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How Malaysia can save Singapore from itself

Why Mahathir may spur Lee into much-needed reform

| Singapore

Mahathir Mohamad wasted no time reminding Singapore why it was happy to see the back of him in 2003.

Just 74 days into his second stint as prime minister, Mahathir is challenging a high-speed rail link between Kuala Lumpur and Singapore. He is threatening to charge the city-state more for water. He is demanding renegotiation of the Trans-Pacific Partnership, a regional trade pact that includes Singapore.

But might Singapore's economy end up thanking Mahathir? Because if any government needs a jolt, it is Singapore's.

Prime Minister Lee Hsien Loong was already in office for five years when Malaysia's Najib Razak took power in 2009 and Lee remains entrenched today. Najib spent nine years wrecking his country's image before voters entrusted Mahathir to repair the damage. Amid questions about $4.5 billion missing from the 1MDB state fund and waning competitiveness, voters showed Najib the door and Mahathir has since arrested his one-time protege.

Now comes World Bank data showing Malaysia is on the cusp of regaining its gross domestic product lead over Singapore.

Admittedly, such comparisons can be superficial. Ask the average Japanese about China's GDP leaving Tokyo's in the dust and they will refer you to per capita income levels four-and-half times Beijing's.

But two caveats add drama to the contest between Malaysia and Singapore. In 2015, Singapore, population 5.6 million, rejoiced over surpassing Malaysia, population 32 million. It was drenched in national pride, coming around the time Lee Kuan Yew died -- a crowning achievement for the father of Singapore. And Malaysia is not so much gaining as Singapore is treading water in terms of development.

According to World Bank numbers, Malaysian output hit $314.5 billion in 2017, just $9.4 billion below Singapore's $323.9 billion. That gap is likely to narrow further, as Malaysia's projected 5.5% growth exceeds Singapore's projected 3.1%.

Malaysia, to be sure, is no economic role model. That voters tossed out Najib's Barisan Nasional coalition marks great progress. It is heartening that Mahathir's Pakatan Harapan coalition is bringing Najib to justice with lightning speed. And it is certainly great that Mahathir is acting transparently. The Najib government's questionable economic data made Beijing statisticians blush. Mahathir's administration is shining light on the true state of Malaysia's finances, regardless of the consequences in the financial markets.

Yet Malaysia's rot was many decades in the making. Though headline GDP growth looked decent, the fruits went to ethnic Malays benefiting from affirmative action policies dating back to 1971, a decade before Mahathir's first stint as leader began. Policies disadvantaging Chinese and Indian minorities impeded innovation and productivity. They fed corruption and enabled tiny Singapore to overtake Malaysia easily in terms of GDP.

Mahathir's successors, Abdullah Ahmad Badawi and Najib, both pledged to end the economic apartheid which turned off foreign investors, only to deepen the policy. That leaves Mahathir, 92, with the tall -- and awkward -- task of reinventing a system he helped create.

That is why Malaysia could be the catalyst Singapore needs at a pivotal moment.

The fallout from Donald Trump's trade war is bearing down on Singapore's export-reliant and manufacturing-heavy economy. Non-oil domestic exports ground to a halt in June --- growing 1.1% versus 15.5% in May. Electronic equipment shipments have now fallen for seven consecutive months as U.S. President Donald Trump's tariffs slow demand from China, Japan and Europe.

Singapore's abrupt slowdown highlights how little progress Lee's government has made in transforming the economy into an innovative powerhouse. In essence, Lee has been caught napping by sticking with too many of the policies his father employed from 1959 to 1990.

To be sure, there were many efforts to encourage innovation and copious talk about shifting to higher-value-added industries. Those efforts, unfortunately, lacked focus, scale and audacity.

In 2010, the government launched several efforts to boost expenditure on research and development to generate a startup boom. Yet it moved slowly to curb the outsized role of government-linked companies. It trod carefully on tax incentives and grants to entrepreneurs across vital sectors -- biotechnology, energy, logistics, software.

In Lee Kuan Yew's day, growth relied on attracting ever-increasing flows of foreign talent. For Lee the younger, it is about getting more out of the population Singapore has now. Singapore is experiencing its own immigration backlash at both ends of society. Some locals chafe at expat bankers bidding up property prices, others complain about low-skilled labor depressing wages.

Today's Singapore needs to be more about ideas and invention than about producing physical goods. One priority: ensuring the education system gives priority to critical thinking over rote learning. If Singapore wants to encourage greater risk-taking, it also must build new social safety nets to catch those who do not succeed.

Singapore must rely less on a slowing China and tap growth in Indonesia, the Philippines, Vietnam and, of course, Malaysia. Southeast Asia's burgeoning middle-class consumer sector is a ready market into which Singaporean startups can sell their wares. Another priority should be helping smaller companies gain access to joint ventures in Europe, a region anxious for closer coordination with Southeast Asia.

Mahathir's return ups the pressure. Again, Malaysia must do herculean amounts of heavy lifting to raise its own game. But his focus on retooling the economy could generate a healthy rivalry, not just for Lee's government but for several throughout the region.

The message from Mahathir in his second stint as prime minister to Rodrigo Duterte of the Philippines, Prayut Chan-o-cha of Thailand and other leaders whittling away at democratic norms is to beware the wrath of your people. The signal to Indonesia's Joko Widodo is that nothing good comes from tolerating economic nationalism.

To Vietnam's Nguyen Xuan Phuc, it is about the dangers of tightening the noose around the media. To Cambodia's Hun Sen, it is the futility of decimating opposition forces. And to Lee's Singapore, it is the costs of complacency in what is essentially a one-party state.

Singapore's economic success is as impressive as ever. Even with zero natural resources, its per capita income is $58,000 to Malaysia's roughly $10,000. And Malaysia has enviable stores of petroleum, natural gas, palm oil, timber and other deposits like the water supplies it sells to Lee's nation.

Yet decades after beating the middle-income trap, Singapore is having a midlife economic crisis. Wages are stagnant, inequality is rising and the population is aging rapidly. At the same time, fierce competition from China, India, and Indonesia make Singapore an expensive property in a cheap neighborhood. The only way to grow incomes is to create new wealth, not to try to compete on price.

Lee's government must take bold and creative steps to increase productivity and entrepreneurship. With tax incentives and regulatory tweaks, it can empower millennials with an idea and a dream to disrupt the model Lee's father built.

Steps in March to raise the goods and services tax and stamp duties on property to finance social-welfare spending were constructive. But it is time Singapore manufactured a more dynamic and innovative future --- one that relies less on factories and more on the natural resource it does have: a smart and determined workforce.

The sudden burst of reformist energy in Malaysia could make Mahathir an unlikely ally in that enterprise.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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