Economic development policy in Hawaiʻi

Geographic price differences confound comparisons of economic performance across cities by conflating nominal urban advantages with real differences in well-being. Existing tools only partially address this problem: the Bureau of Economic Analysis publishes a Regional Price Parity (RPP) Index that represents relative price levels in US cities and states, but it is available only annually since 2008 and with a publication lag, limiting its usefulness for historical or high- frequency analysis. To address this measurement gap, we use the Consumer Price Index (CPI) for 29 US cities to construct a CPI-based RPP, enabling consistent comparisons of urban economic performance over time at constant and comparable prices. We exploit standard price-parity properties using publicly available CPI data to estimate CPI-based RPPs at a higher frequency and over longer historical horizons. This results in a CPI-based RPP for any period with published CPI data, as far back as 1913 in some cities to the most recent observations. By separating nominal urban advantages from cost-of-living differences, the index allows researchers to reassess claims about urban well-being, affordability, and the real returns to agglomeration. We demonstrate the index by examining long-run regional price dynamics and comparing real per capita GDP and real per capita personal income across cities at constant and comparable prices.

Hawaiʻi's dependence on tourism has made its economy vulnerable to shocks and long-run stagnation. In response, there is growing interest in diversifying the economy to build resilience and foster new growth. This paper draws on a study using the principle of relatedness to identify diversification opportunities aligned with existing capabilities. However, identifying opportunities is not enough. If an industry has not emerged, some capability it requires is likely missing. The key policy task is to remove barriers to new industries by uncovering and addressing those gaps. While data access may be more limited for other island economies, the same policy design lessons apply, supporting locally tailored initiatives to identify and overcome barriers to growth.

Many regions of the United States promote diversifying their industrial base as a primary goal in regional economic development strategies but rarely use objective tools to identify diversification opportunities and priorities. In this article, we summarize a case study using a novel approach to identify opportunities to diversify Hawaiʻi’s economy and discuss the wider policy implications of this approach for other regions. To explore diversification in Hawaiʻi, we apply the Principle of Relatedness, which predicts regional diversification patterns. We specifically focus on industries that are related because these have a higher probability of thriving. But to diversify, we look for new industries that are currently underperforming. The case study highlights the difficulty of diversifying and the challenges that are likely to face new industries, often requiring a significant policy response to be overcome.

Specialization in tourism exposes the economy of Hawai‘i to external shocks that trigger collapses in tourist numbers. Furthermore, Hawai‘i's economic growth has diminished for decades as the dominance of tourism has not generated productivity growth. In response, policy makers in Hawai‘i increasingly emphasize diversification. This article examines a spatial economics perspective to explain why Hawai‘i is so specialized, and to sketch policy for diversification and growth. Isolated, small, and open economies tend to be more specialized in one or a few industries because increasing returns to scale generates a coordination problem for new industries. By targeting industries that use related know-how, or a Hawai‘i-specific resource, Hawai‘i can access productivity gains from the scale of related and location -bound industries.

Hawaii was vulnerable to the COVID-19 pandemic due to its reliance on tourism. This article analyzes the pandemic’s economic impact in Hawaii by comparing outcomes with the pre-pandemic forecast. We explain why Hawaii’s experience differed from other states, suggest reasons for a slow recovery, and discuss the pandemic’s lasting effects.