Shenzhen’s development has been nothing short of impressive. Rising from a fishing village, the city transformed within 40 years into a glimmering metropolis. Today, it boasts China’s second highest per capita gross domestic product (GDP) of 183,274 yuan (S$35,641), just behind Beijing’s 190,313 yuan (S$37,010).
Parallels abound between Shenzhen and Johor which wants to grow its 2022 per capita GDP of RM41,001 (S$12,853).
Both Shenzhen and Johor have access to a young, energetic workforce from across their respective countries. They also have abundant resources and plenty of land.
And, of course, both sit to the north of major economic and finance hubs – Hong Kong special administrative region in the case of Shenzhen, and Singapore in the case of Johor.
With the JS-SEZ being mooted, the pitch to companies is that they can set up headquarters functions in Singapore while carrying out production and other activities in Johor.
The southern Malaysian state is already taking steps to try and realise its ambition. In March 2024, Mr Onn Hafiz led a delegation to Shenzhen, with the support of UOB and government bodies from China and Malaysia. The state delegation met Chinese business leaders to learn about challenges and opportunities, and how Johor can implement the right policies to thrive.
However, those with longer memories will recall that this story sounds strangely familiar.
The excitement over Johor rings back to 2006 when the Iskandar region was set up under then Malaysian Prime Minister Abdullah Badawi. It ramped up around 2013 during the tenure of Mr Badawi’s successor, Najib Razak.
But the buzz cooled off subsequently, culminating in the termination of the Kuala Lumpur-Singapore High Speed Rail (HSR) project in January 2021.
Why things will be different this time
Nonetheless, it could be second time lucky.
Three critical elements are different now from 20 years ago: cross-border government support is much stronger, infrastructure and connectivity have been improved, and global economic trends are pointing in the right direction.
Unlike the Iskandar Malaysia corridor, the Memorandum of Understanding (MOU) for the Johor-Singapore SEZ (JS-SEZ) was signed by both the governments of Malaysia and Singapore, increasing the likelihood of more concrete follow-up actions. There have already been several working visits as bilateral relations between Singapore and Malaysia scale to their highest point in recent memory.
In addition, the JS-SEZ has received high-level backing from the current Malaysian King, who hails from Johor. That will help ensure that the project has the support of both the federal and state governments across the Causeway.
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The transport links between Singapore and Johor have also improved greatly.
The Rapid Transit System (RTS) linking Johor Bahru and Singapore will be completed by December 2026, enhancing economic connections between Johor and Singapore.
The Singapore-Malaysia land border crossing is one of busiest in the world, with an estimated 350,000 travellers per day. The RTS, once completed, will go a long way to provide an alternate mode of transport and alleviate the congestion.
The third major reason lies in the tide of investment flows.
Malaysia has clearly benefited from the global trend of supply chain diversification since 2016. Companies are looking for alternative production bases because of geopolitical tensions and, more recently, the Covid-19 pandemic, which exposed problems with concentrating production facilities in the same country.
In particular, Johor has become a key recipient of new investments given its geographical location, vast land, connectivity and resources.
Large-scale public and private projects are in the works, including petroleum refineries, bio-refineries, solar farms and data centres.
Johor is expected to attract some RM7 billion in 2024, making it among the top destinations for new investments in Malaysia. The state’s economy is already the third largest in Malaysia, after Selangor and Kuala Lumpur.
Shenzhen boomed after China started opening up in the 1980s – with the city identifying an economic niche in attracting foreign money to modernise the country’s infrastructure.
Similarly, the hope is that Johor will be able to benefit from its own economic fundamentals and today’s theme of supply chain diversification. The state is valuable as part of a “Singapore Plus One” or “China Plus One” strategy, where multinationals seek out a second operating location on top of Singapore or China.
Lessons from Shenzhen
But Johor will need to put in place several important policies if it wants to replicate Shenzhen’s success.
From the 1980s onwards, Shenzhen introduced a slew of policies which included streamlined administrative control, concessionary tax rates, reduced duties on imports as well as low-rent business accommodation.
The city positioned itself as a link between Hong Kong and the mainland, with Hong Kong supporting Shenzhen with capital, logistical support, access to world markets and management know-how.
The Shenzhen government allowed firms much flexibility to hire and let go of workers, allowing them to raise wages without being concerned with keeping workers on the payroll if things went south.
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Drawn by these higher wages, skilled labour congregated in Shenzhen. The innovative culture driven by a large migrant population contributed to its success as a base for high-tech industries, the digital economy, new-generation info-communications, financial services, exports, and maritime transportation.
Similarly, well-designed policies and effective policy execution will help ensure the success of the Johor-Singapore SEZ.
To attract top minds from across Malaysia and South-east Asia, Johor can make slight tweaks in its labour laws to be more friendly to both businesses and workers.
Possibilities include a differentiated set of tax incentives that will make it attractive to live and work in Johor. The top-tier marginal income tax rate for Malaysians can hit 30 per cent. In addition, non-residents are taxed a flat 30 per cent, with foreigners working in Iskandar Malaysia in specific sectors qualifying for a 15 per cent rate.
While details on the SEZ have not been finalised, the Iskandar benefits should be extended to foreigners working there, so they pay 15 per cent as well. Malaysians can also be incentivised with a lower tax rate than what they would pay if they worked elsewhere in the country.
Tax incentives can also be considered for companies setting up operations to train and employ domestic workers. Quota restrictions on skilled foreign workers should be eased while making it simpler to apply for work permits with longer durations for technical and highly-skilled talent.
The labour laws in the SEZ would need to be flexible to allow hiring and retrenchment – allowing for the virtuous cycle of higher productivity, stronger employment and improved wages experienced in Shenzhen.
In terms of connectivity, it will be key to achieve passport-free travel between Johor and Singapore, and digitalised processes for cargo clearance – both of these will provide seamless connectivity and will be game changers.
Johor and Singapore can cooperate in common areas of interest such as sustainability and smart city innovations, while making joint pitches for large-scale foreign investments and co-organising tourism events.
Implementing a few high-impact changes will dramatically lift Johor’s shine, helping it realise its ambition to be the Shenzhen of South-east Asia.
Suan Teck Kin is head of research at UOB, where he is responsible for macroeconomic research on South-east Asia and Greater China.
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