An Ill Wind Whips Economy In America's Paradise Islands

A few years ago, Steve Vaspra never would have expected to be where he is now. His business was humming along nicely and he had just bought a new condominium in a nearby resort community.

Today, his business of wholesaling used cars is off 75 percent from its peak in the early 1990s, and he has been forced to look for part-time work managing a coffee shop to pay for his condominium. Faced with financial realities, Mr. Vaspra plans to rent the condo and find a cheaper place to live.

In Hawaii, tales like this abound. While the rest of the nation enjoys one of the most remarkable financial recoveries in postwar history, Hawaii has become an anchor dragging behind the buoyant US economy.

Since 1991, Hawaii has grown less than any other state in the country, and last year income here rose only 1.7 percent, also rock bottom in the United States. But even in the depths of the current recession, the first faint signs of recovery are appearing. As the state seeks to carve out a prosperous future, Hawaiians are increasingly being forced to choose between decades-old traditions and new pro-business ideas.

"We have a reputation - one that we have earned - as being not very friendly to business," says Leroy Laney, a senior vice president and chief economist for First Hawaiian Bank.

Back in the heady days of the 1980s, billions and billions of yen poured in from Japanese investors and tourists, who saw the state as an inexpensive Shangri-La. It didn't have to worry about attracting businesses.

But now, with the Japanese economy in a tailspin, Hawaii is looking to American firms, who have a laundry list of reasons not to come.

What's wrong?

While home values tripled during the late '80s, the state government also went along for the ride, increasing its work force by double-digit percentages.

Now, the large state and county bureaucracies, with their byzantine regulations and overlapping jurisdictions, are often cited as a dead weight on the state's economy.

Other business flash points, however, cut much deeper into Hawaiian roots. The state's long-standing liberal tradition, for example, means that labor unions in Hawaii remain one of the state's most potent political forces, and tax rates here consistently rank among the highest in the nation.

Even Hawaii's Polynesian heritage enters into the equation. Recent state Supreme Court rulings challenge the Western notion of private property and reestablish traditional Polynesian rights, which allow native Hawaiians to gather plants on private, undeveloped land. Analysts say the move has scared off investors.

These influences have already had an effect on jobs here. Even businesses that call Hawaii home have to look elsewhere for investment and growth.

Outrigger executive David Carey would love to invest more in Hawaii, but "even if we were wildly successful in our investments here we would still have to invest elsewhere," he says. "There are not a lot of opportunities for growth in Hawaii right now."

But the winds of change are starting to blow through paradise. In 1996, the electorate fired a shot across the bow of the Legislature by ousting two powerful and heavily favored lawmakers, as well as nearly unseating the incumbent Senate president and House Speaker.

For the past two years, Democratic Gov. Ben Cayetano has bit the bullet and cut government jobs. He has also appointed an Economic Revitalization Task Force made up of the state's most influential people - clearly a political move but one that has already produced radical proposals to kick-start the state's economy with tax cuts and incentives for investment.

Mounting debts

Most Hawaiians are looking for anything to work. Bankruptcies have skyrocketed from fewer than 1,000 per year in the '80s to 3,083 in 1996 - the fastest rate of increase in the US. Home foreclosures are also at record levels.

"Before, I saw people with $15,000 or $20,000 in debts on a credit card. Now they are coming in with $50,000 and $60,000 in debt - and a lot of them are homeowners," says Dawn Smith, a bankruptcy attorney here. "These are nice people with good jobs."

And Vaspra is quick to agree, Hawaii's problems are far from over. "It's been really tough."