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By Steven Bond-Smith*
Hawai‘i’s vulnerability to economic shocks has become a paramount concern during the pandemic. Extreme specialization in the visitor industry exposes Hawaiʻi to risk and volatility when events such as a pandemic, recession or terrorist attack trigger collapses in visitor numbers. In response, policy-makers in Hawaiʻi are placing an increasing emphasis on diversification. Those with an interest in alternative industries are asking for support. Others are justifiably concerned that diversification policy is futile and will support special interests rather than genuine policies to achieve diversification. Tourism is Hawaiʻi’s comparative advantage after all. Policy-makers need to consider, is there a way to balance concentration and risk while promoting diversification, growth and prosperity?
As a result of economics and geography, isolated and small economies tend to be more specialized in few industries. These are typically based on natural resources. I have studied similar industry concentration in two other small and isolated economies of Western Australia and New Zealand. I am now turning my attention to Hawaiʻi. Often, the dominant industry develops because it uses a local resource so these industries couldn’t actually develop anywhere else. These businesses have to locate in Hawaiʻi. Specialization enables productivity gains from industry scale that allows these economies to prosper despite their small overall size and isolation. Due to the attraction of its climate, natural beauty, and host culture, Hawaiʻi finds this scale by specializing in the visitor industry. But its extreme specialization also amplifies exposure to external shocks and increases risk.
There are ways to promote diversification and growth that build on the same principles that explain this concentrated industrial structure. Tourism isn’t the only industry that could take advantage of Hawaiʻi’s geography. Other activities could also use the diverse skills that serve visitors. By targeting industries that use related know-how or a Hawai‘i-specific resource, Hawaiʻi can access productivity gains from the scale of related industries that could become embedded in Hawai‘i’s economy and resilient to external shocks. Ultimately, Hawai‘i, needs to find more and other things that it could be good at and that would remain in Hawaiʻi through the shocks.
The European Union’s Smart Specialization policy provides a guide. Smart Specialization is not “picking winners” but supporting areas of strength and opportunity, and still letting the entrepreneurial discovery process determine the winning businesses. Selecting areas of strength and potential diversification opportunities requires a bottom-up process in which locals determine the vision for Hawaiʻi, seek funding to support specific initiatives and constantly revise initiatives in response to tangible measures of each initiative’s ability to achieve Hawaiʻi’s specific goals.
I suggest some initial ideas but the process of locals designing a local vision for Hawaiʻi is vital for both their deep understanding of Hawaiʻi’s unique characteristics and for building local buy-in and momentum. But each potential opportunity is currently weak or absent for a reason. These reasons vary from infrastructure, to R&D, to specific know-how. Proposed initiatives would address these specific issues in the most promising domains. This is not picking winners, but supporting activities, capabilities and domains that could be taken up by a variety of entrepreneurs. This allows the entrepreneurial discovery process to determine the winning ideas. A bottom-up smart diversification process to create a vision for transforming Hawaiʻi’s economy, while maintaining its strengths, is something that all locals could get behind.
Developing an effective vision and strategy requires a rigorous governance process. It is not a process that simply hands out support to the loudest voices, nor is it imposed top-down by governments. Identifying new opportunities builds on deep local knowledge of Hawaiʻi’s human capital, location, industry structure, culture and communities. Such a vision would likely incorporate Hawaiʻi’s cultural values of Mālama ʻĀina, and Mālama Kai. It will understand the skills, tasks and capabilities of Hawaiʻi’s residents. A resilient diversification strategy requires finding niche industries that can remain in Hawaiʻi long-term by having lots of Hawaiʻi connections. These include suppliers, knowledge spillovers, unique skills and social capital. People and businesses that are embedded in Hawaiʻi’s communities will last longer than volatile footloose industries. The diversification strategy will look for the little bit extra that is needed for ventures in new domains to get off the ground. By supporting such initiatives in the communities that actively engage in the process and make concrete proposals, we can nudge Hawai’i towards the more diversified economy the community desires while sustaining economic growth and prosperity.
For many helpful comments and suggestions, thank you to Carl Bonham and Sumner La Croix.
* Steven is currently a Senior Research Fellow (Research Assistant Professor) at the Bankwest Curtin Economics Centre, Curtin University in Perth, Western Australia. Steven will join UHERO as an Assistant Professor in the fall.