‘Niche’ industries could help diversify Hawaii’s economy, study finds
Tourism will remain Hawaii’s No. 1 economic driver with no clear emerging industry to replace it — despite ongoing calls to diversify the economy following the COVID- 19 pandemic and Aug. 8 Maui wildfires, according to a new study.
The most promising opportunities would be to clear obstacles for more “niche” clusters of businesses related to tourism — or for water-based industries such as aquaculture, according to Steven Bond-Smith, assistant professor for the University of Hawaii’s Economic Research Organization.
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Further diversifying Hawaii agricultural crops and developing robust technology industries seem unlikely to challenge tourism’s dominance, Bond-Smith said Tuesday after releasing the UHERO study.
“It’s not that there’s a new industry emerged that’s going to replace tourism,” he told reporters. “Tourism will continue to be the bread and butter of Hawaii’s comparative advantage.”
With no clear dominant alternatives, developing niche industries at least “would help to build resilience into our economy,” Bond-Smith said. “That means when a shock comes along that affects tourist numbers, it might not hurt quite so badly as some of the previous shocks that really punctured tourism spending. But it is going to be really difficult to do, and I do think we need to be a bit more ambitious.”
COVID-19 raised renewed concerns about Hawaii’s inability to produce enough food to sustain itself.
Crops such as kalo, rice and mangoes are promising, but Hawaii lacks large-scale production “to replace the foods that we import,” Bond-Smith said.
Tourism grew following World War II, the advent of statehood and as Hawaii’s plantation era began to wane.
But Hawaii’s isolation, lack of affordable land and other factors make it difficult for manufacturing and shipping. And potential tech industries typically leave after “four or five years” for places like California that have greater economies of scale, Bond-Smith said.
According to the study, “It seems that these are industries that have potential but consistently fail because various developmental barriers exist such as infrastructure requirements, market failures or government failures. Policies that address those bottlenecks would allow market discovery processes to support a more diversified economy.”
Bond-Smith said, “I was hoping to see more low-hanging fruit than what I did. It’s not that there’s any one particular industry that’s going to be easy to add. If it was an industry that was easy to add and it was more obvious, we would already have been talking about it and have created the policies that added the industry.”
The UHERO study could help guide businesses, entrepreneurs and policymakers, who each legislative session look for ways to develop new industries and to wean the state off of tourism — with limited success.
According to the study, “As a result of tourism’s dominance, Hawai‘i’s economy faces short-term risks from shocks that impact visitor numbers and long-term stagnation from flat and volatile tourism spending over the last three decades. In response to these issues — which became especially salient during the COVID-19 pandemic — policymakers in Hawai‘i increasingly emphasize the need to diversify. Still, it is not clear which industries Hawai‘i could diversify into.”
Instead of focusing on small industries that are growing, the study said emphasis should be placed on industries facing challenges that have not yet been adequately addressed. This is a new and ambitious approach because it targets the barriers to diversification, rather than targeting industries that are already showing signs of growth.”
Bond-Smith repeatedly said he lacked the expertise to identify barriers for specific industries, but they need to be identified and reduced.
According to the study, “for many industries, there may be a role for cost-effective policies to address the developmental bottlenecks that are constraining those industries, enabling the market discovery process to diversify the economy.”
Greater opportunities could be developed out of industries that already surround tourism as well as Hawaii’s ocean environment that the study called “underperforming industries with a higher probability of being stronger because they are related to existing strengths.”
“Several opportunities are related to the ocean. These ocean-based industries include finfish fishing, shellfish fishing, boat building, port and harbor operations, finfish farming and hatcheries, and seafood preparation and packaging. These all seem logical diversification options given Hawaii’s location in the Pacific Ocean providing the necessary natural resource.”
When it came to aquaculture around the state, Bond-Smith said, “It really shockingly appeared quite small.”
Without notable economic alternatives, Hawaii and its residents remain at the mercy of economic forces on the mainland and around the world, along with what the study called “local shocks that affect visitor numbers.”
The long-term ramifications of Hawaii’s reliance on tourism could further push residents to move to more affordable communities.
According to the study, “Kama‘aina may feel that they have little option but to leave Hawai‘i to pursue opportunities on the continent, often citing Hawai‘i’s high cost of living. Continuing on this trajectory risks Hawai‘i falling further behind other places in the United States. This would further push residents to leave the state or to face a growing gap between the economic outcomes they achieve in Hawai‘i and potential opportunities on the mainland.”
