South Pacific tragedy: The island that had (and lost) everything

Twenty years ago, the people of Nauru had the highest per capita income in the world. Today they are destitute: their natural resources exhausted, their wealth (and health) squandered, and their future scarcely imaginable.

At first glance, the rows of concrete shacks on the Nauru foreshore look derelict, with their cracked louvred windows, smashed walls laden with graffiti, and narrow passageways strewn with junk. But many of these miserable dwellings are inhabited – by the poorest of the poor – among them Sue Diau and her large extended family.

It is a shock to encounter such living conditions in a nation that once enjoyed the highest per capita income on the planet. But the affluence that flowed from Nauru's deposits of phosphate – extracted from fossilised bird droppings – has gone, and only one thing has saved the island from economic collapse: a detention centre housing Australia's unwanted asylum-seekers.

While Canberra's decision to dump would-be migrants on its impoverished Pacific neighbours was internationally reviled, it was embraced by Nauru, the world's smallest republic, once administered by colonial powers including Britain. One hundred locals, including Ms Diau, were employed at the detention centre, earning incomes that fed an estimated 1,000 people – 10 per cent of the population.

Now the vagaries of domestic politics 2,500 miles away are set to alter the fortunes of this remote coral island again. John Howard, architect of the "Pacific Solution", was ousted as prime minister last year, and one of the first acts of his successor, Kevin Rudd, was to scrap the offshore processing policy. The last refugees – 21 Sri Lankans – have just left Nauru, and the camp that is the island's economic lifeline is about to close.

Ms Diau, a shy 46-year-old, has worked there since 2001. A kitchen hand, she earns more than twice the A$140 (£65) a fortnight salary of a Nauruan public servant. Her husband, Philip, was employed at the centre as a painter and carpenter, on a similarly handsome wage. He was laid off three months ago; his wife will be out of a job next month.

Mr Diau has looked in vain for work. The government is the only major employer on Nauru, a potato-shaped island of just eight square miles. The unemployment rate is about 30 per cent, and there is no social security system. The Diaus support six children, as well as a dozen relatives, and neighbours who ask them for money or food. It is the Nauruan way to share.

"I don't know what we'll do," said Ms Diau, sheltering from the heat outside her tiny, dilapidated house, which is situated next to a rubbish tip. "Everyone is depending on my income."

The sprawling harbourside slum once housed foreign workers who toiled in the phosphate mines. For six decades Britain, Australia and New Zealand – mandated to administer Nauru after the First World War – profited from its lucrative resource. They stripped the island's interior, exporting the mineral and leaving behind a bleak moonscape of grey coral pinnacles.

A commission of inquiry later found they violated international law by failing to restore Nauru to "usable condition". However, mining continued after independence in 1968, and during the 1970s and 1980s the locals grew fabulously rich. The island had a shipping line and airline, with seven planes and half a dozen ships. No matter that two-thirds of Naura was uninhabitable.

Presidents would commandeer aircraft to take their wives shopping in Melbourne, New York and Singapore. Households owned three cars, including, in one case, a Lamborghini, although the island has a 40kph (25mph) speed limit and only one 12-mile circular paved road. Jobs were plentiful, housing free, and no one paid tax. Children went to the best schools in Australia and Nauruans gave lavish gifts, such as three-piece suites.

Eventually the bubble burst, as a result of corruption, mismanagement and sheer profligacy – and by 2001, when a Norwegian freighter rescued 438 asylum-seekers heading for Australia, the country was broke. Little wonder it was Nauru that Canberra approached – after it had refused to allow the Afghans and Iraqis to land – with promises of generous foreign aid.

While the offloading of the asylum-seekers – some of whom spent years on Nauru – was branded a scandal, life for Nauruans improved enormously. Hundreds of expatriates – security guards, catering contractors, maintenance staff – injected cash into the economy. Air Nauru flights and the government-run Menen Hotel were full.

In addition, Australia pumped vast sums of aid into the island. Schools were refurbished, along with the hospital, and notoriously unreliable power and water supplies were upgraded. One former Australian aid official described the cash as an "unmitigated bribe" to keep Nauru sweet – and Nauru's fear now is that the aid will be slashed.

Kieren Keke, the foreign affairs and finance minister, estimates that the centre represents 20 per cent of the economy. He said: "The closure will have a major impact. If the level of aid is reduced at the same time, it's going to totally cripple us."

The sense of anxiety is palpable in Nauru, which has suffered such hardships as workers going unpaid for months, power cuts for up to 20 hours a day, the telephone system collapsing for weeks, and the airline (now a single plane) being grounded repeatedly – and once even wheel-clamped due to unpaid bills.

Even the Sri Lankans who flew out to Brisbane this month voiced concern for the people they were leaving behind. Earnest young men, they chatted quietly in a yard at the centre, just before heading to the airport. One said: "We're very happy to be starting a new life. But the Nauruans, they are not happy. They need financial support from Australia."

On Nauru, the lush tangle of tropical vegetation fringing the island, which from the air resembles an upside-down pie, soon gives way to "Topside" – the mined-out, barren interior. It was here, on a hot and dusty plain, surrounded by a sea of coral pinnacles, that the original detention centre was set up. A second camp opened in 2003.

In the canteen, Evayne Gaubidi said: "It's my first steady job." Ms Gaubidi, 32, added: "We were hoping John Howard wins so the camp will continue." At the centre, workers receive three free meals a day. On Nauru, fresh food– mostly imported – is expensive. An onion can cost A$2. Nauruans are famously obese, a legacy of the days of excess.

Employees are also given 20 litres of water daily – a significant benefit at a time of drought. Nauru suffers from the "oven effect", with its denuded rocky interior reflecting the sun's rays back upwards and dispersing clouds and rain.

Around the island, few signs remain of its colonial past. The Nauru Phosphate Club – where expatriates gathered at sunset to play billiards and enjoy the sea view and evening breeze from its peeling balustrades – is now a Pentecostal church. A nearby nine-hole golf course is parched and overgrown, its abandoned club house a wreck.

The locals reminisce about the days of reckless extravagance. "After independence, it was like we suddenly won the lottery," said Mathew Batsuia, the health minister, over dinner at a Chinese restaurant. His wife, Tricia, said: "It was like there was a pot of gold and it would never run out. The Kiribati people [from a neighbouring Pacific nation] worked in the mines, and served us and cooked for us, and we just went shopping. It was mad with a capital 'M'."

But as Nauruans splurged on foreign travel and consumer goods, a trust fund established from mining revenues – intended to secure the country's future post-phosphate – was shrinking.

Nauru bought showpiece properties around the Pacific. However, millions were frittered on harebrained schemes including a West End musical about Leonardo da Vinci. The entire cabinet flew to London for the opening night. Panned by the critics, it swiftly closed.

After being swindled by foreign powers, the Nauruans were swindled by their own leaders, who raided the trust fund, and by "consultants" of dubious repute. The island became a money-laundering centre and at one point had 400 offshore banks, all of them registered to one government mailbox.

In 2004 the government defaulted on a A$236m loan to an American financier, which seized its properties. Nauru had no assets, and no money. Without the Pacific Solution, things would have been grim. But Australian aid is believed to have been wasted. Up to A$40m, for instance, has gone on improving the electricity supply – yet power is still rationed to 12 hours a day.

Many locals were jealous of the 1,300 asylum-seekers spirited to a distant and unknown country. As one woman recalls: "They were living better than us. They had power 24/7. A Hercules flew in once a month with fresh fruit and vegetables. They even had an internet connection."

A major drain on the country's finances is health. The hospital has seven dialysis machines. In some age groups, nearly half of Nauruans are diabetic. A favourite snack is a fried chicken, washed down with a chocolate milkshake. Life expectancy is 49 for men and 55 for women.

On his hospital bed, Henry struggles to sit. His right leg is missing – amputated as a result of complications associated with diabetes. He is lucky. Doctors believe they can save his left leg.

The man who will plead Nauru's case with Australia is President Marcus Stephen, a former Commonwealth Games weightlifting medallist. He said: "We don't want to be seen as a beggar state. We just need help to stand on our own feet."

Nauru has little to offer potential visitors. The hotel swimming pool is empty, with only a stray dog lounging by it. Richie Halstead, director of tourism, has not had a budget for three years. "We just sit around talking about tourism and playing computer games," he said.

There is one glimmer of hope. Secondary deposits of phosphate were recently discovered, and exports have resumed. At the same time, an ambitious programme to rehabilitate the interior has begun. The pinnacles will be crushed and levelled. Trees will be planted. The land will be used for schools, housing and recreation.

To Nauru's leaders, the mining represents a second chance: an opportunity to give the islanders a future. But it still has A$1bn of debt from the bad old days – and as one observer puts it: "It will take forever to pay that off, no matter how much bird poo they export."