Hawaii’s main industry, tourism and hospitality, has been one of the hardest hit by the COVID-19 pandemic. Policymakers have been calling for economic diversification for decades, but single-single industry dominance has been the norm for centuries.
When it comes to Hawaii’s economy, Sumner La Croix wrote the book. Literally. His 2019 publication “Hawaii: Eight Hundred Years of Political and Economic Change” chronicles 8 centuries years of political-economy in the islands.
The Emeritus Professor of Economics at the University of Hawaii, who also writes and does research for the University of Hawaii Economic Research Organization, is the leading authority on such matters.
One trend quickly becomes clear from his work: life for generations of human inhabitants of the Hawaiian Islands was focused on one major productive activity. What that product was changed substantially over the centuries.
“Hawaii has typically had a large, dominant industry,” La Croix says. “If you look back at the 19th Century you can identify sandalwood, whaling, sugar, and then pineapple. After sugar and pineapple started to decline, then tourism.”
Those various industries declined for different reasons. Sandalwood was largely depleted from overharvesting and undercut by cheaper production in the Asian Subcontinent. Whaling, and its derivative good whale oil for lighting, was ultimately replaced by electricity. Sugar and pineapple cultivation waned in the 20th Century with the advent of globalization and cheaper production in the developing world.
But like in so many previous cycles, a new dominant industry would rise from the ashes of the old: tourism. It was once again based on Hawaii’s abundant natural resources, but this time brought something new to the islands, rather than exporting it abroad.
The advent of jet air travel following World War Two gave rise to the modern visitor industry, which in 2019 brought more than 10 million people to Hawaii from around the world.
Also unlike previous eras, there appears to have been concern about reliance on a single dominant industry early on in its rise. According to LaCroix, there has been talk of diversifying Hawaii’s modern, tourism-based economy since the 1970s.
With local unemployment among the highest in the country due to a near-complete shutdown of tourism and hospitality, it may not seem like the goal of diversification ever came to fruition. Without a doubt, tourism is still the 800-pound economic gorilla in Hawaii’s economy, accounting for nearly 20% of all non-military jobs in the islands, according to state figures.
But La Croix says tourism’s importance has actually been declining for several decades.
“If you go back to 1990, somewhere between 35 and 40% of the economy came from tourism. Today it’s fallen to around 25%. About 18% from direct spending and 7% from indirect spending. That represents a lot of diversification,” he points out.
As an example La Croix offers funded research at the University of Hawaii, which he says was virtually non-existent in the 1960s, but now is worth almost half a billion dollars. However, when it comes to top-down, government-led efforts to foster diversification, the track record isn’t great.
“The ability of government to directly influence diversification is limited, LaCroix notes. “When government has tried to pick winners, it’s often been very unsuccessful.”
In his book, La Croix points to a slew of quasi-state agencies created over the past 40 years to develop higher-value like aerospace industry or a technology development. These include the High Technology Development Corporation, the Information Network Corporation, the Office of Space Industries, and the Hawaii Strategic Development Corporation.
Citing the work economists George Darby and Meheroo Jusswalla, La Croix notes that those efforts failed to attract any sizeable economic activity around the targeted industries. Several successful start-ups did crop up in Hawaii during that time, but most eventually relocated to the U.S. mainland.
A subsequent effort to stimulate economic development through tax incentives, known as Act 221, was also largely deemed unsuccessful. Hover a 15-year period from 2001-2015, it granted $1.2 billion in subsidies, without producing any substantial increase in high-tech investment or job creation.
But as La Croix noted, diversification has happened in recent decades. When asked how policymakers should approach the problem, he points out that the intended goal of diversification should drive what kinds of policies are implemented.
“There’s several types of diversification,” he says. “There’s diversification for resiliency, there’s diversification come up with new types of export purposes. But there’s also diversification that encourages business that are already here. We shouldn’t just be looking at bringing new industries here, we need to be looking at existing industries that are outside of tourism,” he emphasizes.
La Croix puts forward the development of affordable housing as an example of a service for which there is strong local demand, but lackluster supply.
The intended reason for pursuing diversification should drive what types of industries policymakers seek to develop. Increasing agricultural output will create more, lower-paying jobs, while a tech industry will produce fewer, but higher-paying positions.
Luckily, a full-fledged plan is not needed upfront to be successful. La Croix says, the most efficient way to diversify is quite simple and involves tackling problems with which government is already familiar.
“One of the things governments should do is make sure the basics are done right,” he says. “Some of the basics here suffer. Anything government can do to make Hawaii a more livable place would be good for diversifying the economy.”
Traffic congestion and the high cost of housing are concrete examples of basic services that make Hawaii a less desirable place to live, and thus do business.
Everything from remote work to renewable energy has been floated as possible targets for diversification, both to add higher-paying jobs and make the local economy more
resilient to external shocks.
LaCroix says he thinks there is still room to decrease the importance of tourism, but in all likelihood, it will remain a major pillar of the local economy for years to come.
This story is part of a series exploring the idea of economic diversification in Hawaii and what new industries may take root in the future. Find the rest of it here.
