Nov. 11 (Bloomberg) -- Forty-five years after Singapore’s expulsion from a union with Malaysia left Lee Kuan Yew in tears on national television, the economy of the city-state he led to independence is poised to overtake its neighbor.
Singapore’s gross domestic product will cap its fastest annual growth this year since independence, rising as much as 15 percent to about $210 billion, while the economy of Malaysia, a country 478 times its size, will expand 7 percent to $205 billion, government forecasts show. The nations are scheduled to release their 2010 data by February.
The island that former economic adviser Albert Winsemius once said was considered a “poor little market in a dark corner of Asia” is now ranked by the World Bank as the easiest place to do business, has the world’s second-busiest container port, and boasts the highest proportion of millionaire households, according to the Boston Consulting Group.
“Singapore kept on moving to the next level as the world economy evolved and adjusted to market demands and investors’ interests,” said Lee Hock Guan, senior fellow at the Singapore-based Institute of Southeast Asian Studies. “Malaysia was struck by the curse of resource-rich countries: It didn’t optimize its human capital.”
From a low-cost manufacturing center for companies such as Texas Instruments Inc. in the 1960s, Singapore has become the world’s fourth-largest foreign-exchange center with a S$1.2 trillion ($932 billion) asset-management industry.
Smaller than New York City and the only Southeast Asian nation without natural resources, Singapore has grown 189-fold since independence in 1965, helping boost GDP per capita to $36,537 last year from $512. Malaysia’s economy expanded at one-third the pace during the same period and had a GDP per capita of $6,975 in 2009, up from $335 in 1965.
Malaysia’s growth fell to an average 4.7 percent a year in the past decade, from 7.2 percent in the 1990s, when former prime minister Mahathir Mohamad wooed overseas manufacturers, built highways and erected the world’s tallest twin towers.
“Development is like a marathon and all policies geared toward it must be sustainable and continuous,” said Thomas Lam, chief economist at OSK-DMG, a venture between Malaysian securities firm OSK Holdings Bhd. and Deutsche Bank AG. “Malaysia runs the marathon like a 100 meter event, so you see the initial spurt but not continuous progress in the race.”
Lam, 35, is one of 386,000 Malaysians who have become permanent residents or citizens of Singapore, a list that includes Health Minister Khaw Boon Wan and Oversea-Chinese Banking Corp. Chairman Cheong Choong Kong.
“Singapore seems to offer greater career opportunity and mobility in my field,” said Lam, the second-most-accurate U.S. economic forecaster for 2008 to 2009 in Bloomberg surveys.
After more than 140 years under British rule, Singapore joined the Federation of Malaysia in September 1963 as Lee and his colleagues sought a bigger common market to cut unemployment and curb communism. The merger survived less than two years amid ideological differences and worsening relations between the United Malays National Organisation, which dominated the ruling Barisan Nasional coalition, and Lee’s People’s Action Party.
“For me, it is a moment of anguish,” Lee said on Aug. 9, 1965, the day Singapore became a sovereign state. “My whole adult life, I believed in Malaysian merger and unity of the two territories.” Lee, 87, was Singapore’s prime minister from 1959 to 1990.
‘Loss of Time’
Winsemius, the country’s economic adviser from 1961 to 1984, said he thought the merger was a “loss of time.” Credited with helping formulate Singapore’s industrial strategy, Winsemius, who died in 1996, said the general opinion of Singapore in the early 1960s was a country “going down the drain.”
The government acted by investing in export-based industries. It built new container terminals for Singapore’s port, the genesis of the country’s development; reclaimed land offshore to attract companies such as Exxon Mobil Corp. and Royal Dutch/Shell Group for a S$30 billion oil refining complex; and moved into high-tech industries like electronics and drugs.
“Economic development does not occur naturally,” said Ravi Menon, a senior official at Singapore’s Ministry of Trade and Industry. “This is where free marketers are disenchanted with Singapore. The government has never hesitated from guiding the development process or intervening in markets where it believes such intervention will lead to superior outcomes.”
The government invested about S$500 million in its Biopolis biomedical research hub after attracting drugmakers including Pfizer Inc. and Novartis AG. It cut corporate tax rates by nine percentage points since 2000 to 17 percent, compared with 25 percent in Malaysia.
BNP Paribas has a “buy” recommendation on Keppel Corp. and SembCorp Marine Ltd., the world’s biggest builders of oil rigs and two of the companies the government backed to propagate its industrial policy. Singapore Technologies Engineering Ltd., Asia’s biggest aircraft-maintenance company, was rated a “buy” by Deutsche Bank AG.
Singapore was kicked out of the union partly because Lee opposed Malaysia’s affirmative-action policy, which provides special rights to the ethnic Malay majority. While Malaysian Prime Minister Najib Razak has pledged to roll back key policies of ethnic favoritism, he told UMNO’s 61st General Assembly last month that the “social contract” that gives benefits to the Malays cannot be repealed.
“Singapore will overtake Malaysia because its focus is just on economic growth,” Mahathir, Malaysia’s prime minister from 1981 to 2003, said in an e-mailed response to questions. “There is no social restructuring goal such as fair distribution of wealth between races as we have in Malaysia.”
Najib is trying to return the Malaysian economy to the levels of growth that boosted stock prices almost fivefold in the decade through 1996. He set a goal of tripling gross national income to 1.7 trillion ringgit ($550 billion) in 2020, from 600 billion ringgit in 2009 and creating 3.3 million jobs.
His government unveiled an economic transformation program in September aimed at attracting investment, including $444 billion of programs this decade ranging from mass rail to nuclear power, led by private and government-linked companies.
“Malaysia has to ask itself why its investment rates are so low,” said Vikram Nehru, World Bank regional chief economist for East Asia and the Pacific. “There are questions about availability of labor, entry and exit barriers, and underlying concerns about policy executions.”
Najib is also taking steps to bolster the talent base, including plans for a teaching hospital with courses by Baltimore-based Johns Hopkins University and a new corporation tasked with luring back skilled Malaysians from overseas.
About 350,000 to 400,000 Malaysian citizens work in Singapore, including 150,000 who commute daily via buses and motorcycles to jobs in the city-state’s factories, kitchens and offices.
“Singapore followed the export-led industrialization model to become a base for foreign manufacturers,” said Lee of the Institute of Southeast Asian Studies. “The main model for Malaysia for a number of years was import-substitution where it protected certain industries. That created inertia.”
Lee, a 52-year-old Malaysian who studied and lived overseas for more than 30 years, said he plans to return to live in Malaysia only when he retires.
Singapore beat 182 economies to take first place in the World Bank’s annual ranking of business conditions, which looks at property rights, taxes, access to credit, labor laws and regulations on customs and licenses. Malaysia climbed two steps to 21st, according to the Nov. 4 report.
Mercer Consulting ranked Singapore as Asia’s most livable city in May, even as it lags behind Hong Kong on measurements of personal freedom and media censorship. The government says restrictions on public assembly and speeches are necessary to maintain social and religious harmony among its 5 million people. The city was wracked by violence between ethnic Malays and Chinese in the 1960s.
The country must keep innovating to stay ahead, said Tomo Kinoshita, deputy head of Asia economics research at Nomura Holdings Inc. in Hong Kong.
“Singapore must keep searching for new markets,” Kinoshita said. “Less developed Asian countries are all growing quickly and trying to catch up.”
To contact the reporter on this story: Shamim Adam in Singapore at email@example.com