Malaysia and Singapore parted ways 44 years ago but the destinies of these two neighbours may be entwined. The first part of this special report by CLSA looks at the ups and downs in Malaysia-Singapore ties, and the recent warming of relations.
The Singapore-Malaysian relationship has had its fair share of marital discord over the past four decades. More recently, in a spirit of “can do”, the two have been busy reconciling their differences and relations are warming. Singapore’s future growth is hobbled by the developed world’s poor outlook which will necessitate a review of how to enhance economic prospects via trade and investment with its regional neighbours. For Malaysia, investment ratios have fallen significantly since the Asian crisis and a revival of foreign direct investments could be a catalyst for better growth. The most likely area where the improving Singapore-Malaysia relations can result in tangible benefits is in the development of Iskandar Malaysia where UEM Land will be a key beneficiary.
It is no coincidence that, on the way to his official first trip to Singapore as Malaysian Prime Minister, Datuk Seri Najib Razak stopped for a day at Iskandar. This ambitious project is being driven by Malaysia’s sovereign wealth fund Khazanah Nasional Bhd. It has seen significant investment commitments by various foreign parties, including Legoland, the Newcastle University, the Columbia Hospital group, US, as well as various Middle Eastern developers. But Singaporean investment is conspicuously absent bar a handful of land and industrial projects.
Singapore’s income levels are getting too high to run most manufacturing operations profitably. With median individual income at US$38,458 (RM130,757) per annum, 22% of Singapore’s GDP is still manufacturing. Hong Kong has a median annual income of US$30,883 and manufacturing represents just 3% of GDP. There, manufacturers have shifted production to Guangdong. Singaporeans, however, are still wary of moving operations north of the border where per-capita incomes are one-fifth the level of those in the Merlion City.
Economic logic backed by government support will likely lead to the shift of manufacturing out of Singapore. Better transport links (in particular once Singapore’s mass transit system finalises plans and builds a route into Iskandar), overtures by the Johor state as well as the federal government (leading to some major investments by Singaporean companies), and the development of the region should be on track.
Are the gains just for this southern area of Malaysia and some manufacturing operations of Singapore? The benefits should spread out much more broadly. Singaporean hospitals, back-office operations and training centres for various businesses, as well as property firms — all benefit from Iskandar’s proximity.
But as we highlight in this report, the potential extends more broadly with links and investment opportunities to open up for Singaporean banks, the offshore and marine sector, apart from hospitality, leisure, healthcare, retail and other property investments in Malaysia generally.
The past —marital breakdown
From the time British statesman Sir Thomas Stamford Raffles founded Singapore in 1819, the Red Dot was viewed as an extension of Peninsular Malaysia. Indeed, the British had to pay compensation to the Sultan of Johor for its use of the island, which Britain subsequently combined with the ports of Melaka and Penang to form the Straits Settlements.
With these beginnings, there was a sense that Singapore’s destiny would always be interwoven with Malaysia’s. More than a century later, on Sept 16, 1963, Malaysia was formed when the Federation of Malaya, Singapore, North Borneo (now known as Sabah) and Sarawak came together as a 14-state federation. The union was driven by a number of catalysts: firstly, the continuous trend of decolonisation by the British who wanted to give independence to the two Borneo territories; second, it made economic sense to revert to a “borderless” Malaya and Singapore, which existed under British rule until World War II; and lastly, there was a political urgency due to the rise of communism in Singapore, and Malaysia’s concern with the possibility of a pro-communist government close to its southern border.
But the federation did not last long as Singapore only remained in Malaysia for two years. Notwithstanding the initial agreement for a borderless market, there were issues about market competition as Singapore and Peninsular Malaysia were both pursuing the path of industrialisation. At the time, Malaysia was not willing to open its larger market with a population of nine million to Singapore with only two million people. Political tension also arose when the United Malays National Organisation (Umno), the leading party in Malaysia, fielded three candidates in predominantly Malay constituencies in Singapore during its election in 1963. This led to People’s Action Party (PAP), the key party in Singapore, fielding candidates in Peninsular Malaysia during the Malaysian general election in 1964.
The political divide was set as Umno had a communal political culture and stood for the privileged status of bumiputeras (sons of the soil). On the other hand, PAP campaigned for a “Malaysian Malaysia”. Racial tensions quickly erupted as the large Chinese population in Singapore was unhappy with the federal government’s policies of affirmative action which granted special privileges to the Malays. Similarly, Malays in Singapore were being increasingly incited by the federal government’s accusations that the PAP was mistreating them. These tensions eventually led to the notorious riots in Singapore from July to September 1964, when 23 were killed and hundreds injured as Chinese and Malays attacked each other.
On Aug 9, 1965, Singapore was expelled from Malaysia. Malaysian prime minister Tunku Abdul Rahman chose to sever all ties with Singapore, which in his view was a state government that showed no measure of loyalty to its central government. Parliament voted 126-0 in favour of the expulsion, with members of Parliament from Singapore not present. PAP leader Lee Kuan Yew tried to work out a compromise but failed.
In a televised press conference, he broke down emotionally as he announced the separation: “For me, it is a moment of anguish. All my life, my whole adult life, I believed in merger and unity of the two territories. Now, I, Lee Kuan Yew, prime minister of Singapore, do hereby proclaim and declare on behalf of the people and the government of Singapore that as from today, the ninth day of August in the year one thousand nine hundred and sixty-five, Singapore shall be forever a sovereign democratic and independent nation, founded upon the principles of liberty and justice and ever seeking the welfare and happiness of the people in a most and just equal society.”
Singapore’s success story
Without Malaysia, the prospects for Singapore looked frightening and bleak. It is a small country of 640sq km with no natural resources, was reliant on Malaysia for potable water and even food, while depending on the British troops for external defence. Unemployment among its two million population looked set to rise to 14% in 1965 without Malaysia’s hinterland market, while trade with Indonesia stopped due to its “confrontation” with Singapore and Malaysia.
Even in the early days, Lee regarded Singapore as an independent state “not viable by itself”. In his biography From Third World to First, he noted that city-states do not have good survival records. He wrote that the Greek city-states no longer exist as states and that most, while not vanishing physically, have been absorbed by the hinterland in a larger entity.
Lee engaged the assistance of Dr Albert Winsemius, a Dutch economist serving the United Nations, and set Singapore on the path of industrialisation. Winsemius’s advice for Lee was to actively seek foreign investments with generous incentives and tax concessions. Thus, the Economic Development Board (EDB) and Trade and Development Board (TDB) were established, offering foreign businesses attractive incentives and access to Singapore’s highly skilled, disciplined and relatively low-paid work force. The Jurong Town Corporation (JTC) was tasked to provide production space and infrastructure support for these foreign investments.
In the 1960s and 1970s, Singapore attracted investments in consumer electronics, petrochemicals and engineering products, and included multinational corporations like Texas Instruments, National Semiconductor, Hewlett-Packard and General Electric.
From the mid-1980s, Singapore shifted its focus to computer-related components and microelectronic-chip manufacture. By the 1990s, it was targeting investments in the health and biomedical sectors.
On the cusp of the new millennium, Singapore had nearly 200 US manufacturing firms with more than US$19 billion of investments. Singapore’s unique position in Asia made it a viable transit hub; such an advantage was recognised as early as 1819 when Stamford Raffles founded the Merlion City. The island nation adopted a liberal international trading regime and in the early 1990s pushed for tariff reductions with its neighbours under the Asean Free Trade Agreement (Afta). Singapore has also supported Asia Pacific Economic Cooperation (Apec) and the World Trade Organisation (WTO). This strategy has paid off, with the value of revenue derived from trading, three times the domestic production.
The last and most important sector for Singapore’s development over the past four decades has been financial services. From the 1960s to the 1980s, the country had the run of the house because of the lack of competition in the region. Similar to its strategy in the manufacturing industry, the Merlion City attracted international financial institutions via tax incentives. It started off as an offshore currency market, where all Asian-dollar deposits were exempted from statutory liquidity and reserve requirements. Singapore also abolished withholding tax on interest income earned by non-resident depositors. By the 1990s, the city-state had become one of the world’s larger financial centres, with its foreign-exchange market ranking fourth in size after London, New York and only slightly behind Tokyo. The Asian-dollar market exceeded US$500 billion — nearly three times the size of its domestic-banking market.
From its independence in 1965, Singapore’s GDP per capita has grown from US$512 then to US$37,597 now. This is certainly a success story to be envied as the odds were certainly staked against this microstate after its separation from Malaysia. Today, the Red Dot can boast of political stability, a high standard of living and a harmonious multi-racial society. According to Lee, three basic principles helped the progression: social cohesion through sharing the benefits of progress; equal opportunities for all; and meritocracy, wherein appointments are made based on demonstrated talent and ability, especially as leaders in government.
Malaysia’s balancing act
On the other side of the straits, Malaysia’s progress over the past four decades has not been as spectacular as she had to balance economic development with social issues. Singapore’s expulsion from Malaysia, on the back of rising racial tensions between the Chinese and Malays, failed to end the distrust and dissatisfaction between the two races. Indeed, May 13, 1969 was a watershed day for Malaysia as racial riots broke out in Kuala Lumpur, killing 196 and injuring 409, according to official estimates. A state of emergency was declared and Parliament was suspended. The National Operations Council (NOC) was created to govern by decree, with the council chaired by then deputy prime minister Tun Abdul Razak. Tunku Abdul Rahman eventually resigned as Malaysia’s first prime minister in September 1971 and was succeeded by Abdul Razak.
Razak introduced the New Economic Policy (NEP), which was aimed at eradicating poverty and restructuring the economy to eliminate the identification of ethnicity with economic function. In those days, the poorer Malays worked in the most backward sectors such as rubber, rice planting and fishing, while the Chinese were predominantly in the manufacturing and commercial sectors. The initial target was to move the ratio of economic ownership in Malaysia from 4:33:63 ratio of Malays, other Malaysians and foreigners, to a 30:40:30 ratio over 20 years. This was done via special privileges given to the bumiputeras, with regard to employment, equity ownership, education, home ownership and government projects.
By 1990, Malaysia’s fourth prime minister, Tun Dr Mahathir Mohamad, replaced the NEP with the National Development Policy (NDP) but did not set dates for the attainment of the NEP’s original targets. When the Asian financial crisis hit in 1997/98, Mahathir relaxed the NEP in the manufacturing sector, where companies no longer had to comply with the 30% bumiputera-equity ownership. The dismantling process continued in 2009 when sixth prime minister Datuk Seri Najib Razak (eldest son of Tun Abdul Razak) announced that the NEP would also be liberalised in 27 services sub-sectors.
Against this backdrop, the country charted its growth path based on its five-year plans, with the first one launched in 1970, called the First Malaysia Plan. In 1970, mining and agriculture accounted for 41% of GDP, while manufacturing was 13%. Thus, Malaysia followed in the footsteps of the Asian tigers, that is, Japan, Taiwan, South Korea, Hong Kong and Singapore, and had ambitions to transfer its reliance on mining and agriculture to manufacturing.
Malaysia’s path to industrialisation was largely driven by Mahathir, whom many will remember for his vision and boldness. His blueprint for Malaysia was to achieve developed-country status by 2020 under his “Vision 2020”. In this respect, Mahathir announced his “Look East” policy in 1981, encouraging Malaysians to learn from Japan’s success story post-World War II.
Mahathir also pushed his privatisation policy, where airports, airlines, electricity generation, railroads, road construction, shipping and telecommunications were converted into private enterprises. His vision for Malaysia extended into heavy industries, including a national-car project under Proton and a steel mill under Perwaja Terengganu. These projects were closely linked to his Look East policy as Mitsubishi and Nippon Steel were roped in as strategic partners for Proton and Perwaja respectively.
Mahathir was also a builder; under his administration, the country built the Petronas Twin Towers — then the world’s tallest building — and the Sepang F1 Circuit, which put Malaysian landmarks on the global map.
Malaysia’s economic development over the past four decades has been commendable, though probably not optimal as many argued that the NEP created distortions and inefficiencies in the market. Some pundits say that this policy not only caused a brain drain for Malaysia, but also discouraged foreign direct investments (FDI) into the country, especially when more competitive markets like China and India opened up in the late 1990s. On the other hand, if not for the NEP, which was designed to address poverty problems and social imbalances, Malaysia’s growth path could have been impeded by social unrest and political instability.
The present — reconciliation
The Singapore-Malaysia relationship has had its ups and downs. The separation was probably the lowest point, but developments in 1991 and 1998 also led to poor bilateral relations between the two. However, there is much symbiosis and mutual interdependence and the relationship was probably best summed up in the speech made by the Yang di-Pertuan Agong Tuanku Syed Sirajuddin when he received Singapore President S R Nathan in 2005: “Malaysia and the Republic of Singapore share unique and special ties, not only as close neighbours but also through our permanent links of shared history, cultures and languages. Relations between our two countries can be illustrated by the Malay proverb, bagaikan aur dengan tebing, which literally means ‘like the bamboo grove and the riverbank’. Neither would survive without the other and neither would gain if the other weakens or perishes.”
Social and cultural links
The social and cultural links between Singapore and Malaysia are clear where their citizens comprise largely of the Malay, Chinese and Indian races, speaking English, Malay, Mandarin, and various Chinese and Indian dialects. In fact, Malay is the national language for both countries, as Singapore maintained that status despite the separation. Singaporeans and Malaysians are mainly Muslims, Buddhists, Christians and Hindus and they celebrate the same festivities, namely, Hari Raya, Chinese New Year, Christmas and Deepavali. It’s the composition mix which is vastly different where Malays dominate in Malaysia, and the Chinese in Singapore.
These close ties have also led to cross-border labour movements. In the early days post-separation, there were many Singaporeans working in Malaysia as economic prospects in the hinterland were brighter. These days, the situation is the reverse as out of the 1.2 million foreign residents in Singapore, approximately 50% are Malaysians.
Given such strong ties, it is not surprising that Singaporeans and Malaysians spend a lot of their holidays in each other’s countries. In 2008, there were 650,000 Malaysian tourists in Singapore, accounting for 6.4% of total tourist arrivals.
This official figure is based on air arrivals only and excludes Malaysians who arrive by road and rail, for which official statistics are not disclosed. Taking into account Malaysians who enter Singapore by road and rail, we believe this boosts total Malaysian visitor arrivals to 10 million, or 50% of the total.
On the other side of the border, according to official statistics, Malaysia received 22 million tourists last year, with Singaporeans accounting for 46% of that total. Unlike the official Singapore statistics which do not include arrivals via road and rail, this figure does.
Economic ties
There are also strong economic ties between both countries. Malaysia is Singapore’s largest trading partner, with trade amounting to S$111.4 billion (RM270.7 billion) in 2008. As for Malaysia, Singapore is its largest export destination with RM97.8 billion in exports in 2008. In terms of imports, Singapore is the third largest import source, totalling RM57.3 billion last year.
In terms of FDI, Malaysia was the eighth largest foreign investor in Singapore in 2007, investing S$12.3 billion, accounting for 4% of total FDI in Singapore. This figure has been steadily rising since 2003 where FDIs from Malaysia were a mere S$4.4 billion.
For Malaysia, according to the Malaysian Industrial Development Authority (Mida), Singapore was the fourth largest foreign investor in the manufacturing sector in 2008, putting in RM2 billion into 112 projects. This accounted for 6% of total manufacturing FDI in Malaysia in 2008. However, according to the Singapore Department of Statistics, Singapore’s total investments in Malaysia in 2007 were S$21.2 billion, or RM50.8 billion, accounting for 7.1% of its total direct investment abroad in that year.
And lastly, there remains strong cross-border portfolio investments between Singapore and Malaysia. Portfolio investments rose significantly in 2007 and subsequently fell in 2008, in line with weak global equity markets.
Neighbourly spats
As with all neighbours, there are the occasional spats and it has been no different between Singapore and Malaysia. Disagreements and poor diplomatic relations over the last four decades have centred around territorial issues, Singapore’s water supply from Malaysia, and Malaysia’s capital controls in the late 1990s.
Since independence, Singapore has been dependent on Malaysia for the supply of potable water. Despite having the highest GDP per capita in Asean, Singapore is categorised as a “water-stressed” country as less than 1,000 cu m per person is available from within the country. Thus, Singapore signed two bilateral agreements with Malaysia in 1961 and 1962, allowing it to draw about 40% of its daily water consumption needs. Given previous instances where Malaysia threatened to withdraw its water supply to Singapore, the latter has taken measures to increase its self-sufficiency by building a S$1 billion water desalination plant and developing NEWater, a treated waste water that can be consumed by humans.
Another issue is the Singapore-Johor Baru Causeway. This cross-country link over the Straits of Johor was officially opened in 1924, and has been widened three times due to increasing trading activity and traffic congestion across the border. On average, 25,000 vehicles use the Causeway during weekdays, and 60,000 during weekends. However, Singapore argued that the cost of building the replacement bridge for the Causeway was too expensive, that is, S$500 million for Singapore’s portion, and this eventually led to Mahathir proposing a “crooked bridge” (also known as “scenic bridge”) which unilaterally replaces the Malaysian side of the Causeway. Subsequently, when Datuk Seri (now Tun) Abdullah Ahmad Badawi became the fifth prime minister, he decided to cancel the scenic bridge project.
During the Asian financial crisis in 1997/98, Malaysia was affected by the devaluation of the Thai baht. Instead of going to the International Monetary Fund (IMF), the government chose to impose capital controls on Sept 1, 1998. This move effectively banned the trading of Malaysian share equity in offshore markets and this directly affected the Stock Exchange of Singapore’s Central Limit Order Book (CLOB) which trades Malaysian shares. This affected 172,000 Singaporeans with portfolio investments of S$5.4 billion.
Furthermore, the Malaysian government announced that the ringgit, both in liquid form and offshore deposits, would become null and void by December 1998. This put tremendous pressure on Singapore’s financial system which held approximately RM10 billion in public and private funds. In a tit-for-tat, Singapore irritated Malaysians by not allowing them to withdraw some S$2 billion from the Central Provident Fund (CPF) following any termination of employment in Singapore.
Improving cross-border ties
Singapore-Malaysia relations improved when Abdullah took office on Oct 31, 2003. With his previous experience as Minister of Foreign Affairs from 1991 to 1999, he was able to improve government-to-government (G2G) ties, which also spilled over to better people-to-people relations. Abdullah visited his counterpart, Singapore’s second prime minister Goh Chok Tong, as part of his courtesy visits to neighbouring countries in Asean. Subsequently, when Lee Hsien Loong became Singapore’s third prime minister in October 2004, he also made the same customary visit to Malaysia. Both prime ministers attended an informal retreat in Langkawi, Malaysia, in May 2005 to discuss new areas of cooperation and to build on longstanding close ties. With warmer relations between the two leaders, this also led to more official visits among ministers from both sides of the Causeway.
Leveraging on improved G2G ties, many corporates from both countries began to explore business opportunities as well. Ho Ching, wife of Lee Hsien Loong and CEO of Temasek Holdings, visited Kuala Lumpur in 2004 at the invitation of the Kuala Lumpur Business Club. To reciprocate this, Malaysian companies including Malaysia Airlines, YTL Corp, CIMB Bhd, Genting Bhd and RHB Bhd led by the then Minister of Science, Technology and Innovation Datuk Seri Jamaluddin Jarjis met with top Singapore businessmen the following year. These high-level meetings eventually led to substantial cross-border public sector investments by Temasek, Government of Singapore Investment Corporation (GIC) and Khazanah Nasional in 2004/05. The improved relations not only resulted in greater co-operation among government-linked companies, but also companies in the private sector. The Malaysia-Singapore Forum 2004 was held in December that year, with the theme New Leadership, New Challenges and New Opportunities. This was organised by the Asian Strategy and Leadership Institute (Asli) in conjunction with the Asean Business Forum and Money World Asia. The forum created a valuable opportunity for businesses from both countries to network and pave the way for stronger business development. This led to subsequent cross-border private investments in shipping, financials, properties and healthcare sectors, as well as joint ventures abroad.
Datuk Seri Najib took office on April 3, 2009 and the warm cross-border relations were further improved. He visited Lee Hsien Loong in Singapore in May and the latter referred to the “very warm relations with Malaysia” in a joint press conference. Both are sons of earlier prime ministers, growing up in the political limelight and having senior positions in the governments prior to their current positions. Thus, it could be expected that they had known each other for a long time and are able to develop a good working relationship. This can be a vastly different relationship from the old guard, in particular, that between Mahathir and Lee Kuan Yew in the 1990s. Those two premiers had strong personalities, with the former having a more pro-Malay agenda for Malaysia, while the latter strongly believed in meritocracy for Singapore.
Given Barisan Nasional’s dismal performance during the 12th general election on March 8, 2008, Najib now has less than four years to turn around the fortunes of Umno before the next polls by March 2013 at the latest. Therefore, within his first 100 days in office, he liberalised the archaic NEP and has been pushing for better relations with Singapore to spur economic growth. During his meeting with Lee Hsien Loong, the Iskandar Malaysia project was discussed extensively with proposals for a wellness centre, mixed development township and a third bridge in Pengerang, Desaru, linking to the eastern side of Singapore.
Given the increasing presence and interaction between Singaporeans and Malaysians, especially in Johor Baru, Najib also agreed to a Singapore consular office there.
In June, Singapore’s Minister Mentor Lee Kuan Yew was in Malaysia for an eight-day visit which covered Kuala Lumpur and the states of Perak, Penang, Kelantan and Pahang. He was last in Malaysia in April 2005, and this latest trip was to allow him to update himself on the developments in Singapore’s closest neighbour. This was particularly so on the political front, given that the landscape had changed significantly since the March 2008 polls where the opposition won more than a third of parliamentary seats, and controlled five states (now, four).
Lee Kuan Yew not only met with Najib and his wife Rosmah Mansor, but also with opposition leaders including Lim Guan Eng and Datuk Nik Aziz Nik Mat, chief ministers of Penang and Kelantan, respectively.
In his various meetings, top-ranking Malaysian government officials told Lee Kuan Yew that Malaysia wants to cooperate with Singapore. In a press interview later, he said: “I leave Kuala Lumpur with some optimism, guarded optimism because we have to see the words translated into action.” He also emphasised the need for a long-term commitment and co-operation across the board for both countries.
This CLSA special report was compiled by a team of Malaysian and Singaporean researchers led by Clare Chin (Malaysia) and Dhruv Vohra (Singapore). The second part will appear next week.
This article appeared in The Edge Malaysia, Issue 778, Oct 26-Nov 1, 2009.