INTRODUCTION

When the British ruled the entire Malay peninsula, the links between the various parts of their empire were established almost unconsciously. The economies of the various Malay States and Strait Settlements were interdependent, and Singapore, Penang, and Kelang were their gateways. Singapore grew rich on trade provided by the shipment of rubber and tin from Malaya and this same trade funded the development of the Malay hinterland. Since their separation in 1965, both Malaysia and Singapore have made good economic progress and as their development took on different profiles, they needed each other more and more. The old ties remain and Malaysia continues to supply goods and labour to Singapore, which in turn provides facilities for trade, and other services such as the financial sector. Thus, the first phase of economic relationship between the two countries after their separation can be characterized as complementary.

The expanding global economy, foreign direct investment inflows, and growth in Southeast Asia, have contributed to the advancement of the Malaysian and Singapore economies. Singapore's gross domestic product (GDP) grew by 8 per cent per annum from 1960 to 1999. For Malaysia, the growth rate was slightly lower, which is natural when you take into account that it started from an agriculture base and was a larger economy. During 1970–99, the Malaysian GDP expanded by 6.9 per cent per annum. Although small, lacking in physical resources and dependent on its neighbours for the supply of resources, such as water, labour, and food, Singapore has outpaced its neighbours in economic performance. Singapore widened its economic horizon and strove to be a service centre for the Southeast Asian region. Its role as the regional entrepôt has greatly assisted Singapore's growth.

Even though Malaysia's economic achievement is laudable, Singapore's progress, despite the above constraints, is impressive. Its performance is illustrated by the following selected indicators: Besides having the highest per capita income in the region, Singapore's international foreign reserves in 2003 at US$103 billion is larger than Malaysia's (US$54 billion). Considering that Singapore's population is only one fifth of Malaysia's, its GDP at US$87 billion in 2002 was nearly as large as Malaysia's (US$95 billion). In 2002, its exports amounting to US$128 billion were more than Malaysia's (US$92 billion).