It is August coming into September. It is a month of feverish nationalism across Indonesia, Malaysia and Singapore. For the latter two, history is so intertwined that it is almost impossible to celebrate each other national day (days in case of Malaysia) independently and without dishing out minor insults across the Causeway. Over BFM just the other day, the hosts and guests were talking out loud how grateful they were to be Malaysians because of the food… which is better than Singapore’s. Some Singaporeans regularly express how grateful that Singapore is no longer part of Malaysia.
Beyond these banters, there are discussions of what-if. What if Singapore were still the 14th state of Malaysia? Would Malaysia be more prosperous than it is now?
I am in the opinion that the separation is for the best. A what-if Malaysia with Singapore in it would likely be worse for both parties: both Malaysia and Singapore would not be as prosperous as they are now. Both would pull each other back.
From an economic standpoint, the what-if Malaysia would be a Malaysia suffering from a kind of Dutch disease. We are accustomed to the Dutch disease through by overreliance on petroleum. But the Dutch disease can really be generalized into a sector that gobbles up so much resources that it raises cost across the economy, which in turn causes other sectors—especially manufacturing—to be uncompetitive.
In our what-if scenario, that sector would be finance (on top of petroleum).[0]
A strong and big financial sector works in the usual Dutch disease way: higher-than-average wages, which sucks talent away from other sectors. It would also suck other resources and reallocate capital towards short-term profitability instead of enabling greater investment that things like manufacturing usually need.
The well-being of the financial sector does not necessarily align with that of the economy (and within the context of industrialization, manufacturing). In How Asia Works, author Joe Studwell suggests that the financial sector must be put on a short leash to make industrialization works. In clearer terms, that means forcing banks to lend cheaply to manufacturers and having the financial sector bears more risks that it is willing to shoulder. There are other ways to counterbalance the influence of finance but an influential financial sector will make that harder if not impossible to do.
Finance was and is a big part of the Singaporean economy. While it is difficult to obtain clear data from the mid-20th century, as far as reliable and comparable records are concerned, financial services as a share of GDP in Singapore has been higher than it is in Malaysia since 1980.
The trend possibly began much earlier if we consider Singapore’s role as the financial and trading hub of colonial Malaya: the 1960s Singapore was not the swampy kampong some would claim it to be. In 1905, Singapore already operated a network of electric trams, which is shown below (in fact, Singapore had had steam trams as early as the 1880s):[1]
So, if Singapore was still a Malaysian state and the growing finance GDP share trend held up as it did in the 1980s and all the way to the 2020s, I would think other sectors would be competing in a losing battle for resources. This is also part of the reason (in the real world) why some Singaporean more industrial firms have been relocating to Johor: it is too expansive for more and more industries to operate on the island state.
Additionally, the difference in the make-up of the Singapore economy and that of the Peninsula, and even more of the Bornean states, means economic interest and policy would diverge in a world where Singapore remains as a member state. In 1966, Singapore’s GNI per capita was already almost twice as large than that of Malaysia’s.
A concrete example of diverging interest could be seen from 1963 until 1965, there was major disagreement between Kuala Lumpur and Singapore over developmental funding: KL wanted Singapore to contribute more to support development not just in the Peninsula but also in Sabah and Sarawak, while Singapore thought it was being bullied into doing so. In fact, financial disagreement and questions regarding customs union between the federal Finance Minister Tan Siew Sin and Singapore’s Finance Minister Goh Keng Swee over the financial arrangement between Singapore and the Federation had played a role in the separation.
The divergence in policy could also be rationalized through monetary policy. The different stages of development between the member states means each component would need different policy treatment. The Peninsula, Sabah and Sarawak in the 1960s would likely need looser monetary policy relative to Singapore. A monetary authority trying to juggle the needs of such diverse economies would have a headache. Imagine the European Central Bank during the European debt crisis, where they had to satisfy the inflation-phobic German authorities while trying to save the Greece and other southern European economies. European authorities in the end resorted to painful internal devaluation for the already troubled economies.
Similarly for a what-if Malaysia, the benchmark rate would likely be too low for Singapore but to high for everybody else. In this case, the what-if Malaysia would grow slower than real-life Malaysia (making industrialization process harder than it should be) while a Singapore in Malaysia would likely face greater financial stabilities than real-world Singapore.
The fact that Singapore’s monetary policy regime today is so different from Malaysia’s just shows how difficult to run monetary policy in the what-if Malaysia.
And so, as far as development is concerned, separation was likely the best outcome we could hope for.
[0] — On Dutch disease, it is impossible to not mention oil & gas in real-world Malaysia. But I think Malaysia did well in managing petroleum resources due to other strong sectors such as agriculture and also due to strong effort to diversify and industrialize (that is industrialization in spite of petroleum but there are signs of petroleum crowding out other sectors there in Terengganu, Sabah and Sarawak). This is evident from the falling oil & gas since it peaked in the mid-1980s, in contrast to the rising prominence of finance in Singapore today. But the relevant point is, imagine having to deal with two sectors that would suck resources away from manufacturing. Would that Malaysia able to deal with two cost-rising sectors all at once?
[1] — Electric tram at Collyer Quay, Singapore. Following the failure of steam trams in Singapore, electric trams were introduced in 1905 but eventually phased out by trolley buses in 1925-1927. [COLLYER QUAY, SINGAPORE. Seow Chuan Koh. National Archives Singapore. Extracted August 30 2025]
