Location, Location, Location! A uniquely Hawai‘i economic development strategy

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By Steven Bond-Smith

Hawaiʻi’s economy is in trouble. Unemployment is typically low in Hawai‘i and it was close to an all-time low in March 2020 at just 2.1 per cent. But Covid-19 has ravaged the visitor industry. Business travel and tourism have dried up due to public health restrictions and the risk of contracting Covid while traveling in planes, enjoying tourist resorts, or having face-to-face conventions. In April 2020 unemployment was 21.9 per cent. In the 12 months to September 2020 employment in leisure and hospitality had declined 58.8 per cent. While all US states have recovered somewhat since the start of the pandemic, Hawaiʻi still has the highest unemployment rate of any state in the country at 10.2 per cent in January 2021.

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3 thoughts on “Location, Location, Location! A uniquely Hawai‘i economic development strategy”

  1. As you note, the cost of diversification is giving up the fruits of specializing in an economy’s comparative advantage. The benefits derive from better management of an economy’s vulnerabilities. A good start would involve an improved understanding of what those vulnerabilities are and what tools are in the risk-management toolkit. A well-managed stabilization fund might be less costly than diversification of the economy’s base, for example.
    As former UH President David McClain used to say, Hawaii should diversify from strength, building for example on Hawaii’s established success in sports tourism, and further developing its fledgling ecotourism industry.
    “Letting the entrepreneurial discovery process determine the winning businesses” may be at odds with “letting locals determine the vision for Hawaii,” especially if the latter becomes mandates and subsidies to do what is politically expedient. Hawaii has a long history of trying to support diversification with its Land Use Law, high-tech subsidies, and aquaculture for example. Are there counter examples from New Zealand and Australia that would illustrate a more productive approach? Governor Cayetano and his chief economist, Seiji Naya, made the case that a policy of facilitation should be used in place of the old mandate and subsidize approach.

    1. Thanks for your comment Jim,

      I’m not suggesting giving up on Hawaii’s current specialization or diversifying into everything. Indeed, diversifying the base of the economy is but one risk-management tool. The benefits of diversification are more than just fiscal. People like to have jobs. A stabilization fund only addresses part of the problem. If visitors are down, we need other industries that also use the set of skills and capabilities here in Hawaii. I agree there are options to diversify within tourism too, and Hawaii has done this before with business and conference travel. For example, I suggest new sources and types of visitors if Hawaii were a hub between Asia and South America.

      There is also a need to find growth beyond visitors. Hawaii’s economy has been rather flat for a while, and spending per visitor falling. Specialization and diversification are a balance between extreme concentration and lack of scale. Of course, Hawaii should continue in the industries that it is good at. But it would be better if Hawaii could be good at more things. “Letting locals determine a vision” recognizes that locals have a much deeper knowledge of the problems that need addressing for new markets and industries to thrive. Hawaii should have institutions that strengthen its existing strengths, and initiatives to support its potential strengths. Many of these initiatives would focus R&D on areas where Hawaii has existing expertise but is not yet thriving as an industry. Other initiatives would address specific market failures, such as targeted infrastructure. Selecting the areas for diversification requires deep local knowledge and support. Designing the initiatives needs deep industry knowledge. Then selecting the initiatives requires good governance to avoid what is “politically expedient”. Adjusting or sometimes abandoning initiatives requires effective monitoring and governance. This is not the old “mandate and subsidize approach” at all. As you describe, this is a more targeted “policy of facilitation”, with local input to selection and design, supported by better governance and monitoring.

  2. James Roumasset

    Yes; facilitate, facilitate, facilitate! The most important market failure regarding economic development is that of interdependent investments in lieu of futures markets. As our late colleagues Seiji Naya and Chung Lee used to say, these can be addressed through extra-market coordination such as done by the deliberation councils of Japan and South Korea.

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