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While Hawaiʻi’s economic reliance on tourism took a major hit during the COVID-19 pandemic, the industry has periodically been punctured by shocks. For example, the 1991 recession, 9/11, the 2001 recession and the Great Recession all led to sharp declines in tourist numbers and spending.

A new University of Hawaiʻi Economic Research Organization (UHERO) blog and research paper by Assistant Professor Steven Bond-Smith provides insights into how the state can diversify its economy, so when tourism contracts, other sectors expand. Bond-Smith has provided a short list of industries with potential to “make use of uniquely Hawaiʻi capabilities and are appropriate for our small scale.”

Economic opportunities

Based on recent research, Bond-Smith said economies grow by diversifying into related industries. Two industries are related if they both use similar capabilities, such as a shared pool of workers with particular skills. For example, Hawaiʻi’s expertise in caring for visitors could transfer to health support and rehabilitation in the healthcare industry, which would have very different demand dynamics than the tourism industry.

According to Bond-Smith, if some of those conditions to be successful are uniquely tied to Hawaiʻi, then those industries cannot easily shift somewhere else. For example, Hawaiʻi is located on the trans-Pacific internet cables. This makes it a potential location for data centers to host international web-based services that would act as a stepping stone for U.S. start-ups seeking to expand internationally.

“In this way, Hawaiʻi becomes a gateway to Asia for bits and bytes,” Bond-Smith said. “Similarly, Hawaiʻi could be the ideal stopover location for transit between Asia and South America, specifically targeting business travel. China and Brazil are two of the fastest growing economies in the world. And astronomy relies on Hawaiʻi’s high mountains and clear air, which brings a unique STEM industry that is otherwise difficult to come by.”

Hawaiʻi’s economy is small, so Bond-Smith said that we need to find industries that suit small economies. Finance is more suited to very large cities, such as London, New York and San Francisco. However, professional, scientific and technical services are much more common in metro areas of around one million people, such as Honolulu. Similarly, food manufacturing is common in smaller cities with surrounding agriculture, such as around Hilo.

Evolution of tourism

For a long time, tourism in Hawaiʻi experienced significant growth in both visitor numbers and expenditures. Technologies such as the jet engine, and a growing and increasingly wealthy middle class who wanted to vacation in Hawaiʻi, made tourism a lucrative industry. This translated into substantially higher real GDP per capita in Hawaiʻi than in the rest of the U.S. However, visitor spending stopped growing in recent decades while the number of tourists continued to increase. For several decades, the tourism industry has not contributed to growth in per capita GDP in the same way that it had in the past.

“All of this research agenda aims to identify which industries we should expect to see in Hawaiʻi and each of its counties, but are currently missing or weak,” Bond-Smith said. “Then policy makers and entrepreneurs can take a closer look at those industries to see what is preventing them from being stronger. Initiatives need to be designed with a commitment by governments and community organizations to address these barriers.”

To read the entire blog, visit UHERO’s website.

UHERO is housed in UH Mānoa’s College of Social Sciences.

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