Don't Look Now, Singapore, But Malaysia Is Gaining On You

For years, Senior Minister Lee Kuan Yew of Singapore has tormented political opponents and journalists with lectures and libel writs. Now he seems to have met his match. Malaysia's threat to freeze bilateral ties in retaliation for insulting remarks he made about crime in its Johor state, adjoining Singapore, forced Lee to apologize on Mar. 29. "[We] are not going to turn the other cheek again and again," says Zainal Aznam Yusof, deputy director at Kuala Lumpur's Institute of Strategic & International Studies.

The episode shows how Southeast Asia's economic balance of power is shifting. Singapore has long been the main magnet for foreign investment and the region's high-tech leader. But its neighbors are catching up, none more aggressively than Malaysia. Prime Minister Mahathir Mohamad has an ambitious agenda to propel it into the big leagues and surpass Singapore as the region's economic hub.

Mahathir will likely accelerate his crusade. Emboldened by years of 8% economic growth rates, he is determined to undo the British colonial legacies that have long enriched Singapore at Malaysia's expense. Over a quarter of its exports still ship through Singapore and 112 Malaysian companies trade on its stock exchange, making up 40% of daily volume.

Malaysia's catch-up is costly. Mahathir is pouring more than $12 billion into grooming greater Kuala Lumpur. The capital will get a bigger seaport and a new international airport. And Mahathir is creating a 31-mile-long high-tech zone, the Multimedia Supercorridor, between the city and the airport. Financial reforms, too, aim to attract technology companies with a new NASDAQ-style over-the-counter market designed for them.

But Mahathir's efforts are paying off. Microsoft Corp., for instance, last year agreed to put its regional headquarters in the high-tech corridor. Malaysia has snared Dell Computer Corp. and Packard Bell NEC Inc., as well. "In four or five years' time, K.L. will be the place," says Singapore-based Jardine Fleming senior economist Rajeev Malik.

Malaysia's growing challenge puts Singapore in a bind. Unlike Hong Kong, which has China as a backyard, it has no hinterland. The country, with 70% of ethnic Chinese in its population, is an island "in a Malay sea," frets one Singapore government official. Besides, ever since Singapore left the Federation of Malaysia in 1965, Lee's frequent zingers have spread distrust in Asia.

MORE SPATS. Big disputes are something the region's players, grouped with Malaysia and Singapore inside the Association of Southeast Asian Nations (ASEAN), can ill afford. Malaysia and other countries need investments from Singaporean companies. Meantime, Singapore's government is encouraging companies to diversify abroad, because it wants regional investments in manufacturing, shipping, property, and finance to fuel slowing growth.

Unfortunately, growing interdependence may lead to more spats, not fewer. Noninterference in other members' affairs worked fine as a guidepost when ASEAN was a glorified discussion group. But it is becoming untenable as competition between members heats up as ASEAN moves to dismantle trade barriers and form a free trade area by 2003. "We're going to see more and more friction," says Jusuf Wanandi, chairman of Jakarta's Center for Strategic & International Studies.

Certainly, Mahathir can and will exact his political price for Lee's gaffe. He could use it to win financial concessions on projects such as a high-speed rail link between Singapore and Kuala Lumpur or new crossings from Singapore to Johor, the state Lee maligned. Having gained the upper hand, the Malaysians are in no hurry to forgive and forget.

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