The Odd Couple: Singapore and Malaysia team up on development zone

ARCHIVES 2012

By admin-s On Jul 9, 2012

Jonathan Drake / Bloomberg via Getty Images

Visitors to the Malaysia-China Business Forum at the Persada Johor International Convention Centre view a large model of the Danga Bay area of Johor’s Iskandar Development Region, in Johor Bahru, Malaysia, on July 5, 2007

(Time) – A $28 billion port, tourism and industrial complex called Iskandar Malaysia, is rising at the tip of southern Malaysia. It promises to knit together erstwhile rivals and, in so doing, reshape the regional economy.

When the creaky colonial-era carriages of the Keretapi Tanah Melayu railway still crept between Singapore and the Malaysian capital of Kuala Lumpur, the eight-hour journey felt like slipping back in time. Starting in the shadow of Singapore’s skyscrapers, the train rattled across the gray waters of the Strait of Johor. As it chugged northwest, glass and concrete gave way to jungle. Sprays of vegetation began to leap from the boles of the mossy banyans lining the tracks.

This rail journey is no longer possible — the train stopped running in July 2011, after Malaysia and Singapore resolved a dispute over which country owned a valuable parcel of the track. Now the thick tropical forest may also disappear: One of the most ambitious development projects in the world, a $28 billion port, tourism and industrial complex called Iskandar Malaysia, is rising at the tip of southern Malaysia. It is a massive endeavor that encompasses a territory nearly three times the size of Singapore. It promises to knit together erstwhile rivals and, in so doing, reshape the regional economy.

To compete with heavyweights like India and China, Southeast Asian nations are increasingly looking to pool resources like land, labor and capital. For Malaysia, Iskandar represents an opportunity to reverse a decade of lackluster growth and the flight of its most educated and enterprising citizens. After expanding by nearly 9% on average from the early nineties until the 1997-98 Asian financial crisis, its GDP growth rate has slowed to roughly 5% over the past several years. Oil and gas production, the biggest driver of growth, has been tapering off for nearly twenty years, with Malaysia increasingly reliant on maturing fields. Until 2010, when a rebound began, foreign investment had also been slipping. Malaysia’s stock exchange, a darling of emerging market investors in the early-to-mid nineties, now lags behind the turnover and performance of the comparatively roaring bourses of Indonesia and the Philippines. “We’re at a crossroads,” says Idris Jala, a former executive with oil giant Shell who is now a cabinet minister in charge of jumpstarting Malaysia’s economy.

For Singapore, which has welcomed over half of Malaysia’s departing human talent and whose per-capita GDP is now the third highest in the world, there is good reason to support its northern neighbor. A decade of rapid economic growth has pushed Singapore’s land and labor costs ever higher, threatening the city state’s competitive edge. Industrial land in Iskandar can cost less than a third of the price in Singapore and manufacturing wages there are less than half. “There is a symbiotic relationship between these two countries,” says Lee Oi Hian, chief executive of palm oil plantation owner KL Kepong. Illustrating the point, the company is building a multi-million dollar plant in Malaysia that will manufacture the fruits of its Singapore-based biomedical research. “It’s based on the law of comparative advantage,” Lee says.

Singapore and Malaysia may today appear to be joined by economic necessity, yet history has often driven them apart. In 1963, Singapore, led by its founding father Lee Kuan Yew, engineered a union of the two newly independent British colonies. Relations quickly soured. In a May 1965 speech that would alter the destinies of both nations, the then 41-year-old Lee rose in Malaysia’s parliament to rebut earlier comments by Mahathir Mohamad, a junior parliamentarian in 1965 who would later become Malaysia’s prime minister. Lee made it clear that by joining Malaysia, Singapore had never agreed to Malay rule, it had agreed to Malaysian rule. “That was the turning point,” is how Othman Wok, one of Lee’s party colleagues, described the incident in the first volume of Lee’s memoirs, “The Singapore Story.” A few months later, on August 9, 1965, Singapore was expelled from Malaysia.

That long-ago parliamentary skirmish may seem like ancient history, yet it echoes all the way down to Iskandar today. In 1971 Malaysia enacted its “New Economic Policy,” a sweeping affirmative action program intended to bolster the economic position of Malays in Malaysia by reserving places for them in state universities and public housing, as well as requiring the country’s publicly-listed companies to reserve 30% of their equity for Malays. The various quotas instituted by that policy have been quietly relaxed over the decades, and the goals of the original 1971 legislation have been subsumed under succeeding plans. And even though Malaysia began to shift away from its ethnically tilted approach to economic growth with the 1996 launch of its high-tech Multimedia Super Corridor project, analysts say Iskandar represents a critical milestone.

“Iskandar is the thin edge of the wedge,” says Azman Mokhtar, managing director of Khazanah Nasional Berhad, the $34 billion Malaysian sovereign wealth fund that planned and launched the mega-project in 2006. Noting the absence of the Malay ownership quota for companies operating in the central business district of Iskandar, which is trying to attract industries such as financial services, education, tourism and healthcare, Mokhtar adds, “If it works in Iskandar, it works. It will be copied.” Within Malaysia that is a brave position to take, as it has opened the current regime of Malaysian Prime Minister Najib Tun Razak to attack from conservative Malays angered by the rollback of their old privileges. So far, the government has withstood the political heat.

Luckily for the prime minister, his position over Iskandar is largely shared by the country’s political opposition, led by former Deputy Prime Minister Anwar Ibrahim. “We are very clear it {the National Economic Policy} has outlived its usefulness,” says member of parliament Nurul Izzah Anwar, the 31-year-old daughter of Anwar, who entered politics after her father was imprisoned in 1999. Anwar was released in 2004, and is expected to run for political office in the next general elections. “Iskandar is pretty impressive,” she says. “A huge chunk of it will succeed if not entirely.”