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How to Revitalize Hawaii’s Economy – Extended Version

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Belsby: I find it interesting that in my prior career I did a lot of consulting work with Chicago School District, San Francisco and Los Angeles school districts, and what I found out is that the larger they got, the less efficient they became. Their precept was that there would be cost savings but larger than that, but of course the bureaucracy that was created offset any cost savings that were ever achieved and so I think to some degree on a smaller scale, we’ve also realized that issue here in Hawaii. There was a corollary in the old Soviet Union on the agricultural collectives with the small plots of land that were given to the citizens were something like 10 times more productive than was realized in the larger collective. So I think that is very instructive that it takes a village to raise a child, not the state. And I think the more that we can migrate to that village model the better off we’ll be. Because I think it’s very simple to where people in our own community when they feel they own those facilities or that infrastructure are going to take a more active role. I don’t blame the state for the educational problems. It’s us as parents. We have given, abdicated our roles as educators of our children to the state, but I think part of the problem is that even with this Athenian form of democracy that we have here in Hawaii where you can go down to Legislature, anybody can go make an appointment with Carol Fukunaga tomorrow, whether a large landowner or whether you’re a plumber and Carol will sit down and patiently talk with you. I’ve seen her do it. It’s a wonderful thing. I don’t think anybody has that same feeling with the Department of Education (laughter).

Petranik: What a great analogy! In our May issue, we looked at what many agree is the best school system in North America, in Edmonton, Alberta. We talked with the man who created that system, Mike Strembitsky. The state DOE actually consulted with Strembitsky early in this decade, though his reforms were never institutionalized here. One of Edmonton’s innovations was turning each school into an independent entity and students could go to any school that had space for them. So you have schools competing for students, you break down the giant bureaucracy of the central office. That means you can have a school that becomes a travel academy, another becomes a tech school, and another a trade school or an ag school. That specialization can’t happen when every school is trying to be everything for everybody.

Fukunaga:  I’ve advocated that for a long time. When you talk about not having enough schools facilities and we’re always in a backlogged situation for repair and maintenance, one of the things that we had proposed years ago is to allow schools to compete for students. If parents, who have to work in town, were able to choose different schools to take their children to, it would sort of slow down the rate at which we had to build new schools. In Kapolei, parents drop off their kids at the elementary school at 6 o’clock in the morning because they have to commute, so then you have to have a before-school program. Wouldn’t it be much more efficient to look for under-utilized schools and offer parents an opportunity to take their children wherever they want them and that would then encourage schools to sort of compete because then the dollars follow the child. If we could introduce competition that could be very healthy and it could lead to a tech school here, a construction academy there, and you really would see a change in behavior.

Petranik:  Kyle, what’s the role of unions in revitalizing the economy.

Chock: One of the things that we’re trying to do more now is leveraging our assets to put our money and capital to work and be partners with the business community. For instance, we try to do more in terms of putting our pension fund assets to work in terms of funding projects at a time when local banks aren’t funding projects. So our doors are open for business. We’ve put money into projects all over the state right now with the idea of deploying our capital to get our members to work with the hammer swinging in at the same time being an asset for developers or hoteliers that are trying to build projects or The tech industry now – we’re trying to cross over all kinds of bridges that we’ve never crossed before and trying to approach it that way in terms of being an equity partner and a business, and if businesses win then you win, versus I think some unions who are still stuck in dealing with the employer as the enemy. I think we’ve kind of crossed over that a long time ago and tried to find that balance where you could still protect worker’s rights, you can still have an honest day’s wage for an honest day’s work and still have an environment where employers and businesses come together.

Sullivan: We were just talking about this a few days ago. The only way we can really recover is if everybody is working together. If you really look at how capital gets deployed around the country, unions are a big part of it. The sooner we understand why and how that works, the better off how we’ll be. Unions built the country. Unions have been a part a big part of building industries and the unions have played a big role in Hawaii. They get sort of set outside like “Those crazy union guys,” but actually they’re a part of this. We need to work together and the more we do, the more we can accomplish.

Petranik: Unions in the private sector, more and more, are collaborating with businesses to create and protect jobs. But government unions don’t have that same incentive to collaborate.

Chock:  I’ll use this as an example: In the early 1980s in the construction industry, it was employer vs. union labor, opposite ends of the table fighting against each other. Walter Kupau took control the Carpenter’s Union in 1970.  The first contract that he tried to negotiate for the members, swung for the fences, got this huge contract. Then 1980, first strike, big strike. I think it was a six-month strike. Three or four years later, they come back to renegotiate the collective bargaining agreement, the employer on the other side of the table said, “We remember what you did. Now, we’re going to cut and try to roll back your wages three or four bucks an hour.” So there was this adversarial relationship between the union and management.

One way we’ve evolved over the last 20 years is that partnership – looking at how can the employer win, how can the worker win. If you try to resolve all of those issues outside of a collective-bargaining environment, you’re going to be more successful when you end up in the economic situation like we’re in now, where in our industry, union and management can solve problems with a phone call vs. a strike or this incredible amount of posturing through the media between the administration and public worker unions. That happens because they are trying to resolve all those issues in this collective bargaining environment – (a nonconfrontational approach) really needs to happen in the years outside of negotiating a contract and I don’t think that happens enough with public sector union, but it happens a lot in our industry. One of the first things we did when the downturn came was our union ratified a vote among our membership to freeze pay raises that were negotiated and that employers by law were required to pay, and we froze those raises. We tried to be responsive to changes that were happening in the environment and I think you can do that when you put all that equity and trust in the middle of the table between labor and management that, I think, at times, the public sector unions and the state and the counties have struggled to do.

Petranik:  What about the military. The military presence in Hawaii seems to solid going forward, but is there a way we can further leverage that?

Sullivan:  The Department of Defense probably continues today to be the biggest investor in technology in the world. Everything continues to evolve including the military and what they need and the way they need it. There are big opportunities for local industry to support the requirements of the military because among other things the acquisition concept that was really created post-World War II is outdated and there’s a lot of dialogue going on right now about how to do it differently. It’s happening at the highest levels in government, from the secretary of defense, right down the chain. People are trying to think about how to do it differently. How to get things out faster, get things that are more responsive? Because the bad guys can go to eBay or get it off the Internet; they’re not bound to go through this long protracted drawn-out process. The rate of change of technology is much faster. It’s a huge advantage for us in Hawaii especially if you consider the command right here. We have the biggest military in the world right down the street, and so it’s an enormous opportunity for the state. I think what the Chamber (of Commerce of Hawaii) is doing is trying to increase the dialogue and awareness at that level. So it isn’t just about making sure that you’re welcome, which I think is really important. Once you have somebody that has been stationed here and they see the aloha that is here for the military, I think that means a lot. But the next thing that’s going to happen is the participation with the tech sector and military, and it’s an opportunity that’s sort of waiting to happen, and what you’ll see then is more participation from local industry in a variety of things. The thing in the newspaper three or four months ago about the Stryker, and you’ll notice Sen. Inouye is a big supporter of Stryker and continued funding for that, but out of 38 states in the country where was some company participating in the manufacturing of that, not one from Hawaii. And so, there’s an evolution going on in the right direction and I think the military has a huge opportunity for local industry and it’s a terrific way to invest in developing new technology that can then be brought to nonmilitary applications. It’s moving in the right direction, and I think what you’ll see in the next few years are companies not only being responsive and faster but better able to transition these technologies to the private sector. For the first time in the state’s history, I think, we have these ongoing get-togethers where we talk about what’s going on (To watch a meeting or find out where and when they are held, see http://www.ustream.tv/channel/dualusehawaiis-show). It’s an open environment for all local companies as well as large Mainland companies. They want to talk about what they’re doing and to collaborate. So there are a lot of real positive things going on in that area.

Fukunaga: State government has made small-scale investments to support that, but the real goal is to have Hawaii companies become globally competitive for that time when we may not have Sen. Inouye to help bring in so much funding.

Sullivan: To give you an example, years ago, I remember looking at Small Business Innovative Research grants, SBIR. The state of Hawaii was 48 out of 50. The state of Hawaii started a matching grant for phase II awards. Phase I is 50 or 100 grand. Phase II is maybe $500,000 to $2 million. Phase III can be $50 million or more. And after the state started this program, you saw that the state’s numbers moved from 48 or 49, to 23 to 24, a real direct correlation. It occurred over about a five- or six-year period. What this little extra money did – it wasn’t a whole lot – but these (local) companies would show up to compete for the next round of funding. Physically show up in D.C., get in front of these guys, tell them what they’re doing. Just by doing that meant that little bit of support was leveraged into a lot of more support, and there have been a lot of things the state’s done to support that and it continues to grow. And there’s matching funding, too. I think it’s huge. It has taken some of the technology then it’s leveraging it to these other levels.

Dancil: The dual-use community is probably the most stable tech group, it’s been around for a while and it’s growing. The state did act (inaudible), which is the commercialization (inaudible) next level. States have got to deliver this all on funding, and from there companies got together the same marketing plans, which you can’t pay for in government contracts and marketing plan or how do I commercialize this or how do I build this prototype. If those types of funds aren’t from these typical defense contracts, but for them to get the state call on funding to sort of help support this industry, not to sort of help leverage but sort of think of all these products "on the market." Not just the military market but the civilian market as well. As Pat said, now for the first time these small companies have started to work with the large clients. In the past, the large clients didn’t really play with the smaller guys, but they are starting to do that more and more. Another thing that is huge here are military construction projects and they (the military) are leading the way with solar and alternative energy projects – green projects. The commercializing that’s going on now, companies were developing and working on those way back in the 1970s. That’s what they were working on back then. What companies are working on now, who knows what they’ll be rolling out in 30 years. Is our remoteness a liability or an asset? The military is here and they’re not going away.

Sullivan:  The fact that we’re not Rochester means that when we think of optics, we don’t have to think about a Kodak film. The lack of domain expertise leads to more disruptive innovation, which is a natural act for people in Hawaii, but it’s hard for a lot of other parts of the country. It occurs at the University of Hawaii and it occurs in a lot of these companies. Disruption, just to give you a little background on it, 50 years ago, the first ruby laser was demonstrated. Lasers have changed everything that you can imagine, from communications to healthcare to security to you name it. It started with the disruptive idea that light could come out of this gadget, and it has changed everything, but the university and a lot of the businesses here are really pre-wired to think disruptively because they don’t have the burden of domain expertise telling us “This is how you have to do it.” It’s a natural advantage and the fact that the military is here, they need disruption to be able to step way over what’s going on to beat the bad guys. They’re not going to do it by competing with the same things; they have to step way over with disruption.

Belsby: Part of the challenge, too, is a lot of our policies have been in an arena of trying to get small companies started. Think if you go to every major military installation across the country, one of the common denominators that you’d find is that presence of a large defense contractor: General Dynamics, McDonnell Douglas or Boeing. We have satellite contingents here, but if we put more effort into attracting a more serious presence of these Fortune 500-type companies and get them to commit to a longer-term presence again because of the large military bases we have here, you’ll do two things. No. 1, you’ll obviously create jobs. No. 2, and this is as important, those companies provide the spin-off opportunities for the smaller companies. When General Dynamics and the defense industry died in San Diego that was the genesis for the life science industry. Many of those people went to form Hypertech or other companies, and Hypertech gave birth to other companies, and so on and so forth. So while a lot of our effort is at the birth of small companies and then building them up, there’s another value chain that says, “Let’s attract a large company,” and obviously that would require a lot of effort and a lot of resources, but it’s another way of fast-tracking progress.

Petranik: Thank you for coming today. We had a very stimulating discussion.

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