SINGAPORE (June 11): The change of government in Malaysia represents a decisive turning point for the country. After years of scandals, growing ethnic and religious discord, unhappiness over living conditions and worsening crime, the people of Malaysia came together to elect a reformist government. This promise of reforms has raised hopes that Malaysia’s great potential could be realised, even that it could emerge as a shining example for emerging economies, especially those in Southeast Asia and the Muslim world.

But, what does this watershed event mean for Malaysia’s southern neighbour, Singapore? Singaporeans have largely welcomed the dramatic developments in Malaysia but they are also concerned, especially after the cancellation of the high-speed rail (HSR) that was to have connected Kuala Lumpur with Singapore and the news that the Malaysian government would be reviewing another iconic joint project — the planned link between Bursa Malaysia and the Singapore Exchange. How will Singapore’s economy be affected by the changes in Malaysia?

The initial phase was always likely to be awkward

Malaysia is embarking on an unprecedented effort to reverse more than 20 years of institutional degradation and all manner of distortions and inefficiencies that have built up in the system. This context will tend to make for some awkward moments in its bilateral ties with many countries, with Singapore being just one of them.

First, the new government is still in a state of flux, so it is far too early to know which way things will go in terms of a whole range of policies. The dynamics of the new government are not defined yet, as important cabinet positions have yet to be filled, with at least 10 more cabinet ministers remaining to be named. There is, as yet, no foreign minister. Moreover, the economy minister is still double-hatting as chief minister of Selangor until the latter replacement can be found. The governor of the central bank has just resigned as well. So, key agencies that influence the course of economic and financial ties with Singapore are not operating fully yet. Singapore needs to be patient.

Second, the new government has to show voters that it will deliver on its election pledges, which prioritised the cleansing of the system as well as measures to immediately relieve the people of economic hardship. So, even where some of these promises might not actually be optimal for the country in the longer run, the government feels compelled to keep those promises. One example of such a policy change is the abolition of the goods and services tax, which will strain the public finances, especially if oil prices fall and reduce a large source of revenues. The cancellation of the HSR is just one of many such policies that needed to be reviewed, given that its rather high cost has raised suspicions that it is riddled with inefficiencies. Other projects, which have nothing to do with Singapore, such as a mass transit railway line, are also being cancelled. So, Singapore should not overreact to these measures.

Third, it is clear that the new government is seriously committed to the cleansing of the system. This determination was seen in the bold choice of Tommy Thomas as Attorney-General, a person of extraordinary courage and uncompromising integrity, even though some parts of the establishment were not comfortable with his ethnic and religious background. As the cleansing proceeds, much will be revealed about bad contracts and how the plundering of the system was carried out. It is clear that substantial amounts, indeed mind-boggling amounts, of money were looted. These monies probably flowed through the world’s major financial centres such as Singapore, Hong Kong, New York and Geneva. Some of the evidence that will now be revealed may be awkward for these centres, but doubly so for Singapore, since it is Malaysia’s closest neighbour. Singapore should cooperate fully with the Malaysian authorities and contain any potential damage.

Clearly, the new Malaysian government has much on its plate. As its political honeymoon eventually ends, as it must, it is only natural that the government will face even more challenges. It will be preoccupied with these domestic issues and not have all that much bandwidth to nurture ties with Singapore. That is the reality that Singapore will have to deal with. At the same time, none of the potentially discomfiting developments mentioned here are so unmanageable that they will badly set back the bilateral relationship. With good sense, the awkward phase can be managed and, once that happens, the two countries can focus on the longer-term relationship.

Malaysia and Singapore share many common interests

Fundamentally, while both countries differ greatly in terms of size, economic structure and ethnic composition, they also share vital interests that should help transcend particular personalities or the occasional difficulties in their bilateral relationship.

<ul><li>Both are highly open economies, and so their huge dependence on trade, foreign investment and tourism makes them vulnerable to growing protectionism and the higher likelihood of trade skirmishes, if not outright trade wars. Thus, the two countries share a common interest in banding together to mitigate the dangers posed by protectionism. It is no coincidence that both countries are part of the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP), together with Japan, Canada, Australia and several other Pacific economies. They are also involved in the Regional Comprehensive Economic Partnership (RCEP) agreement negotiations. Their views on international trade are in alignment and there is considerable scope for further cooperation;</li><li>Economic planners in the two countries are also aware that some of the new technologies that are becoming entrenched tend to favour large economies over small ones because of powerful network effects. Scale is becoming ever more important, which explains why so many of the tech “unicorns” (privately held start-up companies valued at more than US$1 billion [$1.3 billion]) are from the US, China or other very large countries. Separately, Singapore and Malaysia generate annual output of about US$350 billion each, placing them in the middle ranks of economies by size. Combined, however, they would be the world’s 20th-largest economy. There is a strong case for the two countries to find ways to collaborate, such as promoting mergers and acquisitions among their companies; and</li><li>The two countries are also aware that Asean, the regional club they belong to, has lost momentum of late. The interests of the countries of the Mekong region are increasingly diverging from those of the other members in the southern part of Asean. Consequently, Malaysia and Singapore cannot rely on Asean to effectively produce the synergies of economic integration despite its many grandiose plans. So, they need to do more together.</li></ul>

Are there risks for Singapore?

If the reforms succeed, a rejuvenated Malaysia could become a much more competitive economy. Is this something Singapore should fear?

There has always been a competitive edge to the bilateral relationship. But we would argue that competition should not be a problem: Let us look at a real-life experience, the establishment by Malaysia of the Port of Tanjong Pelepas almost 20 years ago. PTP shocked the Port of Singapore by wooing away its two largest customers. That competition spurred PSA to aggressively revamp its operations. In the end, both PSA and PTP have grown sizeably and are profitable. In fact, neither country should fear competition — the greater problem is the absence of competition, which encourages complacency and inefficiency.

What could the way forward be then?

More than 50 years after Singapore separated from Malaysia, the paths of the two countries have, of course, diverged. But they still have much in common because of their common colonial heritage, which makes it easier for the two to collaborate.

In fact, the growing integration between the two means that Malaysia and Singapore already have a good base to work on. There is much that can be done in addition to working together in the CPTPP and RCEP.

A good start can be made by further developing the Iskandar Region, the economic zone in southern Johor that was established by Malaysia to leverage off Singapore’s development. Of late, the Iskandar project has been overly dominated by massive Chinese investments in real estate, while the planned synergies between Iskandar and Singapore have not flowed as much as expected.

This can be remedied with a good effort to improve connectivity, not only through the rapid rail link between Singapore and Johor (which the new government has said will go ahead) but also through more bridges between the two regions. In addition, making travel between the two regions more seamless through speedier immigration, customs and security checks would also promote more integration. With these efforts, more activity can relocate from Singapore to Iskandar. That would be win-win, since such relocation would release scarce land in Singapore for even higher value businesses, while Iskandar would gain as industries that pay good wages set up there. There would also be scope for collaboration on airports and aerospace activities. All the major global cities that Singapore competes with have at least two major airports. As it grows, it would probably help Singapore’s position as a global hub if it could access another airport other than Changi. The obvious option is to work with Senai Airport.

What about the HSR? The high-speed rail is very expensive, so it has to be structured correctly for there to be an arguable economic case for it. First, the costs have to be brought down by eliminating inefficiencies — this can be done since the original HSR clearly was so much more expensive per kilometre than comparable projects. Second, and more important, the right ecosystem has to be created for the HSR to really generate enough economic benefits to justify the costs. The rail project should be part of an economic corridor with many viable activities. It has to be supplemented with other infrastructure such as industrial estates and logistics parks, and there should be incentives for companies to relocate activities to the corridor. So, if a more holistic plan can be drawn up, there may well be a case to revive the HSR in the future.

The global environment will be more challenging in the coming years — protectionism, more big power contestation in the region, multiple new technologies that could undercut the competitive positioning of countries such as Malaysia and Singapore, and an Asean that is likely to be less effective.

Like it or not, it makes a lot of sense for the two countries to overcome any differences they may have and cooperate with each other on the many issues of common interest that they have.

Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy

This column appears in The Edge Singapore (Issue No. 834, week of June 11) which is on sale now. Or subscribe <a href="http://subscribe.theedgesingapore.com/" target="_blank">here</a>

What's next for Malaysia and Singapore?

What's next for Malaysia and Singapore?

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