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The Honolulu Advertiser
Posted on: Sunday, August 16, 2009

Tourism leads economy


By Michael Tsai
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Visitors to HawaiĹi often pay a visit to Waik´k´ Beach. Tourism has been the stateĺs dominant industry almost since statehood.

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Hawaii news photo - The Honolulu Advertiser

The Royal Hawaiian hotel had few neighbors on Waik´k´ Beach in 1958. The tourism boom sparked a surge in development.

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In 1959, military spending outstripped the combined revenue generated by Hawai'i's sugar and pineapple industries, the pillars upon which Hawai'i's modern economy had been built. That year, tourism ranked a distant No. 3.

In less than two years, however, tourism would overtake both military spending and agriculture to become Hawai'i's dominant economic mover, a position it has yet to relinquish.

The shift occurred with startling swiftness, thanks to statehood and the introduction of high-volume, relatively low-cost jet travel between Hawai'i and the Mainland.

"Statehood and jet travel catapulted us," said former First Hawaiian Bank CEO Walter Dods, who graduated from high school and entered the job market in 1959. "They were the start of dramatic, positive increase in Hawai'i's economic situation.

"Historically, Hawai'i was a capital-short state," Dods said. "It was an awakening to have money come in for the construction of hotels and infrastructure. Outside capital poured in, which had a tremendous impact on the economy."

The number of tourists traveling to Hawai'i skyrocketed after statehood and maintained an upward trajectory for more than four decades, declining only once between 1960 and 1990. From 1960 to 1970 alone, visitor arrivals jumped from 296,000 a year to 1.7 million. By the 21st century, that figure had increased to more than 7 million.

The boom in tourism was met with a surge in development, funded in part by Mainland investors whose confidence in the market was bolstered by Hawai'i's new status as a state.

"Local banks embraced statehood and allowed funds to flow, which helped in the ability to attract big Mainland lenders," Dods said. "If you had a $50 million project, we could fund maybe $10 million. The rest had to come from larger banks on the Mainland. We needed those banks to work with us, and they were willing."

The rise of tourism had immediate benefits and far-reaching implications.

In 1960, the local building industry hit a new high with $164 million in building permits, an increase of $35 million over the previous year.

For 1961-62, the state's operating budget increased by $10 million to nearly $104 million.

The growth of the economy led to a surge in population, as well.

"At 20 percent growth per year, every three years it doubles," said James Mak, a professor of economics at the University of Hawai'i and author of "Developing a Dream Destination: Tourism and Tourism Policy Planning in Hawai'i."

"Incredible rates of economic growth drove up income," Mak said. "In 1959, the average income was relatively low, about 20 percent below the national average. By 1970, we had caught up."

During the transition from an agriculture-based economy to a service-based economy, the local population increased dramatically.

"People migrate to jobs," Mak said. "And in Hawai'i, jobs were created that the local population couldn't fill."

Mak said the initial growth spurt was made possible by a laissez-faire approach to government. He said that while the local government did not heavily regulate the growing tourism industry, it did invest in ways that ultimately helped tourism, such as building infrastructure on the Neighbor Islands and establishing UH's travel-industry management program "for labor force training."

Eventually, however, the pace of growth proved unsettling, even disruptive, to the local community. Projects like Henry J. Kaiser's Hawai'i Kai development plan threatened to displace existing rural and agricultural communities.

Mak said permitting and other regulatory policies were put into place to slow the rate of development. These policies, he said, would eventually become impediments to business and economic development as the rate of growth dropped off.

"Because we were growing so rapidly, they wanted to slow it down," Mak said. "But today, we're still doing the same thing at a time when we want to accelerate growth."

LOOKING TOWARD JAPAN

Local government officials and private business leaders identified early on the value of cultivating the Japanese market as a source of tourism business, and business and real estate investment.

As Mak noted, Japan eased travel restrictions on its citizens after the Olympic Games in Tokyo in 1964. Riding a wave of economic prosperity themselves, Japanese tourists flocked to the Islands.

Under Govs. George Ariyoshi and John Waihee, the state continued to promote Japanese tourism and investment through the 1970s and '80s.

Japanese tourists remain highly valued because, on average, they tend to spend more while on vacation than visitors from the Mainland.

In 1985, the U.S. dollar was significantly devalued in relation to the Japanese yen as part of the so-called Plaza Accord between the United States, Japan, West Germany, France and the United Kingdom.

The result for Hawai'i was a massive increase in Japanese investment, particularly in the local real estate market. The impact for residents was a spike in housing costs that, in combination with a higher-than-average cost of living, drove many to seek more affordable lives on the Mainland.

At the height of Japan's influence on Hawai'i, Japanese contributed $3.8 billion to the local economy and accounted for 11 percent of total real estate value in the Islands.

VOLATILITY OF TOURISM

Such heavy reliance on Japan, and on tourism overall, was reflected in recessionary periods after Asian markets tumbled in the 1990s, the 9/11 attacks, the SARS outbreak and other tourism-inhibiting events.

Such volatility has prompted the state to invest in a variety of industries Ś including high-tech and aquaculture Ś in hopes of providing more economic stability during low periods in tourism. But achieving this goal has been problematic.

"Anybody who has any sense wants a diversified economy," Dods said. "But that's easy to say and hard to do."

Dods said no single industry is likely to provide the sort of economic stability the state seeks. Instead, he said, the answer likely lies in nurturing and protecting the tourism industry while at the same time developing "smaller niche markets" uniquely suited for Hawai'i.

For Mak, who agrees that tourism "makes the most sense" as Hawai'i's leading industry, the key to future prosperity lies in diversifying tourism itself and acting upon new opportunities, as the state has done in its recent efforts to cultivate Chinese visitation.

"The Hawai'i economy is down right now because tourism and construction are down, but this is not insurmountable," Mak said. "We are facing difficulties, but not difficulties that will last beyond two to three years."