Part 2: Plantations shut. Tourism stumbled.
But as events inside and outside the state
changed all the economic rules, Hawaii was
still dealing with many of the same old tools.

By Ken Sakamoto, Star-Bulletin
Stormy weather is ahead for Hawaii's tourism industry.
Growth is no longer assured and other destinations are
offering strong competition. Story, Page 6.

---

Who’s to blame?

Labor, politicians and big business
held fast to the status quo, failing to
adapt to the tougher times

By Russ Lynch
Star-Bulletin

War, weather and other events beyond the control of anyone here contributed greatly to Hawaii's troubled economy, local business observers and economists say.

But, the experts say, the relationships among labor unions, politicians and big business that were established decades ago left the islands without the flexibility to act when the going got tough.

So as the economy underwent fundamental changes -- with Hawaii's No. 1 industry, tourism, slumping and its other big employers, sugar and pineapple, moving on to cheaper pastures overseas -- the state's old ways of doing business remained.

Government continued to grow throughout the early 1990s even though the economy started shrinking. Gov. John Waihee's administration drew upon the state's budgetary surplus and left the state with a huge deficit by 1994.

Small businesses continued to complain of being overtaxed and overregulated to death; the rising number of business failures and bankruptcies lent credence to their pleas.

The government doesn't get all the blame, however.

Length of slump was unprecedented

Some say the state's private sector has relied on government for too long to solve problems and did not take any real initiative to craft a long-term vision for the state.

"The private sector in Hawaii has been so shielded by years of government protection and coddling," said University of Hawaii economics professor Jim Mak.

And the length of the current downturn has caught both politicians and businesspeople by surprise -- past downturns have lasted no more than a year or so.

"We have been complacent," said Stanley Hong, president of the Chamber of Commerce of Hawaii. "We always felt we would bounce back quickly."

Indeed it was a number of external events that coincided in the early 1990s to help put Hawaii so deeply in the hole. They included:

The rush of Japanese investment that poured money into the economy in the second half of the 1980s fizzled out when Japan's economic "bubble" burst near the end of that decade.

By then, there was a mainland recession and consumers cut their spending on nonessentials. California, Hawaii's single biggest tourist market, was hard hit by a wind-down of the aerospace industry.

Five months of tension in the Middle East in late 1990 and the six weeks of the Persian Gulf War that followed in January and February 1991 hurt international tourism.

Then in September 1992 came a local disaster, Hurricane Iniki.

No luck with diversification

Before and since those troubles, efforts have been made to diversify Hawaii's economy but true success has been fleeting.

The state promoted aquaculture, and some of the big corporations dabbled in it. It was supposed to be a great opportunity because of a huge export market in Asia and on the mainland.

Unfortunately, it was too expensive to get most of the products to markets outside the islands. The industry is down to a dozen or so prawn farms supplying hotels, restaurants and local retailers.

From time to time, Hawaii has been touted as a potential mid-Pacific financial hub, perhaps with its own stock exchange. Time differences between the mainland and Asia were supposed to make this an ideal place to handle financial transactions.

The problem: the ability for businesses to communicate and for money to change hands electronically has grown rapidly.

Financial centers can be anywhere in the world and they don't have to locate in a high-cost place like Hawaii.

Local economist David Ramsour says one of the problems has been state leaders' approach to finding solutions. For years, Hawaii's elected leaders -- when they weren't fighting to keep single big industries, such as sugar, from closing down uneconomic operations -- sought the big hit, the one new industry or big new company that would boost jobs all by itself.

That, said Ramsour, couldn't succeed.

"With very few exceptions, this is not the way powerful or even sustainable economies come to be," said Ramsour, who was chief economist at Bank of Hawaii from 1983 to 1995 and is a private consultant.

What is needed instead, he said, is a wide variety of small fruitful businesses, and to get to that point, there has to be an overall public and political attitude that nurtures what Ramsour calls "these agents of production."

"The single large industry or corporate rescue is so intently looked for in Hawaii because it is politically manageable," Ramsour said.

Labor and politics are so wrapped together that the idea of large moves to save individual big employers or attract new ones suits political leadership, he said.

Every time the Legislature asked, "What is going to take the place of sugar and pine?" they were willing to listen, "but only if it was a large, cohesive, manageable component," Ramsour said. "If it was 300 or 400 small businesses, they were frightened to death by that."

In search of true leadership

Until recently, no one has taken the lead to come up with a vision for Hawaii's economic future, one that both the public and private sectors embrace, said the Chamber's Hong, who was president of the Hawaii Visitors Bureau for nearly 10 years in the 1970s and '80s.

In the past, Hawaii grew gangbusters despite the lack of such planning, he said.

The only visionary economic planning he recalls the state doing dates to the years when George Ariyoshi was governor (1974-1986).

Ariyoshi had a blueprint for each sector of the economy, including tourism. But Hong didn't put much stock in the documents, especially the tourism blueprint, saying the numbers were suspect. "It's questionable whether those plans actually were realistic," he said.

When Gov. Ben Cayetano took office in early 1995, however, his key economic advisers argued that the state needed a strategy to deal with the changing economy.

Seiji Naya, head of the state Department of Business, Economic Development & Tourism, said the duration of the slump underscored that the changes were structural, not cyclical, and that the state had to respond accordingly.

Cayetano's answer: Get the state's fiscal house in order, make Hawaii a better place to do business and kick-start critical sectors of the economy with injections of money for construction and tourism marketing.

Legislature fails to offer relief

But Cayetano's message has either not been heard or has been muddled by the persistence of the downturn, leading some business executives to say the state still lacks an economic vision.

Furthermore, these executives say, the 1997 state Legislature failed to come to grips with the economy. It stayed bogged down in the same-sex marriage debate.

"One good thing to come out of the Legislature," said Sam Slom, head of Small Business Hawaii since 1983 and a freshman state senator in the recent session, "was the change in the general excise tax for sublessees."

Most Hawaii businesses are on land or in buildings that belong to someone else, often at the level of sub-sub-sublessees. Hawaii's general excise tax goes on top of the rent at every level. The new act eliminates the pyramiding.

"But that doesn't kick in until Oct. 1, 1998, and then takes seven years to become completely effective. That's not relief," Slom said.

The reality is that the problem is much longer-term, Slom said.

"It's what we've done here. Taxes have continued to go up, whether we call them fees or whether we remove tax credits or whatever. Mandated benefits, such as prepaid health care and workers compensation, have gone up," Slom said.

---

Star-Bulletin reporter Rob Perez
contributed to this report.

---

Wanted: Your comments
What needs to be done to help Hawaii emerge from
its prolonged slump? Write to us at Letters to the
Editor/Economy, P.O. Box 3080, Honolulu, HI 96802
or e-mail us at editor@starbulletin.com and share
your suggestions. Please include your
daytime telephone number.