Economic competition between Malaysia and Singapore is increasing, as each fights for a bigger share of the southeast Asian economy. But, as Andrew Cohen reports, this is a fight in which there are likely to be no losers –

From his office on the 27th floor of Singapore’s SGX Centre, Patrick Wale overlooks a fleet of container vessels. The venue provides the chairman of the Singapore International Chamber of Commerce (SICC) with more than just a stunning view over the Strait of Singapore towards Indonesia.

It is also a prime vantage point for overseeing a battle on the high seas involving SICC’s corporate members. The container ships are big revenue earners for Singapore and an indication of its regional economic pre-eminence. Neighbouring Malaysia wants to steal a piece of that action.

Malaysia’s ambitions do not end there, however. The tussle over the transshipment business is part of a multipronged effort by Kuala Lumpur to win a larger slice of the whole southeast Asian economy.

Malaysia is no longer content to provide the world with low-end manufactured products. As China increasingly consolidates its position as regional leader in that sector, Malaysia is looking south for inspiration for growth and development. Singapore’s successful transformation into a hi-tech and services centre, which has brought it great wealth, is something that Malaysia now strives to emulate. And therein lies a clash between the neighbours.

Public officials and corporate executives in both countries play down the idea of bilateral friction. Wale describes it as a “friendly rivalry between the two countries”. He and others believe it is all fair play in the game of global capitalism, which spurs efficiency and innovation and is healthy for both economies’ worldwide competitiveness.

“Anything we do, others will try to replicate and do better,” says George Yeo, Singapore’s trade and industry minister. “It’s an endless competitive dynamic. In the end, maybe this is good for both sides because we act as each other’s pacer.”

That may well be true in the long term. But in the sectors in which Malaysia has chosen to play hardball Singapore has suffered more immediate setbacks.

PSA Corporation, Singapore’s port operator, is the most prominent victim. In the past two years it has lost much of the business provided by two large shipping clients, Maersk Sealand and Evergreen Marine.

Both have moved the bulk of their operations a half-hour’s sailing time down the Strait of Singapore to Tanjung Pelepas, a new and expanding facility just over the border in Malaysia’s southernmost state of Johor.

Lower costs and dedicated wharves lured the shipping lines. But the port’s location is hardly coincidental. The facility promotes itself by noting that its position offers the same benefits as PSA’s in Singapore.

When the Malaysians decided to put resources into developing Tanjung Pelepas “they committed themselves to a course of action that can only be a head-to-head battle with Singapore,” says Stewart Forbes, executive director of the Malaysian International Chamber of Commerce and Industry (MICCI).

The battle for commercial supremacy is also being fought in the air. Malaysia has recently opened its gleaming Kuala Lumpur International Airport (KLIA), an enormous facility which appears to have near-unlimited room for expansion and an appetite for airlines that make Singapore their regional hub. Air Mauritius and Egyptair are among the carriers that have abandoned the city-state for KLIA.

Malaysia has also been active in the hi-tech sector, another of Singapore’s mainstays. Its Multimedia Super Corridor (MSC) is a greenfield site 15 kilometres wide and 50 kilometres long, designed to house the research and services offered by the new economy and to propel Malaysia into the information age.

The MSC occupies an area stretching from the centre of Kuala Lumpur southwards through the futuristic government complex being constructed at Putrajaya and the “intelligent city” of Cyberjaya – home to multimedia industries and R&D; centres – to KLIA.

Fujitsu, NTT and Sun Microsystems are just three of the more than 700 companies that are active in the MSC, or are planning to be.

Despite this comprehensive effort, Malaysia’s record in wooing business away from the island nation is at best mixed, much to Singapore’s relief. Tanjung Pelepas may have won two high-profile clients, but its relatively small size hardly poses a threat to the survival of Singapore’s port operators.

PSA is quick to note that it retains a relationship with both companies that defected because its Malaysian rival cannot offer all the services they need. PSA’s more extensive facilities, the volume of cargo it handles and, most importantly, its global connections make it irreplaceable for shippers.

From Singapore vessels sail directly for 600 ports in 123 countries, a range unrivalled by any other port, let alone its relatively tiny counterpart just down the strait.

KLIA has similarly had mixed success in attracting airlines, especially those serving nearby Singapore. A temporary waiver on landing and parking fees has helped lure some smaller carriers. But global airlines, such as BA, Lufthansa and Qantas, have rebuffed efforts to displace them from Singapore.

On the tarmac at KLIA, on the other hand, few jets not bearing the livery of Malaysia Airlines are seen at any one time. In the end the airport will prove to be either a white elephant or a grand vision that gave the country sufficient capacity for growing crowds of air travellers.

On the hi-tech front reality is also falling short of expectations. Malaysia allows 100% foreign equity and grants tax-free status to enterprises in the MSC. But the amount of business conducted there is still low.

It is “not quite working yet the way it should,” admits MICCI’s Forbes. And one member of Forbes’s organization notes that the activity in the MSC is “not exactly the highest of hi-tech”.

Malaysia has successfully sought to create a 21st-century infrastructure and established political and economic stability, but more is needed if it is to put up a real challenge to Singapore’s commercial dominance.

The installation of a high-speed, fibre-optic network means communications are up to standard. And transport is facilitated by new highways and a modern train system connecting Kuala Lumpur, Putrajaya, Cyberjaya and KLIA.

Even the business community no longer fears the occasional impolitic outbursts of prime minister Mahathir Mohamad or a reintroduction of the capital controls that he imposed during the East Asian financial crisis of 1997-98.

Despite all these positive developments, aspects of Malaysia’s workforce put the country at a disadvantage. Knowledge of English, for example, generally falls far short of the fluency of the average Singaporean.

Edmund Terrence Gomez, an associate professor of politics and economics at the University of Malaya, believes this is the result of a failing educational system. He says foreign investors in Malaysia find adequate infrastructure but insufficiently qualified manpower – especially for the hi-tech sector. This has frustrated the country’s development plans and hindered growth. “We have a lot of catching up to do,” Gomez says.

The government is attempting to rectify the linguistic deficiency through a controversial proposal to teach mathematics and science only in English. However, even if the policy is implemented, it will be more than a decade before students more proficient in the language of global commerce enter the workforce. There is no quick solution.

Gomez cites the government’s bumiputra (“sons of the soil”) policy as another disincentive to investment. This so-called affirmative action programme offers benefits to the indigenous population, guaranteeing them an influential presence in the business sector. But it has also marginalized a thriving ethnic Chinese community. “[It] has negated a dynamic force,” Gomez complains. “This could have been the force to drive the industrialization process.”

Malaysia also has the misfortune of going up against a neighbour that is neurotic about competitiveness and achievement, and which has a lingering inferiority complex that spurs it to action.

Singapore’s feeling of insecurity stems from its forced independence at a time of great vulnerability. The city and its overwhelming ethnic Chinese majority were expelled from the Malayan Federation in 1965, ostensibly for reasons of social harmony. A city-state, now the world’s 23rd smallest independent territory, was suddenly born – an entity without any hinterland or natural resources on which to base an economy.

To survive, Singapore had to create a physical and legal infrastructure that attracted investment. It also needed to provide a well-educated labour force, fluent in English and ready to conduct business with the world. The result has been an astounding success, as Singapore – a backwater only three decades ago – is on the cusp of becoming a fully developed society.

Singapore’s feelings of insecurity nevertheless persist and its government continually frets about the country’s ability to remain the region’s pre-eminent commercial hub.

“I know that many of you are anxious about our economic situation,” prime minister Goh Chok Tong said in his annual National Day speech in 2002. He acknowledged that he, too, was worried about “whether one day Indonesia and Malaysia would overtake us”, and cited the competition between PSA and Tanjung Pelepas as a particular concern.

But Goh welcomed the competition and assured his fellow countrymen that, like all Singaporean enterprises, PSA would not take the loss of business lying down. “It will do whatever is needed to maintain its position as the premier trans-shipment hub of our region,” he declared.

He appears to be right. In June last year, PSA announced that it was slashing terminal charges and rates. Three weeks later the port operator signed a contract renewal with South Korea’s Hanjin shipping lines. The company admitted that the new pricing scheme was instrumental in its decision to remain with PSA.

To stay ahead, Singapore is also on the lookout for new market niches to seize. One such opportunity has recently arisen in life sciences. In response, the government has established the Genome Institute of Singapore and drawn up plans for Biopolis, a large biomedical R&D; complex to be conveniently situated near the National University of Singapore. (For its part, Malaysia intends to develop a bio-valley.)

Typically, work on the Biopolis site is running to schedule and should be completed by the end of 2003. In addition, Singapore has created one of the world’s most permissive climates for stem-cell research, avoiding the restrictions that many industrialized countries are placing on the activity. This gives it a respectable chance of securing a large amount of investment in the field.

Having a competitive tax policy is also a Singaporean national concern. The government has said it intends to lower corporate tax rates, taking them down to 20% within three years. “There will also be a shift from direct to indirect taxation, which will be good for inward investment,” says trade minister Yeo.

This overachiever attitude has served Singapore well and will continue to do so as Malaysia nips at its heels. But both countries realize that their incessant competition offers bilateral advantages. It keeps markets on their toes and fuels efficiency and innovation.

Both countries have already reaped such benefits from Wale’s “friendly rivalry”. The economic battle he overlooks from his office is proving to be a fight with no real loser.