a rare resource creates a lasting lead only if it is used wisely and renewed in time.
Sources
- Jay B. Barney: Firm Resources and Sustained Competitive Advantage. In: Journal of Management 17 (1991), no. 1, pp. 99–120.
- Jay B. Barney: Looking Inside for Competitive Advantage. In: Academy of Management Executive 9 (1995), no. 4, pp. 49–61.
