Malaysia and Singapore last week inked a deal to establish the Johor-Singapore Special Economic Zone (JS-SEZ) in Malaysia's southernmost Johor state, just north of Singapore.

The initiative is designed to attract global investment and ease the cross-border flow of goods and people between the two nations, while leveraging the strengths of both to deepen economic ties.

Johor, Malaysia's second most populous state, plays a vital role in the country's economy, with key sectors including manufacturing and tourism. 

Proposals for the JS-SEZ include a passport-free immigration clearance system, cooperation on renewable energy, and simplified business approvals.

Singapore's and Malaysia's leaders laud project

Singaporean Prime Minister Lawrence Wong said the JS-SEZ will create good jobs for citizens of both countries and attract significant international investment.

"Both sides have actively engaged stakeholders to ensure that the JS-SEZ has the conditions to help our business grow together for the longer term. It's about both sides working together to attract new investment projects globally," he said.

Malaysian Prime Minister Anwar Ibrahim said the project created a "unique initiative" for both nations to harness each other's strengths and deepen linkages in a world that is becoming more polarized.

The two leaders also invited proposals for a high-speed rail connection between the two countries, which Anwar said should be led by the private sector, with limited government involvement. An earlier plan was scrapped in 2021 over disagreements.

Johor's chief minister, Onn Hafiz Ghazi, emphasized the importance of seizing the opportunities presented by the new agreement. He stressed that the benefits of the JS SEZ would extend beyond Johor Bahru, the state capital, to the entire state and contribute to Malaysia's broader economic and tourism sectors.

"The key question is whether we, the people of Johor, are ready to embrace the opportunities that will transform the economy, because if we're not ready, others will take advantage," he said. "Malaysia as a whole will gain from various sectors like the economy, tourism, and more."

Johor, an attractive tourism destination

Johor has long had several significant tourism attractions, including Legoland, Desaru and the Johor Zoo.

More than 16 million foreign tourists visited Johor in 2023. Government officials predicted 20 million as the target for the whole of 2024.

Muhammed Abdul Khalid, a research fellow at the Institute of Malaysian and International Studies at the National University of Malaysia, said the JS-SEZ builds on "Iskandar Malaysia," the country's first economic region and Johor's main economic corridor, which was launched in 2006.

"The JS SEZ is significantly larger, encompassing Iskandar and incorporating the failed and stalled Forest City project," he told DW.

Forest City's Chinese developers envisioned it as housing 700,000 people, but it has since been labeled a ghost town, with less than a quarter of it completed.

What role could China play?

Ian Chong, a political scientist from Singapore, said that the JS-SEZ leverages the strengths of both countries, fostering closer ties and mutual benefits.

"It draws the two countries closer together," he told DW. "If things work well, both Malaysia and Singapore stand to gain."

Chong emphasized the need for long-term foreign direct investment (FDI) strategies to be diverse, noting that although China could contribute, its role may be constrained by internal economic challenges.

"In the longer term, it should be diverse, especially from developed countries — which have been and continue to be the largest sources of FDI in ASEAN generally. China could be a source of FDI, but given their domestic economic headwinds, and debt they may be a more limited source of FDI," he said.

"In the short term, FDI to Southeast Asia, including Malaysia, has been a beneficiary of the 'China Plus One' strategies of many companies," he added, referring to the global scheme where firms diversify their supply chains by moving some of their China production to other promising emerging markets."

"However, those benefits come from the major powers accommodating smaller and middle powers working with their rivals. Should there be less tolerance for working with key rivals, FDI could face some limits — at least in the short to medium term," Chong said.

Potential political backlash

Khalid cautioned that the JS-SEZ would bring political challenges, particularly regarding Singapore's influence over Johor and cross-border labor movements.

"The government must ensure that there is no risk of 'gentrification' in Johor, otherwise it could lead to political backlash," he said.

Khalid suggested that the Malaysian government should also consider the JS SEZ's broader implicatons.

"Concentrating economic activity and offering highly favorable tax incentives within the zone could divert investment from other regions, exacerbating regional inequalities," he said.

"Perceptions of economic colonization by Singapore could arise if the government fails to address these concerns effectively and ensure that the benefits of the SEZ are shared equitably across the nation."

Edited by: Keith Walker