SYDNEY -- The story of Nauru, a tiny island nation in the middle of the Western Pacific, is a cautionary tale about the dangers of depending on a single source of income -- in this case, bird droppings.

     For decades, the country's economy was fueled by fossilized bird guano, which, thanks to the phosphates it contains, makes for an excellent fertilizer. But when the supply started drying up, so did the nation's coffers. Today, the government has turned to making money by accepting refugees from other parts of the world.

     The Nauruan economy has essentially collapsed. The phosphate deposits that had been mined there since 1907 are almost completely depleted. There is no other industry to pick up the slack, and the country depends on imports for most of its food and consumer goods.

     Nauru was formed over millennia in part by the droppings of seabirds migrating across the Pacific, as well as by the carcasses of the animals themselves. In the 19th century, the island, then mostly covered with palm trees, was claimed by Germany. The U.K., realizing the island was rich in phosphate -- a source of phosphorus, an essential agricultural fertilizer -- acquired exclusive mining rights there. Nauru was a "gold mine" for the Commonwealth nations of Australia and New Zealand as they built up their agricultural industries.

The gravy train

After gaining independence in 1968, the Nauruan government took over the mining operations. Phosphate prices rose from $10 per ton to over $65 in the 1970s, and per capita gross domestic product topped $50,000, second only to Saudi Arabia.

     Nauru began providing public services for free, and taxes were nonexistent. Many people stopped working. The government took care of everything, down to the wages for household help. People bought big cars and spent time driving around the island every day, eating frozen and fast foods (so much so that diabetes became an epidemic). Huge amounts of public funds were funneled into overseas property investments. Money was spent as fast as it rolled in.

     Then came the crash. Nauru's phosphate deposits were essentially played out, and its national finances were at the mercy of international commodity prices. The country found itself squeezed by a bankruptcy crisis and around 30% unemployment. And because for a century most of the mining work had been done by laborers from China and neighboring island nations, the Nauruans had, in a sense, forgotten how to work.

     To earn foreign currency, Nauru tried becoming a tax haven. But it soon stopped amid criticism from the U.S. and the Organization for Economic Cooperation and Development, which characterized it as a rogue nation helping Russian gangsters and others to launder their money.

     Now Nauru earns the bulk of its foreign currency by taking in refugees from around the world looking to eventually settle in Australia. The Asian Development Bank estimates the business, which is funded by Australia, is driving real GDP growth of 10% a year. To stem the tide of refugee boats reaching its shores, Australia forged an agreement with Nauru on refugee transfers. In the 2000s, Nauru allowed Australia to build an immigration detention facility on the island. It closed temporarily under one Australian government but reopened in 2012.

     Construction of the detention facilities has given the economy a lift. Australia also pays Nauru "visa fees" of 3,000 Australian dollars ($2,347) per refugee every three months, which come to around A$10 million a year. Other types of visas also raise revenue, but serve mainly as a deterrent to unwanted visitors. Nauru has sharply raised the price of business visas, from A$400 to A$6,000. Foreign-owned private businesses are limited to Chinese-run stores. Visa fees for journalists were raised from A$200 to A$8,000.

Building a healthier economy

Nauru may be an extreme case of how the floor can drop out on an economy, but other resource-dependent Pacific island states have taken the lesson to heart. 

     Island economies have traditionally been overly dependent on fishing, tourism and agricultural products such as sugar cane. Financially, they tend to look abroad for help. The Pacific Islands Forum, where the heads of those nations meet, serves as a venue for exploring problems common to its members. They are working to build export opportunities and help smaller businesses grow, but the going has been slow.

     One government that is optimistic is that of Papua New Guinea, whose prime minister, Peter O'Neill, says the country has entered an era of unprecedented change. It has doubled the number of children in school by making education free. By developing its human resources, it hopes to set the stage for stable growth based on its natural resources.