Malaysia’s China Problem

Malaysia is losing out to neighbour Singapore in taking advantage of economic opportunities China offers.

Malaysia's natural advantages in resources and infrastructure and its cultural claim to being 'Truly Asia' will count for little if it’s unable to address the long term challenges of how to tap into the rise of the two countries that lay claim to its largest ethnic minorities—India and China. Comparisons with neighbouring Singapore aren’t encouraging for Malaysia.

Singapore's economy grew at 14.5 percent last year—double Malaysia's strongest pace in a decade of 7.2 percent. Official figures show Singapore's GDP per capita increased from $512 in 1965 to $42,653 in 2010, while Malaysia's GDP per capita lagged significantly over the same period, rising from $335 in 1965 to $7,775 in 2010.

A litany of social tensions, many of which could easily be found in Malaysia 10 or 20 years ago, still exist today. The retention of the notoriously wide-reaching Internal Security Act, the adherence to a more than 30-year-old affirmative action policy aimed at assisting ethnic Malays, ethnic minority emigration, Anwar Ibrahim's ongoing trials, last month's protests by Indian activists offended by the inclusion in school curricula of a novel allegedly depicting the ethnic group in an unfavourable light, and the looming presence of Dr Mahathir all give a sense that Malaysia is somehow trapped in a time warp.

Malaysia's need to pay attention to these cracks in its delicate social contract between its major ethnic groups may leave it unable to fully comprehend the rise of China and India.

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So, will Malaysia remain stuck in the middle income trap while Singapore races ahead? In the halcyon days prior to the Asian financial crisis, Malaysia had Asia's second-highest stock market turnover rate, second only to Japan. Today, the Malaysian stock market accounts for only 4.15 percent of the benchmark MSCI Asia ex-Japan index, while foreign direct investment into the country has cooled significantly.

In contrast, Singapore has since 2009 established an FTA with China and is the highest contributor of FDI after Hong Kong and Taiwan (ahead of Japan and the United States), with $5.657 billion worth of capital flowing into China in 2010. In addition to being Singapore’s third-largest trading partner and top investment destination, China is also the second largest source of tourist arrivals to the city state. Bilateral trade between the two countries rose by more than 25 percent in 2010, to 95.3 billion Singapore dollars.

While Malaysia is aiming to establish certification of halal foods in China to service the estimated 150 million Islamic population, and is encouraged by the uptake of tropical fruit in the country, these are small steps compared with the level of China awareness in Singapore. And while Malaysia may aim to take on China's dominance in the rare earth industry with help from Australian mining company Lynas, solving the social divides within the country may be an altogether bigger undertaking.

Catherine Chan is an environmental lawyer and journalist based in Beijing.

(This article is an edited version of an entry that appeared in the Lowy Institute's Interpreter that can be found here.)