Five local experts talked with the Star-Bulletin about the future of the Hawaii Economy. Chuck Gee, left, Chris Resich, Christine Camp, Leroy Laney and Pearl Imada Iboshi sat down for a roundtable Wednesday. Despite attempts to diversify, all agree tourism will remain the state's economic engine for the foreseeable future.

Hawaii's economy

A conversation under
the shadow of war

Moderated by David Segal

The potential war with Iraq is creeping up like an afternoon shadow and Hawaii's long-stagnant economy is being held hostage once again. Gone are the heady days of the 1980s Japan real estate bubble. Now, it's all about recovery.

If it's not the Persian Gulf War, then it's the U.S. recession or 9/11.

Last fall, Hawaii's economy was showing signs of picking up steam again -- albeit growth forecasts were modest. But that scenario is changing again as war approaches.

A panel of five local experts recently weighed in at a Star-Bulletin economic roundtable on what could be in store for Hawaii's future.

Among their views:

>> Softening visitor numbers show that Hawaii already is feeling the effects from the Iraq situation.

>> Residential real estate may have three good years left before peaking, but commercial real estate still has further to fall.

>> Safety and cost concerns are prompting Japanese to choose China over Hawaii as a vacation destination.

>> Legalizing gambling would harm the state's family image and create social problems.

>> Additional tax breaks need to be offered by the state to attract outside investment.

>> The scarcity of seats on interisland airline flights necessitates some intervention from the state.

>> Health-care costs have to come down to help small businesses.

>> The state needs to continue its diversification efforts in the film and medical school areas as well as within tourism itself.

Participating in the panel were Christine Camp, Chuck Gee, Pearl Imada Iboshi, Leroy Laney and Chris Resich.

Star-Bulletin: Most experts have been forecasting real personal income growth in 2003 of about 2 to 3 percent and visitor arrivals to increase anywhere from 5 percent to just more than 6 percent. Now that we're nearly two months into 2003, what kind of shape do you think Hawaii's economy is in? What do you think will happen the rest of the year? And how prolonged would a U.S.-Iraq war need to be for Hawaii to feel the effect?

Laney: I've been forecasting the Hawaii economy (for 13 years) and it seems to me the current environment is more uncertain than practically any other time with possibly two exceptions. One was around the Gulf War in 1991. And the big one was Sept. 11 of 2001 ... As I compare the Persian Gulf War in 1991 with the current situation ... it seems to me that the risks are higher now both for the local economy as well as the national economy, and I think some of the same drag on the Hawaii economy is just exactly the same thing as it is on the national economy ... Most of that has to do with the uncertainty in Iraq. How long will it last? What are the scenarios? How will it play out? If you compare the two situations, it would seem we're at great risk now because in 1991 we were only talking about getting Saddam out of Kuwait. Now we're talking about a regime change, which is something a little more serious ... This could hurt our international tourism here in Hawaii. ... You've also got North Korea on the back burner ... along with the backdrop of terrorism, which we didn't have in 1991. I'd like to be as optimistic as I can, but I can't see any kind of conflict in the Middle East playing out positively for the local economy.

Leroy Laney

>> Professor of economics and finance at Hawaii Pacific University.
>> Former chief economist for First Hawaiian Bank.

Star-Bulletin: Pearl, what about yourself? Do you agree with Leroy? Are you more optimistic? More pessimistic? How do you view things?

Iboshi: I think everybody has a great deal of concern about what is happening and we already see that concern reflected in some of the visitor numbers. Some of the uncertainty of when a war would take place would make people hesitate to get on a plane now ... If it's a short Gulf War-type war, which would sort of be a best-case scenario, and there are no terrorist attacks subsequent to that, then we probably would see a Gulf War type of situation where you have a big drop in visitors, like 20 percent or so for the month, but it comes very quickly back. I think 9/11 was a little more difficult, and even in that case we came back sooner than some people had expected ... I think there are some things, though, that are positive for us as compared to the Gulf War situation. One is that in the early '90s we were coming off this incredible high so we got hit from this top, by not just the Gulf War, but by the bubble bursting in Japan and by the U.S. recession taking place thereafter. So that was a very difficult period that we totally had to retrench from. Whereas now, we've been on this steady growth path, nothing exciting, but at the 2 1/2 percent growth level, and we have a very strong real estate market and construction market which is being helped by the low interest-rate environment. So there's more positive points now with our ability to deal with the situation than we had at that time, so I'm relatively optimistic

Pearl Imada Iboshi

>> Economist for the state Department of Business, Economic Development and Tourism.
>> Currently on loan to the governor's office.

Construction promising

Star-Bulletin: Christine, since Pearl brought up the real estate market, let me ask you about that in regard to the economy here. How do you view the real estate market right now in this economy? A lot of people have talked about the real estate market getting into a bubble, perhaps similar to the way it was in the '80s. Then, there are other people who say there are different types of buyers today than there used to be because you don't have as many speculators. How do you view the market in this economy and are we heading for another bubble?

Camp: You have to really differentiate between residential and commercial. The commercial market is very soft. We all can recognize what is happening in the office sector, which is on a downward cycle now. We expect it to be softer before it gets any better, and we probably will not see anything improving over the next two years. On the retail side, it's rather flat. I think there are some good things happening as far as redirection of some of the shopping centers, but still consumer confidence is somewhat waning, so I think it will be a little softer, or as it is now. On the residential front, I don't think we're in a bubble market and the reason why I say this is that we're kind of a lagging indicator. The homes that are out there are still affordable. We can talk about the speculative market, which are the second-home buyers, and that market has kind of waned from the hyper price inflations that you've seen on Maui and the Big Island. That subsided a bit and yet the market has stabilized now at a lower scale ... The prices are still affordable for the average income that we have per family as long as the interest rates are where they are today ... I feel Hawaii is a lagging market compared to everywhere else where they're hyperinflated. ... We are just kind of getting started. I think we have about three more years going as long as interest rates are where they are. ... As far as down the road, I feel that in 2003 people are going to pull back, but next year is an important year (for construction) and the reason is military housing. They're going through a bid process now and they're going to be selecting (contractors) -- 7,700 homes for the Army, 2,000 homes starting with the Navy but they're going to be adding to that for a total of about 7,000 units, and construction is going to start for Ford Island. And the Air Force has 2,000 units. ... Next year is going to be a huge impact for us in job growth in the construction industry, design, property management and supplies.

Star-Bulletin: Chris, I'd like to move on to you with the same questions. Then, perhaps you can talk about the Japan visitors because, as we know, the visitor arrivals from Japan are still down and they're not at the levels they were prior to Sept. 11. Do you see any improvement there or do you think this market is getting too mature for them?

Christine Camp

>> Principal and managing director, Avalon Development & Consulting.
>> Chairwoman, Urban Land Institute Hawaii District Council.
>> Vice chairwoman, Chamber of Commerce.

Arrivals softening

From the tourism point of view, we are already at war. We have to recognize this. Arrivals are softening. January was soft. February is soft. More importantly, we hear from our partners in travel that bookings, and this is a time ... when people make bookings for February, March and even for the summer ... bookings are very slow. ... From past experience, we know that there's a certain segment of the market, maybe 20 percent, who are risk adverse and if there's going to be uncertainty they are not going to travel. That is in the U.S. and we are observing this behavior already. We are seeing this behavior also in the international markets. We are hearing from international wholesalers that bookings again are soft for March, April and I think that the situation in North Korea is adding on that side of the market. Then there is a second negative impact, and that is the visa situation. After 9/11, it's is so much more difficult for Chinese, Koreans to get visas to Hawaii. ... Based on 9/11, we learned there were actually two trends we have seen. One positive trend on the American side over time is that Americans felt more comfortable traveling within the U.S. as opposed to outside the U.S. and Hawaii clearly benefited last year from that trend, and we gained, especially from the West Coast. ... Assuming the war scenario is relatively mild, I would imagine the American margin would come back pretty quickly. Different scenario in the international market. I believe the Japanese are still going to have trouble traveling. They are going to continue to be risk averse. The Japanese market did not come back last year the same way it did after the Gulf War. ... The Hawaii, Guam, U.S. markets, if you look at the departures from Japan, all those markets were down. Where were they traveling? To China. China is a safe country, an interesting country, and it's closer. So they benefited from it at the expense of the U.S. destinations, Hawaii included. ... We were expecting a 10 percent increase (this year) from the Japanese numbers in terms of arrivals, but considering the international situation, that is probably going to be very difficult. ... The opportunity is on the American side and that's where we should put our money in terms of promoting the destination and communicating the differentiation of Hawaii from other destinations.

Star-Bulletin: Let me get Chuck involved in this conversation. I saw you nodding your head in agreement with Chris. You've been in Hawaii a long time and obviously have studied tourism here. How does this economy and market feel to you right now?

Chris Resich

>> President, MC&A Inc.
>> Chairman, Chamber of Commerce.
>> Former president and chief operating officer, Hilo Hattie.

China luring tourists

Not great. ... As an academic, you tend to look at things with a global perspective and then you filter it down to how it's going to impact where you live. And you look at things also historically. When I came here, agriculture was the big industry, then military, and then small business. So tourism was the Johnnie Come Lately. The tourism industry in Hawaii is roughly only 30 years old or so. It began with the coming of the first jumbo jets in '63 thereabouts. ... Once they started coming, we knew the markets would open up. But it grew so fast. Up through to the '80s, it was doubling every five years, ... and by the time we reached '85 or so, we were in a terrible mature situation. When you're in a mature mode, each new customer is harder to gain. All the signals were there. The growth of the repeat market vs. the first-timers. The amount of money you have to spend incrementally to attract each new visitor. ... I knew we were going to be in for some trouble. ... You had a lot of things going against you, yet it kept growing. During the 1980s, the Japanese investments kept fueling the boom. We were in a real estate period but I knew that we were going to be in for a slow period. And, by the time the Persian Gulf War hit, Japan's bubble economy had already burst. If you're looking globally right now, the only healthy country is China. It grew last year about 7.8 percent. ... The Japanese market is not growing. ... They're going to China. Not only do they perceive China as a safe place to be, but there's another reason why they're going. It's cheap, cheap cheap.

Star-Bulletin: We obviously have the Wal-Mart and Sam's Club combo coming down the street. Do you feel that the retail market here is getting saturated? Do you think there are too many of these larger chains coming in here and it's starting to wreak havoc with the small businesses?

Camp: Oversaturation is obviously a matter of perception. ... I think right now we're just in an equilibrium as far as what we have and it's a double-edged sword. By having the new retail introduced to Hawaii, it's saving our residents a lot of money. Sure, it's impacting small businesses. Anytime there's change it's going to impact the people who can't adjust ... but maybe there just wasn't enough time to help them adjust and certainly there needs to be something to help small businesses look at other opportunities and niches.

Chuck Gee

>> Dean emeritus, University of Hawaii School of Travel Industry Management.

Advice for Lingle

If you take Iraq out of the situation, what advice would you give the Lingle administration?

Laney: It would be good if we could improve Hawaii's image as a place to invest. Hawaii's far too small an economy to generate its own savings enough to invest. We've always been dependent on some kind of external injection of capital. We can go all the way back to pre-sugar. The most recent wave that we had, of course, was the Japanese speculative bubble -- that didn't do us much good in the long run -- in the late 1980s. ... We do need to improve on the state's image as a place to invest and I feel that is probably a priority of the governor and our administration.

Star-Bulletin: Pearl, I realize your hands might be tied a little bit (due to your working relationship with the governor), but what is your advice?

Iboshi: One of the priorities of the governor is to improve the business image, to improve the overall business environment because it's not just an image thing. You can't go out and say how wonderful it is. You have to actually go out and change things. People have to start talking about it for real investment to take place. Some of the tax-incentive things that have been put forth have set the stage in some areas and what we need to do is build on what we have just by making it easier overall to do business in Hawaii.

Camp: We really do rely on tourism. It is our No. 1 industry next to the military. We need to look at how we can motivate the airlines to continue to do business and to bring them here ... instead of having surcharges and fees for our airports. We should be looking at tax breaks for them. The second thing is to build on tourism facilities -- the sandy beaches and creating the space to be a tourist. As much as we want to build Hawaii as a place to do business, we have to remember that people think of Hawaii as sand and surf and the weather and we need to support the infrastructure for tourism. (Two ways to do that are with) commercial tax credits and hotel tax credits, which is kind of in line with building an infrastructure for tourism.

Resich: I think we're on the right track and the (Lingle administration) just needs to persist in implementing the changes. Overall, from the business community perspective, the cost of doing business and the difficulties of doing business in Hawaii are the problems for all of us and I would like to see the new administration work closely in the future to make changes in this regard. From that perspective, I would suggest to the new administration to look at ways to decrease the government, not only maintain the no-growth government but really decrease it. Still, the level of taxation, which is driven by the price of the government, is too high. ... Also, I would like to see the administration work with us on improving the other aspects of small business. Particularly the health-care costs of doing business in Hawaii are still enormously high when you look at the percentage of payroll. ... On the tourism side, I would suggest that the administration work more closely with the Hawaii Tourism Authority. At this point, we don't see that working relationship working out yet.

Gee: At the top of the list would be education. I think the university can be a wonderful incubator of new businesses and I'm really impressed with what's happening at the medical school in the areas of biotechnology. Major grants are coming in. ... Not all kinds of business are suitable for Hawaii. We can't do manufacturing, for example. But think tank industries, green industries, any of these things would be very suitable and would complement our way of life. ... Not too long ago I brought in a whole bunch of experts just before I retired as dean to talk about what was happening in other destinations. ... And out of that conference came ideas for new sectors of tourism. You can't look at tourism as a monolithic entity, but there are many forms of it -- everything from sports-related to health-related. ... The spa industry is very big now all over the mainland and in Asia because people are very concerned about their health. ... If you look at the long-term projections, where will the new wealth come from? In 15, 16 years from now, China may be the third-largest economy or maybe will replace even Japan's economy. So where will new investment come from? You better have a good relationship with that particular country.

Airlines a concern

Resich: The first priority right now is truly the interisland airlines. ... The interisland situation is dangerous for the economy the way it is right now evolving. The cutbacks in flights impact the way people do business internally within Hawaii and impact the travel market. We are clearly seeing a decline in sales of products that involve travel from one island to another because people can't get seats when they want to travel. It's not only a matter of pricing by the airlines but it's also a matter of their costs. I think the state ought to look at how they can improve the environment for them to succeed and then leave it to the market to decide the price-supply equation. ... As the airlines are telling us, their flights to the Big Island are losing money even if they are full. On the other hand, it's difficult for them to increase pricing. It's difficult (for the market) to take a 20 percent, 30 percent increase in the prices. I think we are in the process right now of developing that better equation between the price and supply but I'm saying in order to help everybody, if the landing fees could be adjusted or if there were other ways to help them on the cost side, maybe the price doesn't have to go up 30 percent for them to make money on those flights.

Gee: If I had a piece of advice for the governor as far as air transport, I think we ought to pursue the idea of cabotage. Naturally, our Americans carriers would not like it. But, at times when you cannot get seats, during the marathon for example, getting a flight out of Hawaii into any part of Asia was a near impossibility. ... If you were to allow a foreign carrier to have a stopover privilege in Hawaii without declaring Hawaii as its gate, you would increase the capacity by quite a lot. ... I always thought Hawaii should explore the idea of a free-trade zone (for all sectors) ... to allow people to bring raw materials and finish it here in Honolulu before taking it on to the mainland.

Gambling busts

Star-Bulletin: What's your opinion on introducing legalized gambling in the state? Do you think it will be good for the economy or will it be bad for Hawaii?

Laney: It's a very controversial issue. I've written on it. I'm on record as saying it may not necessarily be that great of a thing. It could be, to an extent, a zero-sum game, and we do have competition there, and I'm just not talking about Nevada. There are a lot of places there.

Star-Bulletin: You could even go the way of the lottery rather than casinos. Do you think there should be maybe a lottery and not casinos, or do you think we should have nothing?

Laney: The thing about a lottery is it's usually run by the public sector, by government, so it tends to be something of a tax. And not only that, it's a regressive tax because it's basically poor people who indulge in the lottery and more wealthy people have other sources to indulge their risk taking. ... But there is another side to it. I know there are a lot of proponents of some form of gambling here. I think a lot of people have the view of, 'Let's try it. Let's see how it does work.' I think if it became an industry of any size here it would change the image of Hawaii and then it might be difficult to take it back. You

Gee: It's also about entertainment and we're not prepared to make that kind of investment. The entertainment side of it is multibillion dollars, huge showrooms that are all subsidized by the casinos. ... Then, you've got the social problems that would lend itself to crime and other things. ... Economically, some will make money but it will probably go to the outside. It will be outside investment, outside managed and we will be left with the social problems. Profits will be siphoned out of Hawaii and our image will be changed forever.

Resich: I agree that mass-market gambling is certainly not a good option for Hawaii from the social point of view as well as the marketing point of view. We're a family destination and the pristine beauty of Hawaii and the pristine beauty of our culture are really the great selling points. So we need to preserve it. However, there are places where gambling as a product enhancement may have some room and that is cruise lines. Cruise lines are already offering gambling on trips between the mainland and Hawaii and I think right now the only exception is for cruises originating and ending in Honolulu. Possibly, if that exception was eliminated, that could bring additional customers to Hawaii in a very controlled way.

Diversification needed

Star-Bulletin: There's been talk about diversifying here so we don't have to be so dependent on tourism. Do you think it's possible to diversify into something else? What could we diversify to? And what do you consider the No. 2 industry in Hawaii right now?

Camp: We're forgetting military. They really are an industry. There's close to $9 billion a year of funding that's coming to Hawaii. But I really think we do have an opportunity to build a second industry other than military. Military housing is going to be just phenomenal when the construction starts and we're going to see more money coming into Hawaii than ever -- not only for construction but the rent that we've never seen before. Right now, all the people who are living on bases have never paid rent. When that becomes privatized, that money is going to come in the form of payrolls and services and supplies. The multiplier will be at least three times. We have $100 million of rental income coming every year from each of the bases, plus about $1 billion in construction in the Army, about $1 billion in the Navy over the next three to five years, maybe the next 10 years. That's a huge impact. ... The second industry that could be developed is the medical center. ... I think what's happening in Kakaako could be our future in the sense of research and having that knowledge-base industry.

Resich: We have opportunities to continue our diversification apart from Kakaako. ... We have some other areas like the film industry. They are right now taking advantage of Act 221 (a state law passed in 2001 that provides tax credit for investments in high-tech businesses). ... If they are legitimately supported in the right way, we have a tremendous opportunity to compete for movies and bring more movie production here to Hawaii. Of course, we have other research opportunities -- oceanography, astronomy and in agriculture. I think that Act 221 was a great first step. ... However, tourism is still, for the foreseeable future, going to be our No. 1 industry and what we have to recognize is that tourism is this huge industry that is moving, that is volatile and that needs care and management.

Iboshi: Tourism has been shrinking as a share of our total economy. The things that have been growing are the business sector, which includes the technology industry, and health care. But tourism will continue to be very important. One of the things we need to look at is diversification within tourism. ... The East Coast market is relatively untapped from Hawaii and it's a difficult market because it costs more to get here per visitor than the West Coast market. But, at the same time, it's such a large market we can't afford to ignore it. We really need to invest more in it. China is going to be an emerging market, but visa issues are the main problem at this point in time. Korea is also a market. Europe is a difficult market because it's so far. The cruise industry is a really growing area in the visitor industry, and that's going to be a bigger part of our tourism market. Time share is an interesting thing we've been watching develop and grow. It's a really stable market. They come every year and that will really change the complexion of our visitor industry and has already in Kauai and some of our other islands.

Star-Bulletin: Hawaii has always gotten the knock of being a hard place to do business. Do you think a lot of that is perception, or as Chris mentioned with Act 221, is that helping to alleviate the knock on the state? Also, do you think things will be changing under the new administration?

Resich: Hawaii is a difficult state to do business. It's real (and not a perception) when you look at the level of taxation, when you look at health-care costs for businesses, when you look at the transport issues, when you look at the whole process, all the regulations, permitting, all the difficulties businesses have to deal with in dealing with the government. That's an additional cost, delays. Clearly, that's one aspect that we need to improve on in order to help existing businesses do more business and grow, as well as to attract new business.

Responsible growth

Star-Bulletin: The economic growth pattern we've been in the last 10 years has been described as anemic and limping along. Is that our future? Should that be our future? Do we want to change that? And if we do want faster growth, where's that going to come from?

Gee: How much growth do we really want? Not all growth is appropriate. We would not be able to sustain, let's say, a 10 percent increase in population. First of all, you're looking at fragile resources. Islands, by their very nature, are environmentally fragile. Not every form of business is suitable for Hawaii. Sometimes, the high cost of doing business is not altogether bad. I agree it's not the friendliest place. Logistically, it's always kind of hard to bring in raw material, finish them here, anything to do with manufacturing. The perception that we're an unfriendly place to do business is more than a perception. Everyone has confirmed that. It's a high cost of doing business. Yet, if it were not, would you see this explosion that would deteriorate our way of life?

Camp: I'd like to define growth. Growth for growth's sake is not something we want. We want sustainable growth. Sustainable growth for me is when you provide the resident population with decent jobs, decent wages and a place to work and play and all the different things that come with lifestyle and a community. Right now, in my opinion, Hawaii is not there yet. We still need to grow to provide for our residents and to allow for our residents to stay home. Can we sustain growth? I believe so. The only way we can do that is to have exported goods and services. ... I would like to see growth a little faster. ... I think 2 or 3 percent is a good rate of growth.

Resich: Right now our situation is not too good. We have been in a stagnant economy for quite some time. We've been losing jobs. That's not a good environment overall for the residents. Residents have had to go looking outside the state because there are not enough good opportunities within the state. We need to resurrect some growth in order to start creating those opportunities for the residents to stay here in Hawaii. Secondly, in this stagnant economy, the costs of social benefits are increasing. That's where we have those pressures on the cost of government and those costs as a percentage of the economy of the output. If we continue in this trend, we are going to be having more and more problems balancing the budget and providing the social benefits at the level that islanders would like. We pride ourselves on having a state that's quite liberal in this regard and offers a good set of benefits. And, if you want to be able to afford them, we've got to go into the growth mode. I guess growing 2 to 3 percent would probably be ideal growth. ... What is very important for the new administration and to all of us is to address the issue of how far do we want to grow the economy, and tourism within the economy.

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