Pacific Perspective
Pacific Perspective
Drawing wrong conclusions
and the game of ranking statesOn Sunday, March 24, the Star-Bulletin featured the front-page headline: "Hawaii lags in ability to compete."
These types of headlines occur with some regularity as various organizations -- in this case Boston's Suffolk University Beacon Hill Institute (BHI) -- publish studies comparing states on some socio-economic issue or another.
BHI showed Hawaii ranked 43rd out of 50 states in terms of "competitiveness." Following the Sunday article, the paper editorialized on Wednesday that "Hawaii's reputation of being unfriendly to business has received more confirmation" through the BHI study.
I agree with the general findings of the BHI study that Hawaii has some real and perceived disadvantages when it comes to our competitive environment.
Likewise, I agree with this paper's editorial opinion that the BHI study does not help our image.
However, I would like to note some of the limitations of such studies. It is important to understand these limitations since we should not allow reports like this to lead to useless self-flagellation and wrong-headed policies.
Studies that compare states through various socio-economic indicators are limited by the availability of consistent data across the 50 states. In many cases, the most appropriate data are impossible to obtain on a timely basis.
To me, the most troubling example of this is BHI's conclusion that Hawaii does poorly in terms our openness to trade with the rest of the world.
The reason for including openness as an indicator of competitiveness is that "When a state is open to trade, its firms are more likely to be competitive and hence more productive."
According to the BHI ranking, we placed 39th on the basis of two indicators: "Incoming foreign direct investment per capita," where we did well and ranked fourth; and "exports per capita," where we did poorly and ranked 50th.
However, this result is misleading. As we teach our undergraduates in their basic international economics classes, foreign investment follows foreign trade. It is thus inconceivable that we could rank fourth in the former while being last in the latter.
Since we know there is a lot of foreign investment in Hawaii, there must be something rotten in the BHI export rankings. Indeed, that is the case.
Due to lack of any other state-by-state data, BHI uses the amount of manufacturing exports as the indicator of exports. However, Hawaii is not a manufacturing state: It accounts for only 3 percent of our economy. Rather, we are a service state and many of these services are exported.
For example, we export services to Japanese tourist when they buy a meal or a submarine ride or a circle-island tour. We export these services in large, but difficult to measure, amounts.
Thus, because the government does not collect state-by-state data on service exports, we look bad when the inappropriate proxy is used.
Contrary to the findings of the BHI study, Hawaii is a very open state to foreign investment and trade. We have many problems, but lack of openness is not one of them.
Jack P. Suyderhoud is a professor of business economics at the University of Hawaii at Manoa College of Business Administration. Reach him at SUYDER@cba.hawaii.edu.