Singapore and Malaysia are in advanced talks to establish a special economic zone (SEZ) in Johor and the Republic, which could bring significant benefits to both countries in terms of economic growth, job creation, and bilateral cooperation.
What is a special economic zone?
A special economic zone is a designated area that offers various incentives and advantages to attract foreign investment and promote trade. These may include tax breaks, simplified customs procedures, relaxed regulations, and improved infrastructure.
SEZs are often used by developing countries to boost their industrialization and competitiveness in the global market. They can also foster innovation, technology transfer, and human capital development.
According to the World Bank, there are more than 5,000 SEZs in the world, with China being the most prominent example of their success. China’s first SEZ was established in Shenzhen in 1980, which transformed the city from a fishing village to a metropolis with a GDP of US$414 billion in 2020.
Why Johor and Singapore?
Johor and Singapore have a long-standing and symbiotic relationship, as they are geographically close and economically interdependent. Johor is Singapore’s largest trading partner, accounting for about 16% of its total trade in 2022. Singapore is also the largest foreign investor in Johor, with cumulative investments of RM113.5 billion (US$25 billion) as of 2020.
Both countries have also been collaborating on various projects in Iskandar Malaysia, a development corridor in southern Johor that covers an area of 2,217 sq km. Iskandar Malaysia was launched in 2006 with the aim of becoming a metropolis that complements Singapore’s economy.
Some of the key initiatives under Iskandar Malaysia include the Rapid Transit System (RTS) Link, which will connect Johor Bahru and Woodlands by 2026; the High-Speed Rail (HSR) project, which will link Kuala Lumpur and Singapore by 2031; and the Forest City project, which is a smart and green city built on four artificial islands.
The proposed SEZ will build on the existing cooperation and synergies between Johor and Singapore, and leverage on their respective strengths and attractiveness. It will also help both countries recover from the impact of the COVID-19 pandemic, which has severely disrupted cross-border travel and trade.
What are the potential benefits?
The SEZ could bring many benefits to both countries, such as:
- Economic growth: The SEZ could attract more foreign investment and trade to Johor and Singapore, especially in sectors such as manufacturing, services, digital economy, and green economy. It could also create new opportunities for businesses and entrepreneurs to tap into new markets and networks.
- Job creation: The SEZ could generate more jobs for both Malaysians and Singaporeans, especially in high-value-added and high-skilled industries. It could also enhance human capital development through training, education, and knowledge exchange.
- Bilateral cooperation: The SEZ could strengthen the ties between Johor and Singapore, as well as between Malaysia and Singapore at the national level. It could also foster mutual trust, understanding, and goodwill among the people of both countries.
- Regional integration: The SEZ could contribute to the regional integration of ASEAN, as well as the broader Asia-Pacific region. It could also support the implementation of the Regional Comprehensive Economic Partnership (RCEP), which is a free trade agreement among 15 countries that was signed in 2020.
What are the challenges?
The SEZ is not without challenges, such as:
- Political uncertainty: The SEZ will require strong political commitment and support from both countries, which may be affected by domestic politics and external factors. For instance, Malaysia is currently facing political instability due to a hung parliament and a possible snap election. Singapore is also expected to undergo a leadership transition in the near future.
- Legal complexity: The SEZ will involve various legal issues such as taxation, customs, immigration, labor, environment, and security. These will require careful negotiation and harmonization between both countries to ensure clarity and consistency.
- Social impact: The SEZ will have social implications for both countries, such as income inequality, environmental sustainability, cultural diversity, and social cohesion. These will require proper consultation and engagement with various stakeholders such as civil society, academia, media, and local communities.
What are the next steps?
Singapore and Malaysia have agreed to set up a task force to study the feasibility of establishing the SEZ. The task force will be led by the Ministry of Trade & Industry from Singapore and Ministry of Economy from Malaysia, with the support of relevant government agencies from both countries.
The task force will give a progress update at the 10th Singapore-Malaysia Leaders’ Retreat, which will be held in Singapore later this year.
In addition, commercial operators from both countries will also study the feasibility of launching a new ferry service between Tuas in Singapore and Puteri Harbour in Johor, which could enhance cross-border connectivity and facilitate the SEZ.