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Singapore-Johor economic model stretched by Covid-19

Daniel Moss for Bloomberg
Daniel Moss for Bloomberg10/26/2020 11:38 AM GMT+08  • 11 min read
Singapore-Johor economic model stretched by Covid-19
Is the border between Malaysia and Singapore economically meaningful? Is Johor, in essence, an industrial suburb of Singapore?
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It’s late afternoon and the century-old bridge joining Singapore and Malaysia should be starting to clog with the evening commute. Viewed from a boat in a narrow sea lane, only a few trucks and the odd car make their way across. The paucity of traffic on one of two road crossings between the countries reflects the toll Covid-19 has taken on their vital economic ties.

Singapore split from Malaysia in 1965 and built a city-state that became a hub for global business. For all of Singapore's attributes, commercial links with its ex-spouse underpin important parts of its success. The southern Malaysian state of Johor is the linchpin of those ties. The border is much more than a small sea lane: water, power, labour and food flow between Singapore and Johor. The eggs I ate for breakfast were probably laid there.

People can earn more money in Singapore, while its rapidly ageing society and dwindling fertility rate have created labour shortages. It's far cheaper to make stuff in Malaysia, but a lot of factories rely on Singapore to reach global markets. Buying property in Johor is more affordable, too. Many of the condominiums that line its shores are owned by Singaporeans.

The coronavirus exposed how vulnerable this mutual dependency can be. Before the pandemic, about half a million Malaysians travelled to Singapore for work, a big chunk of whom were stranded when border restrictions were imposed. One father, who has been barred from returning to his family since March, recently made news when he waved to his wife and two toddlers across about half a mile of water, identifiable only by the colour of his shirt.

The contours of this relationship force us to rethink what borders truly mean. Are they lines on a map drawn by diplomats, or is the more substantive demarcation found on the edges of interdependent regional economic zones? I caught up recently by phone and email with Francis Hutchinson, who with Serina Rahman, edited “Johor: Abode of Development?” The new collection of essays is second in a series charting economic links between Singapore and its nearest neighbours. Here is a lightly edited transcript of our exchanges:

DM: Is the border between Malaysia and Singapore economically meaningful? Is Johor, in essence, an industrial suburb of Singapore?

FH: The border simultaneously binds and divides. If we go back to the initial discussions that Malaysia, Singapore, and later Indonesia, had in the early 1990s about forging an economic zone, the goal was to take advantage of the different assets each territory had and marketing them as one integrated unit to investors. You had the best of three worlds right next to each other, with skill and capital in Singapore, and abundant land and labour in the other two locations. While there is capital in Singapore, land and labour are very expensive. Yet, 40 minutes away, the relative prices for these assets changes. And it is this division and these cost differences that allow many of the links between the two territories to take place.

The border and the economic interchanges between Johor and Singapore work in both directions. You have certain assembly tasks that are located in Johor and coordinated from Singapore, such as hard disk drives and electronic components. But you also have workers that come from Johor into Singapore every day.

A significant portion of the vegetables and fruits eaten in Singapore come from Johor. While many Singaporeans go to Johor for tourism and leisure, the same holds true for Johoreans coming to Singapore. And, there are many farms in Johor that produce ornamental flowers and factories that make light high-value electronic components that use Changi Airport and the Port of Singapore as a gateway to world markets.

In terms of the border, actually, if we go back to the pre-colonial period, you had the Johor-Riau Kingdom, whose territory roughly corresponds to Southern Malaysia, Singapore and the Riau Islands in Indonesia. So, you have deep-seated cultural, linguistic and family ties that span the three territories. And, between Johor and Singapore, you have even deeper ties, as both territories were part of British Malaya, and then Malaysia in the early 1960s before Singapore departed.

DM: How has the economic structure of the relationship between Johor and Singapore evolved? The book discusses how manufacturing was encouraged to move from Singapore to Johor in the past few decades. Does that model still work? If not, why not?

FH: The ties in manufacturing that we see today have their origins in the mid-1980s, when both Singapore and Malaysia benefited from a wave of Japanese investment in Southeast Asia. This was then complemented by investment from American, European and other Northeast Asian countries, which wanted to diversify production locations and take advantage of lower costs.

Broadly, this continued up until the mid-2000s, when a lot of electronics production was absorbed by China. This particularly affected Johor, which had been doing a lot of assembly of consumer electronics. The number of firms and workers in the state shrunk substantially as Japanese relocated production to China, and local suppliers’ firms went with them.

Also, Singapore’s electronics industry evolved, it began to specialize in the production of semiconductors, which was undertaken more in Singapore and less in Johor. A lot of the electronics production in Singapore became increasingly capital intensive and automated, which meant less demand for workers as well as being more rooted in Singapore the country.

However, increasing rents and difficulty getting foreign workers in Singapore has meant that many small-scale electrical — not electronics — producers that used to supply to multinationals in Singapore have begun to relocate to Johor. These are smaller operations that are less technologically intensive. You have a lot of room for expansion, if Johor can begin to improve the quality of its workers and its local innovation environment.

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FH: There is an inflow to Johor as well as an outflow. In part, this reflects a segmented labour market, with other Asian countries, particularly Indonesia, supplying workers to sectors such as palm oil, as well as security, construction, ports and retail. In turn, you have large numbers of Johoreans that work in Singapore.

A substantial proportion of the labour flows from Indonesia into Malaysia are irregular. You have full spectrum of legality. You have many workers from Indonesia working in Malaysia with full work permits, particularly for ports and for construction. There are also people that do not have valid visas. And, you have people that have 30-day visas that are allowed to be in Malaysia, but not work. They normally come to Malaysia for several weeks, do odd jobs, and then cross back to Indonesia. These two later categories have been significantly reduced due to Covid-19 because there is more patrolling of waters between Malaysia and Indonesia.

In terms of the flow of workers between Johor and Singapore, it is very large and very tightly regulated. This has been really interrupted due to the pandemic, with the border controls imposed by both countries. People have either opted to wait things out in Johor, or have chosen to temporarily move to Singapore. In time, things will gradually return to normal.

DM: At the time of independence, Singapore had very few sources of fresh water and was dependent on Malaysia for almost all its supply. How have transactions between Johor and Singapore on water and other basic utilities evolved over time?

FH: Again, due to their proximity as well as cultural and economic linkages, there are many dimensions to the relationship. Water is perhaps the best known of these, but not the only one. The initial dealings on water between Johor and Singapore date from 1927, when an agreement was signed by the British government in Singapore and the Sultanate of Johor. Singapore bore the costs of the water infrastructure in Johor, and in 1932, began to receive water.

This was then superseded by two agreements in 1961 and 1962, respectively. The first agreement covered water to Singapore from the Tebrau and Skudai rivers in Johor, which expired in 2011, and the second covers water from the Johor River and will expire in 2060.

Periodically there have been discussions over the price of water. The transactions involve not just raw water flowing from Johor to Singapore, but also treated water going from Singapore to Johor. From Johor’s side, considerations on the arrangement have been driven by its own growing domestic water needs — due to its growing population and also more diverse economy, and the fact that it also supplies water to Malacca.

In turn, Singapore has sought to diversify its sources, investing heavily in desalination, increasing catchment areas and water purification, and it seeks to attain water self-sufficiency by 2061. At the moment, about 40% of its water needs are met by Malaysia, compared to about 80% in 1965.

DM: The palm oil industry faces a number of pressures right now. How has the industry evolved, how important is it for Johor and what might it look like in the future? (For example, agribusiness getting out of palm oil and into, say, property development.)

FH: The export of agricultural commodities has been a key part of Johor’s economic development. The forests of Johor were initially cleared for rubberwood, and then for cultivation of pepper and gambier, which was used for tanning leather. In the early 1900s, the state’s flat and fertile land was turned to the production of rubber, and to a lesser extent crops such as pineapple, coconuts and coffee. It did this very well, and the Sultanate of Johor grew substantially in population, economic size and the provision of services like health and education.

The palm oil sector started in 1910 in the state, but growth really took off in the 1970s. Today, about one-third of the state’s territory is dedicated to oil palm plants. The role of the central and the state governments has been really key. When British plantation owners began to pull out in the 1970s, the federal government stepped in and acquired many large scale plantation concerns with a big footprint in Johor. Sime Darby and Guthrie Group Ltd., two of the country’s oldest firms dating from the colonial era, channelled proceeds into sprawling enterprises. (Sime, for example, now has interests in retail, healthcare, autos, theme parks and resorts, as well as plantations.)

In addition, the government established the Federal Land Development Authority, which was a large land settlement scheme oriented at the rural poor. While it was implemented in other states as well, what is key about Johor is that most of its beneficiaries were from the state. They were given land, and training to produce palm oil, and this, in turn, has resulted in a very important and influential voter bloc on the state’s east coast.

DM: How does the Singapore-Johor relationship compare with other international economic zones, such as the one stretching from the Pacific Northwest of the U.S. through Vancouver or the Greater Mekong zone that includes Thailand, Cambodia, Laos and Vietnam?

FH: There are several things about the Singapore-Johor and Riau Islands relationship that stand out. They comprise component units from neighboring countries that are in close proximity and have very different cost structures.

When you deal with geographic territories that are too big, much of this cost and proximity argument is lost. While the initial relationship was between Singapore, Johor and the Riau Islands, over time the governments of Malaysia and Indonesia came under pressure to include more states and provinces. By 1997, four Malaysian states and six Indonesian provinces were included in the cooperation agreement between the three countries. This never took off and, in the years since, the more organic relationship of Singapore and Johor, along with the Riau Islands resurfaced.

Thus, it may be better, rather than looking at the Greater Mekong Zone, which really is very big, to look at areas within those countries that offer interesting combinations of cost differentials, infrastructure and proximity. There are some emerging cross-border production sites in areas of Cambodia near the Vietnamese border. The industrial parks are located in Cambodia, but leverage expertise and reliable utility supply from neighbouring areas in Vietnam.

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