Growing an Economy

When things got rough in the mid-1990s, the president and chief executive officer of Office Pavilion in Honolulu tuned out the gloomy forecasts to look for opportunities. She halved her rent and doubled the space in her penthouse office at the Pan Am Building by scooping up offices abandoned by a Japanese construction company; cut her payroll by 20 percent; secured the exclusive license to sell her products in the Pacific so she could gobble up accounts in Guam, Japan and Korea; and shifted her business mix to include medical furnishings and more government contracts, which were still abundant despite drooping commercial sales.

"I’ve become a much better business person," Hayes says. "To survive, you had to be really creative, you had to watch the bottom line, you had to understand the impact of forces around you."

Today, Hayes is sitting on an office furniture business that is steel-reinforced against economic hurricanes. In the coming year, she is looking for sales to rise by 5 percent. She plans to expand her $12 million-a-year operation by focusing on one of the new opportunities that sprouted during the downturn. "We’re really looking at the high-tech sector," she says.

Hayes’ story is an example of what economists say is occurring in Hawai‘i at the start of 2001 as local business people who struggled to survive the rough times of the last decade now aim to grow and diversify their operations for another year. Many of those who have managed to survive expect to keep growing - if only by a little bit - in 2001.

Warning signs

It is this self-nurturing activity among local businesses that is shaping up to be the state’s economic story this year. As the year begins, that story is playing out against an increasingly uncertain regional backdrop as economic warning signs have begun emerging on the Mainland and in Asia, and some business leaders here express private concerns about a possible slowdown.

Despite that, local economists are predicting that Hawai‘i this year will ride a delayed swell from the Mainland’s strong performances in recent years. They say the state’s economy will grow at about 3 percent - about the same rate as 2000 - and will likely outperform the national economy.

Even if the U.S. economy sinks deeper into a down cycle, they say, the state should fare better than in recent dips. After a decade of tough times, they say, the local economy is back afloat thanks to the increasing flow of money from tourism and construction, and to the greater efficiencies of local enterprises. More business has meant more jobs, less unemployment and more movement in the housing and real estate industries.

That local demand won’t suddenly disappear, economists say, and would help businesses and residents here to avoid the immediate pull of a regional economic undertow. By contrast, the state’s economy was struggling in 1997 when the effects of the Asian financial crisis deflated attempts at recovery.

This year, economists are looking for statewide construction activity to continue for another year at a pace of 10 percent to 15 percent. Personal income is expected to rise 3 percent, and jobs should grow at 2 percent. Unemployment should remain low. A tight labor market should add pressure on employers to raise salaries and wages, said Byron Gangnes of the University of Hawai‘i Economic Research Organization.

"For the first time in a decade," he said, "things are looking pretty good across the board."

Experts point to cases such as Hayes’ to emphasize the importance of skillful business decisions. Unlike a decade ago, when many inefficient or rigid local businesses took a dive after the Japanese bubble economy burst, hard times have taught Hawai‘i’s surviving owners and managers to become more astute, more savvy and better prepared to adapt to changing market pressures.

No harsh changes

As always, business and economic leaders in Hawai‘i spend much time looking beyond these shores to predict trends. If the Mainland’s economic picture, which has been growing dimmer by the month, becomes too bleak, it means Hawai‘i’s prospects could take on water, too.

The best-known economists here, however, are not predicting harsh changes or a profound downward tug from a Mainland slowdown. But they have taken note when, for instance, the top economists of the Blue Chip Economic Indicators adjusted their 2001 growth forecast down a notch in December, calling for 2.6 percent growth in real gross domestic product. That’s about half of last year’s growth rate.

In Hawai‘i, most experts continue to believe that the Federal Reserve Board will ensure that the Mainland economy eases peacefully into a pattern of slower, sustainable growth that would create little disruption here.

"The Fed seems very keen that the soft landing is not bumpy," said Christopher Grandy, economist for state Department of Business, Economic Development & Tourism.

Still, economy watchers like retail/real estate consultant Stephany Sofos caution that, under the mercurial principles of the New Economy, comforting notions of a lag time between the Mainland and the Islands can be misleading. For instance, she said a continuing crisis driving up energy prices in California could finally upset the economic progress in Hawai‘i in a matter of days.

"Economic change can happen overnight," she said. "We’re a very fragile economy around here. I don’t think people want to realize how fragile we are."

Indeed, experts here keep a careful watch on matters such as high oil prices, the unimpressive Japanese economy and California’s energy crunch. After a decade of a painful slowdown, it is regular practice to ponder ways to bolster the structure of the state economy just as businesses have individually been renovating theirs.

Sofos sounds a familiar theme: "Hawai‘i needs to diversify."

Calls to broaden the state’s economic base were common during the slowdown, and some small successes have occurred in developing more activity in biotechnology, diversified agriculture and information technology. But the state still is primarily dependent on one industry: tourism.

Sofos isn’t alone in advocating a greater mix of industries to buffer the cycles of tourism and real estate speculation that have driven the local economy to extreme highs and lows during the past two decades. For instance, Gov. Ben Cayetano’s campaign to develop more high-tech and science-based industry has aimed at the same goal.

Sofos’ choices for change are in commercial applications of oceanography, aquaculture, astronomy and alternative energy development.

"Why are we, in the 21st century, relying on what HECO (Hawaiian Electric Company) does for us?" she asks. "If we’re going to grow, let’s make ourselves self-reliant and independent."

External pressures

Others, like Gangnes, see the advantages of self-sufficiency but caution that diversity by itself doesn’t protect the Islands from the external pressures - whether energy shortages, currency crises or the global swings of the electronics industry - that can afflict even the strongest economies.

"I think there is room for gains," he said. "I think there’s a lot of potential for areas like a small high-tech center, for the health care sector to be larger, for higher education and research to play bigger roles.

"But," he added, "they have a long way to go before they would reduce in any significant way the dependence we have on the rest of the world."

Even the much sought-after high-tech industry, he noted, is not greatly different from tourism in being subject to the pressures of global economic cycles. Hawai‘i, moreover, with its relatively small local market, doesn’t have the advantages of major metropolitan areas where local services and industries can sell primarily to nearby consumers.

But as critical as such a plural economic structure would be in the long run, a broader menu of businesses won’t soon challenge the importance of tourism to Hawai‘i’s economic health. Tourism has been the economic survivor in Hawai‘i as sugar plantations died, as military spending evened out, as manufacturing couldn’t compete and as many other services lacked, until recently, the distance-cutting benefits of communications technology.

"We are a place whose advantages lie in tourism-related enterprises," said Gangnes. "It’s hard to see in the near term that’s going to be radically different."

Asian crisis

What is different, after the rough years of the 1990s, is the more sophisticated way industry and government leaders now manage the state’s tourism business. The shock of the Asian economic crisis - and the related disintegration of the Japanese visitor base - pushed the state to revamp its methods for funding and marketing tourism.

In 1998, Cayetano appointed the Hawai‘i Tourism Authority to create a long-term strategy for marketing Hawai‘i to the world and gave the agency $60 million a year to do it. The money was more than twice as much as in previous years, and it was free of the strings that come with the state’s legislative budget process.

Some notable participants in the tourism industry also adapted with impressive agility, positioning themselves in a commercial environment that now features fewer Asian visitors, emphasizes repeat visitors, and looks increasingly to the Mainland for growth.

Maui Divers, one of the largest jewelry operations in the state, has tried to pluck the pearl from the oyster by exploding its retail operations and creating new product lines that cut across a diverse visitor base.

When attendance sagged in 1997 at the Maui Divers Design Center, the company’s showroom and flagship retail outlet in Hono-

lulu, the company followed the "Mountain to Mohammed" model. It opened 20 stores across the islands that would put the product in the way of visitors, rather than making visitors find the product.

"That’s worked very well for us," says president and chief executive officer Robert Taylor.

By the end of this year, Maui Divers will have 32 retail outlets; in 1997, it had two. It is those new outlets, Taylor said, that should provide growth in 2001, while sales at the original retail center will likely remain flat.

The company also launched two distinct new product lines, the upscale Island Pearls and Pick-A-Pearl, where visitors pick an oyster and then set the pearl they find inside. Each store features only one product line, creating the opportunity for multiple outlets at the same resort and drawing on a larger universe of potential customers.

Trying once again to be ahead of the curve, Maui Divers has secured contracts with American Hawai‘i Cruises and some of the international lines that send ship passengers their way.

"Two years ago, mostly what you heard about cruise ships was that they are competition for Hawai‘i," Taylor says. "Now most everybody has jumped on the bandwagon and sees it as a real growth opportunity."

At Roberts Hawai‘i, the state’s largest privately owned tour and transportation operator, management went out to meet the sagging visitor numbers of the mid-1990s. The company increased share of repeat visitors by updating its products, adding new attractions and reaching out to locals.

This year, he said, Roberts expects growth from a strong westbound market.

Roberts sank more than $20 million into updating the show room for its "Magic of Polynesia" show in Waikiki, improving its Voyager submarine attraction by submerging a ship to attract more sea life, opening the Hawaiian Ocean Thrills Sports Park and modernizing its fleets and communications systems.

"They were keying into the people who had already done the Polynesian Cultural Center, the Arizona Memorial," says Roberts spokeswoman Sam Shenkus. "It was ‘What will be new and different for people who have already been to O‘ahu and seen everything?’"

Roberts also looked to the stars for answers, launching a star-gazing trip up the slopes of Mauna Kea on the Big Island. The 11-person vans have been so full that the tour recently increased from three times a week to two trips a day.

"It’s for the repeat visitor, for someone in a timeshare or a condo," Shenkus says.

Managing more risk-taking

This capacity to adapt strikes David McClain, dean of the University of Hawai‘i’s College of Business Administration, as a sign of the way the state’s best business people have forged strong management skills. He points out that success has come, in many cases, with the willingness to take risks - and the smarts to develop the skills to manage those risks.

"We have a lot of people here who are pretty akamai in managing themselves," he said.

McClain acknowledged that the state may never be a global leader in risk-taking, a condition that he said fits the importance of maintaining a valued cultural identity. But he said a key for future structural improvements will be state lawmakers’ willingness to keep an open-market attitude that rewards those who adapt to the New Economy.

One element among the state’s many economic statistics suggests, in fact, that a gradual increase is occurring in entrepreneurial risk-taking.

Grandy, the state economist, said recent household surveys are revealing a higher rate of job growth and income than similar surveys of employers at job sites. That difference, known as proprietor’s income, reflects the activity of self-employed, small-business operators.

And that component, he said, has been growing two to three percentage points faster for the past three years than virtually any other component of the job picture - another sign that Hawai‘i’s economy is increasingly taking root.

"It seems like Hawai‘i has come into this period where people have started taking some entrepreneurial risks," Grandy said. "They started businesses they might have been leary about before because of the risks. These are the people who, if they survive, Hawai‘i’s economy depends on."

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