Where can Hawaiʻi diversify its economy? UHERO finds areas

UH News,  July 2, 2024

Hawaiʻi‘s economy depends heavily on tourism, and is therefore vulnerable to sudden drops in visitor numbers as well as inconsistent and slow growth in tourism revenue for the past 30 years.

A new report by the University of Hawaiʻi Economic Research Organization (UHERO) identifies potential opportunities to diversify the state’s economy by analyzing the variety of industries across counties in the U.S. and Hawaiʻi.

PDF: See entire report

Based on industries already in Hawaiʻi, the study shows Hawaiʻi has great potential for ocean-based industries—such as fishing, fish farming and hatcheries, boat building, port and harbor operations, and seafood packaging. Diversifying into these industries can create long-term stability and support growth beyond tourism. Additionally, the study highlights opportunities to grow industries that align with Hawaiʻi’s traditional strengths while also offering potential for diversification, such as hospitality, water transportation, and video production.

The report authors—UHERO Assistant Professor Steven Bond-Smith and UHERO graduate research assistant Sumit Ilamkar—developed these possible opportunities after studying the industrial composition of all counties in the U.S. to measure relatedness between industries. To find diversification opportunities they examined the industrial composition of Hawaiʻi’s counties to identify underperforming industries with a higher probability of being more robust because they are related to existing strengths.

“The information in this report will be useful for policymakers and legislators seeking advice for economic development policy and for businesses and entrepreneurs seeking new opportunities,” said the report. “It also presents Hawaiʻi as a case study of an approach that will be useful for other places looking for strategies to diversify.”

Diversification challenges

Diversifying Hawaiʻi’s economy is challenging due to the advantages small, open economies gain by specializing in their strengths. The report identifies industries with significant growth potential that are currently facing obstacles such as inadequate infrastructure, skills shortages, and market and government failures. To achieve greater economic diversification, the report suggests adopting a more ambitious approach that targets these barriers instead of concentrating on already successful sectors. For long-term effectiveness, these policies must also include ongoing monitoring and strong governance.

“We show how Hawaiʻi initially benefited from specializing in the tourism industry, and how this specialization now exposes Hawaiʻi to short and long-term risks,” according to the report. “In this way, diversification is not an end in itself but aims to build a more resilient economy that is less exposed to these short- and long-term risks.”

PDF:  Read the entire report on UHERO’s website.