The September 11th attack
Hawai'i leaders seeking ways to diversify economy

By John Duchemin
Advertiser Staff Writer

It's the Gulf War of 1991, the California recession of the mid-1990s, and the Asian economic crisis of the late 1990s all over again:

As Hawai'i's other traditional industries stagnated or declined over the years, tourism has remained the backbone of the state's economy, despite atttempts to diversify. Gregory Yamamoto • The Honolulu Advertiser

Despite a decades-long campaign by government and business to find a reliable alternative, the visitor industry remains the major determining factor in Hawai'i's economic fortunes. The state flourishes when tourism booms — like last year, when 7 million visitors helped the economy grow 3.7 percent — and it falters when tourism busts.

Perhaps at no time in recent memory has it been more painfully obvious than in the economic turmoil that has followed the Sept. 11 attacks in New York and Washington.

No strong second industry can help offset or replace the salaries of thousands of workers who have lost their jobs or had their hours cut in the past few weeks. And none of Hawai'i's other industries can alleviate the expected economic drop-off, which several observers say could shave 1 or 2 percentage points from gross state product growth this year.

"The economy is more diverse now than it was in the Gulf War period, but tourism is so dominant that it's barely worth talking about the other areas," said Carl Bonham, economics professor at the University of Hawai'i. "Have we cushioned ourselves? Clearly, not enough."

Gov. Ben Cayetano has called an emergency special session of the Legislature to try to inject $1 billion into the economy, and the tourism industry is launching an emergency marketing campaign to try to lure back visitors. But some say a longer-term outlook is needed.

"If I were the governor, I wouldn't gather the old cronies around me to come up with another 'Thumbs-up Hawai'i' (a 1990s campaign to increase residents' confidence)," said James Dator, a University of Hawai'i professor of political science and one of the architects of the "Hawai'i 2000" campaign in 1970. "I would hold a statewide discussion on what we want to do here. ... Get all citizens to consider whether we could make a major, substantial change in the way we do business."

Without an immense effort to diversify toward other industries — or even diversify and broaden the tourism industry — Hawai'i is doomed to repeat the boom-and-bust cycle of the past 20 years, according to many observers.

The governor agrees. "Clearly, the case has been made that we need to diversify the economy ... but it hasn't perhaps always been taken seriously," Cayetano said. "There is perhaps now a greater receptivity. This situation (the post-attack drop in tourism) has demonstrated our vulnerability. ... This is a case that, since we're so heavily dependent on air travel, it shows really how vulnerable we are."

However, diversifying is easier said than done. While inroads have been made in areas such as diversified agriculture and biotechnology, the buildup has been slow — and more often than not, fiscal and political priority has been placed on bolstering tourism, observers said.

Some say Hawai'i political and business leaders have only given lip service to the goal — and that an honest effort to change requires more money, political resolve and ingenuity than has been invested.

"The state has yet to show the necessary focus and commitment" to develop a viable side industry like technology, said attorney Anthony Clapes, author of "Blue Wave Millennium: A Future for Hawai'i", speaking at a Hawai'i Venture Capital Association meeting this summer.

Tourism's shadow

The goal to diversify the state economy is more than 30 years old.

In 1997, AT&T began laying 300 miles of cable for GST Telecom Hawai‘i, a move that many hoped would significantly diversify the economy. Such efforts have had little effect in decreasing the state’s reliance on tourism. Advertiser library photo

In the early 1980s, Gov. George Ariyoshi launched a campaign to build the state technology industry, an attempt to get away from "the four basic pillars" of tourism, sugar, pineapple and federal expenditures. His administration organized technology symposiums, composed reports and suggested ways to attract new types of business.

"Recent economic trends have shown us how dangerous it is to have so limited a productive base," Ariyoshi wrote in the foreword to the state's High Technology Development Plan, published in 1981.

The early diversification efforts were somewhat successful. Among other things, business parks such as the Manoa Innovation Center and the Mililani technology park were created during the 1980s. However, these projects were overshadowed by the huge advances in tourism.

Twenty years later, the Cayetano administration is revisiting the issue. And with business backing, the state has managed to make some inroads in many industries.

Proponents of economic diversity have attempted to lure businesses that use Hawai'i's unique natural resources. Along these lines, the state has been pushed as a tropical agriculture research center; a marine biotechnology center; a home for large-scale testing of genetically modified crops; and a center for astronomy.

Other industries have been targeted because Hawai'i seems a good geographic fit as a spot for customer service call centers that can reach both Asia and North America during business hours, a hub for trans-Pacific fiber cables, a telehealth center for remote island nations, and the U.S. Pacific Command, and as a centrally located "Geneva of the Pacific" for international meetings.

Still others are targeted through streamlined regulations and tax benefits. The state has tailored its insurance laws to lure "captive" insurance companies, which are formed by large multinational corporations to offer insurance to their own employees. And for the past three years, the state has passed tax benefits for research and entrepreneurial companies that do business here.

In some areas — particularly on the Neighbor Islands — these efforts are having an effect.

Genetically modified test crops worth millions of dollars are being planted each year and are generating tens of millions of dollars worth of seeds for export. This has made the state the largest test-bed for genetically altered crops, according to the U.S. Department of Agriculture.

On the Big Island, the development of the Mauna Kea telescope complex has created a mini-industry centered around space research. On Kaua'i, the island's economic development board has helped attract several corporations to the Pacific Missile Range Facility, and technology companies now employ dozens of workers at the research park there.

Gary Baldwin, the board's chairman, said the research there has achieved critical mass; a planned expansion of the tech park should fill up quickly, he said.

"If I had another building, I could find technology jobs for 200 people tomorrow," Baldwin said.

Negligible effects

When compared with tourism, however, the economic impact of Hawai'i's side industries remains negligible.

Development of the Mauna Kea telescope complex on the Big Island has created a mini-industry centered on space research. Advertiser library photo

The actual number of entrepreneurial technology companies not connected with tourism is smaller. And those companies, already constrained by a shortage of investment capital, have suffered in the recent tech and telecom downturn.

Adtech, arguably the biggest and most successful local tech company in recent years, cut its work force last summer by 30 employees. Other firms have closed down, left the state or delayed expansion.

Most of the other economic projects have had even smaller impacts. Hawai'i has attracted 100 "captive" insurance companies since the Legislature tinkered with state insurance laws in the 1990s, making the state one of the nation's leading homes for captives. But aside from a contribution in fee income, the industry has a tiny impact; much like a "Delaware corporation," the captives' presence in Hawai'i is often limited to a paper certificate. The resulting "industry" — a small network of financial managers who handle paperwork — contributed $16.5 million in fees and a few jobs to Hawai'i's economy.

Loss of sugar, pineapple

As Hawai'i struggles to come up with economic alternatives, tourism has gradually strengthened its claim as the state's No. 1 economic driver, thanks to the decline of large-scale pineapple and sugar production. As the visitor count has surged to record levels in recent years, and airplane capacity has peaked, pineapple canneries have virtually disappeared — there's one left on Maui — and only two operating sugar mills remain.

The Ke Kua‘aina Hanauna Hou ogo project on Moloka‘i represents one small effort to revitalize Hawai‘i’s once strong agricultural base. Advertiser library photo

The other big contributor — defense spending — has stagnated. Though the amount of direct military spending in Hawai'i has increased in the past 15 years, the military's overall share in the state economy has dropped from about 15 percent to less than 10 percent, and the amount of defense personnel and dependents in the Islands has fallen.

Tourism, meanwhile, still accounts for about 25 percent of the gross state product. That's down slightly from the 1990s, but still dominant.

"Yes, we have diversified some, but not enough to take it to the bank," said David McClain, dean of the College of Business Administration at University of Hawai'i. "There's been some successes, but they've been fractional, not really substantial. Tourism is still the name of the game."

Burdened with disadvantages

Despite the "new economy," in which business can supposedly be done from anywhere on the planet thanks to communications advances, the state still wrestles with many of the challenges that derailed past attempts to diversify.

Limited land and high transportation costs mean the state can't compete in large-scale manufacturing of low-cost goods — as the decline of pineapple and sugar attest.

Distance still remains more of a burden than an asset, despite attempts to create positives out of the situation. Many technology companies in Hawai'i say they are handicapped in fund-raising and marketing products, leading many to set up sales offices on the Mainland, but causing others to leave the state altogether.

The intermittent but spectacular successes of tourism, economists say, has lessened the urgency of efforts to change — especially since those successes have come on the heels of relatively lengthy periods of gloom.

While some marketing money is being spent to attract high-tech workers and non-tourism businesses — particularly to high-tech complexes like the Pacific Missile Range Facility or the Maui Technology Park — the inroads at such places have yet to be noticed by most people, observers said.

"We are becoming diverse," said Jeanne Skog, president of the Maui Economic Development Board, an agency that helped engineer a 30 percent growth in technology-related jobs on Maui in the late 1990s.

"It's just a matter of getting people to realize it."