The worries of war

By Sean Hao
Advertiser Staff Writer

Tourists are again returning in greater numbers. Personal incomes are rising and the real estate market remains robust.

Keith Sienkiewics, a 25-year employee of Waipahu Bicycle & Fishing Supply, fears that another war between the United States and Iraq will hurt business more than the Persian Gulf War in 1991 did. Eugene Tanner • The Honolulu Advertiser

But events halfway across the world have some local businesses anxious about the future. War with Iraq remains a distinct possibility, and there's growing concern over whether North Korea's nuclear weapons program can be kept in check.

Whether such matters will develop into a military conflict is unclear, but many people agree that the fallout of any war could take a heavy toll on Hawai'i's tourism industry. It could trickle down in the form of higher energy prices, which would make flying and driving more costly, and affect such communities as Kane'ohe and Wahiawa, where the call-up of thousands of troops could hurt local businesses.

Given the already weakened state of the local and national economies, some fear another Persian Gulf war could derail chances of a recovery in Hawai'i, which is still suffering from a drop in tourism more than a year after the 9/11 attacks.

Keith Sienkiewics, a 25-year-employee of Waipahu Bicycle & Fishing Supply, remembers how the last conflict with Iraq hurt business about 12 years ago.

"I think everybody was kind of scared to spend money," he said. "They didn't know what was going to happen.

"I think it might be worse this time."

However, other factors affected the state's economy in the early '90s and contributed to the slowdown after the 1991 Gulf War, including the bursting of Japan's bubble economy and a recession in California, said Leroy Laney, an economics and finance professor at Hawai'i Pacific University and chief economic consultant to First Hawaiian Bank.

Laney said any war involving the United States would hurt tourism and take a toll on certain military-dependent communities in Hawai'i. Still, it's unlikely another war with Iraq would rock the local tourism industry as abruptly as the terrorist attacks, or as severely as the 1991 Gulf War, he added.

"It would have an impact, but it wouldn't be a body blow to the economy," Laney said. "You don't have the same confluence of events" as in 1991.

"The national economy is not doing tremendously well, but it's still on a recovery track." And as for Japan's economy, "It's still weak, but it's not falling off a cliff," Laney added.

Ultimately, a resolution of the situation in Iraq would be positive for consumer confidence and the economy in the long term, he said.

"Just the uncertainty weighs on economic activity," Laney said. "A resolution would be good, even if the outcome isn't particularly favorable."

Here's a breakdown of how some experts said sectors of the state's economy could fare during wartime:

Tourism

Regardless of the size of any military call-up, experts agree that war in Iraq or North Korea would hurt the state's tourism industry. Just how much it could cut into visitor arrivals would depend in large part on the duration of such a conflict, said Eugene Tian, tourism research manager for the state Department of Business, Economic Development and Tourism.

The agency expects visitor arrivals to rise 6.1 percent to 6.8 million visitors this year, while pumping $11.1 billion into the local economy. The bulk of that growth would come from the Japanese market — the second-largest source of Hawai'i tourists, Tian said. However, the Japanese market is particularly susceptible to adverse world events because of the already fragile nature of that country's economy.

During the Gulf War, the state's visitor arrivals in February 1991 plunged 22 percent, or about 117,000 people, from those of the year before, Tian said. Growth did not resume until July.

Given the already weakened state of the tourism industry as well as the Japan economy, it could be longer before the tourism industry rebounds should war break out once again, he said.

"In the early '90s, (the Japan market) was very strong," Tian said. We don't expect the Japan market to recover to the 2000 level until 2005."

Stu Glauberman, a spokesman for Aloha Airlines, agreed that tourism is vulnerable during a major military conflict.

"The experience of the Gulf War was very negative for the Islands," he said. "Interisland service is not affected by world events so much, but we did have an impact on foreign visitors to Hawai'i. Typically, the Japanese are very cautious and are very nervous about traveling overseas during times of conflict."

Military communities

In Wahiawa, Waipahu, Kane'ohe and other communities where the military is a significant contributor to the local economy, there's concern that local businesses may suffer as the military gears up for war. It's still unclear where or how many Hawai'i-based troops could be shipped out should war in Iraq become a reality. During Operation Desert Storm, about 7,600 Kane'ohe Marines and 500 Scho-field Barracks soldiers and reservists served in the Persian Gulf.

An equally large concern is the effect a war would have on already weak consumer sales. Laney and others said the uncertainty of war would likely cause many consumers to rein in spending at least initially — a development that local businesses experienced in 1991.

Sienkiewics, at Waipahu Bicycle, said business already is hurting in this sluggish economy. A loss of military business would only make things worse.

"They do come in and buy fishing gear and stuff," Sienkiewics said of military people. "We're already losing business from people from Guam and Saipan, and with all the cutbacks in interisland flights, fewer people are going fishing on the outer islands," which translates into lower sales, he said.

At Wahiawa Pawn shop, military customers represent 25 to 30 percent of business, said owner Samuel Burchette. Still, the activation of local troops shouldn't materially hurt business, he said.

"As the husbands go away, the wives need money," said Burchette, who also owns North Star Pawn in Wahiawa. "So they come in and pawn items.

"This is a good business either way: when the economy is good, people come in and buy, and when it's not, they sell."

The same outlook may not hold for many other businesses in Central O'ahu and on the Windward side — areas with large military populations. According to the Kailua Chamber of Commerce, the military comprises an estimated 20 percent of local business activity, with tourism kicking in another 12 to 15 percent. About 6,800 Marines and 2,100 soldiers are stationed at Kane'ohe Bay.

Brad Adams, owner of Windward Antiques, acknowledged that war would not benefit the local business climate. However, he hoped a resolution of the situation in Iraq would ultimately lead to better times.

"I think long term, it would be good for business — get rid of (Iraqi President Saddam) Hussein and all those turkeys now," Adams said. "I don't want to see American boys die, but someday we're going to have to pay the price. Hit them before they hit us."

Energy prices

Apart from the possible effects of war on tourism is a potential rise in energy prices, including the price of gasoline at the pumps.

"That is something you definitely have to take into account," said Laney of Hawai'i Pacific University.

After Iraq invaded Kuwait in late 1990, the average price of self-serve regular gasoline jumped from $1.19 cents a gallon nationwide to $1.34 as crude-oil prices soared. However, by March 1991, that price had plunged to $1.02 a gallon, in part because of a release of oil from the nation's Strategic Oil Reserve and a boost in output by other oil-producing countries, said Doug MacIntyre, a senior oil-market analyst with the Energy Information Administration, which collects and analyzes data for the U.S. Department of Energy.

Since the early '90s the nation's gasoline market has become more regionalized, with many areas using specialized blends with various additives and oxygen levels, he added. That makes it much more difficult for one region to supply fuel to another when shortages occur, which makes gasoline prices more volatile.

"I would suspect that if we saw a similar rise in crude-oil prices this time, we'd have a higher jump in prices at the pump," MacIntyre said. "That's not to say we're going to have higher crude-oil prices."

The labor market

As businesses contemplate potential sales losses from a resumption of war, they also face losing employees that may be called to serve in the military. So far 53,816 National Guard and reservists nationwide have been called to active duty, including 51 from Hawai'i, according to the Department of Defense. That's up from 16,200 nationwide in September 2001.

During Operation Desert Storm in 1991, 265,322 guard and reserve members were needed to fight Iraq. The highest estimates for a new war total about 250,000 troops.

But today, a greater percentage of reserve forces needs to be activated to field a wartime army because of a draw-down in active-duty forces since the Gulf War, said John Oshea, a spokesman for the Reserve Officers Association in Washington, D.C.

That could leave some businesses stripped of key people as mechanics, refuelers, pilots, police officers and truck drivers are plucked for service overseas.

"Those are the skills that are found in the reserves, and they're the skills that will be in the biggest demand, if there is some large conflict," Oshea said. "If there is a conflict and it lasts for a long period of time, then employers would probably face a greater impact than they did during the Gulf War."

Many of those serving in the guard and reserves also work in key public safety areas such as police departments and hospitals, which may cause problems because increased homeland security since 9/11 is straining law enforcement and medical staffing resources.

About 170, or nearly 10 percent of the Honolulu Police Department's 1,800 officers, are in the National Guard or reserves, said department spokeswoman Jean Motoyama. So far, about 10 officers have been called to active military duty.

She said the potential for a larger request for reservists remains a concern.

Were there a large call-up, "we would have to look at it where they working and adjust accordingly," Motoyama said. "There's contingency plans for everything."

Michael Pavkovic, director of Hawaii Pacific University's diplomacy and military studies program, agreed that a large loss of reservists could create shortages in people charged with security at home. Compounding matters is the possibility that the United States might need to field soldiers in both Iraq and North Korea, he said.

"We're facing our worst nightmare — trying to put forces in two theaters at the same time," Pavkovic said. "It's the kind of scenario military planners were not looking forward to."

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.