HONOLULU — Tourism will remain Hawaii’s primary economic driver despite ongoing calls for economic diversification in the wake of the COVID-19 pandemic and the Aug. 8, 2023 Maui wildfires, but there is no clear emerging industry to replace it, according to a new study.
The most promising opportunity, says Stephen Bond-Smith, an assistant professor at the University of Hawaii’s Institute for Economic Research, is to remove barriers to more “niche” industries related to tourism, or to fishing industries such as aquaculture.
Bond-Smith, after presenting the UHERO findings, said greater diversification of Hawaii’s agricultural crops and the development of a strong technology industry are unlikely to challenge tourism’s dominance.
“We’re not seeing a new industry replace tourism,” he told reporters. “Tourism will continue to be a pillar of Hawaii’s comparative advantage.”
In the absence of a clear, viable alternative, developing at least a niche industry “would help make the economy more resilient,” Bond-Smith said. “That means that if there’s a shock that affects tourist numbers, it might not be as big a hit as previous shocks that have really hit tourism spending. But it’s going to be very hard to get that done and I think we need to be a bit more ambitious.”
COVID-19 has renewed concerns that Hawaii may not be able to produce enough food to feed itself.
Crops like kalo, rice and mangoes show promise, but Hawaii lacks large-scale production to “replace the food we import,” Bond-Smith said.
After World War II, Hawaii’s statehood, and Hawaii’s plantation era began to decline, tourism grew.
But Hawaii’s isolation, lack of affordable land and other factors make manufacturing and shipping difficult, and potential high-tech industries typically leave within “four or five years” for places like California that have bigger economies of scale, Bond-Smith said.
The study found that “despite the potential of these industries, they seem to always fail due to a variety of development barriers, including infrastructure requirements, market failures and government failures. Policies that address these bottlenecks would help the market discovery process support a more diversified economy.”
“I was hoping for a more straightforward outcome than what I saw,” Bond-Smith said. “It’s not like there’s a specific industry that’s easy to add. If it was an industry that would be easier to add and it was more obvious, we would already be talking about it and creating policy to add that industry.”
The UHERO study could be useful to businesses, entrepreneurs and policymakers who each legislative session are looking for ways to develop new industries and move the state away from tourism, but they have had limited success.
According to the study, “As a result of its dominance by tourism, Hawaii’s economy faces near-term risks from shocks affecting visitor numbers and longer-term stagnation due to flat and volatile tourism spending over the past three decades. In response to these challenges, which have become particularly pronounced during the COVID-19 pandemic, Hawaii policymakers have increasingly emphasized the need for diversification. Yet it is unclear into which industries Hawaii could diversify.”
Instead of focusing on small-scale industries that are growing, the study said emphasis should be on industries that face challenges that are yet to be adequately addressed. This is a new and ambitious approach as it targets barriers to diversification rather than targeting industries that are already showing signs of growth.”
Bond-Smith reiterated that he lacks the expertise to identify barriers for specific industries, but barriers need to be identified and mitigated.
“For many industries, there could be a role for cost-effective policies to address the development bottlenecks that constrain them and diversify the economy through a market discovery process,” the study said.
Greater opportunities could come from industries already tied to tourism and Hawaii’s marine environment, which the study described as “underperforming industries that are likely to become stronger because they are linked to existing strengths.”
“Several opportunities are ocean-related. These ocean-based industries include fish fishing, shellfish fishing, ship building, port operations, fish farming and hatcheries, and seafood preparation and packaging. These all seem like logical diversification options because Hawaii is located in the Pacific Ocean, which provides the necessary natural resources.”
When it comes to aquaculture in the state, “it really seemed shockingly small in scale,” Bond-Smith said.
Without a significant economic alternative, Hawaii and its residents will remain at the mercy of economic forces on the mainland and around the world, as well as what the study calls “regional shocks that affect visitor numbers.”
The long-term effects of Hawaii’s reliance on tourism could force residents to relocate to more affordable areas.
According to the study, “Kamaaina may feel that Hawaii’s high cost of living leaves them with little choice but to leave to pursue opportunities on the mainland. If this trend continues, Hawaii risks falling further behind the rest of the U.S. This will either lead residents to leave the state or widen the gap between the economic achievements they achieve in Hawaii and the potential opportunities on the mainland.”