An agreement on the Johor-Singapore Special Economic Zone (JS-SEZ) was announced in early January, after several months of negotiations. The project encompasses a large part of the southern Malaysian state of Johor, and is intended to increase economic ties between Malaysia and Singapore, while also attracting investment into priority sectors like manufacturing, logistics, tourism, clean energy, and the digital economy.
Malaysia has made no secret that it wants to play a bigger role in global semiconductor and clean energy supply chains, and the government has also been marketing the country as an attractive place to build data centers. The JS-SEZ agreement can help Malaysia realize these ambitions, while providing complementary benefits to neighboring Singapore.
A big chunk of the agreement covers the movement of goods and people, aiming to make it easier for Malaysians and Singaporeans to cross the border with passport-free QR codes and improved immigration and customs clearance facilities and procedures. Another feature is that Malaysia has opened a one-stop investment center to make doing business in the SEZ easier, and there are plans for a tax incentive scheme and so forth. The agreement is set to be officially ratified later this year.
In its reporting on the deal, the Financial Times framed this agreement in broad geopolitical terms, writing that the SEZ “has been designed to help [Malaysia and Singapore] withstand tougher global economic trading conditions.” That may be part of the impetus. But geopolitics notwithstanding, there are some simple economic rationales at play as well. Malaysia has certain endowments that Singaporean firms need, such as land and labor. And Singapore has things that Malaysia wants, the key one being it’s a major source of finance and investment. So it’s natural to combine these things in a Special Economic Zone.
This is not really a new idea. The Indonesian island of Batam, a short ferry ride from Singapore, was identified as a potential industrial development zone back in the 1970s. It was given the status of a tax-free bonded zone for exports in 1978 and the government began churning out master development plans. But large-scale industrialization on Batam did not really kick off until the early 1990s, when Singapore became more directly involved.
Joint ventures between Singapore and Indonesia like the Batamindo Industrial Park, which was fully supported by the Singaporean government, became a successful template for offshoring Singaporean manufacturing to a neighboring country. Nowadays, Batam has one of the higher levels of per capita GDP in Indonesia and, according to authorities, the economic zone attracted about $2 billion of investment in 2023, mostly from overseas. Singapore remains the largest, though far from only, source of foreign investment in Batam.
The Johor-Singapore SEZ is a more explicit joint development being conducted under the umbrella of stronger bilateral ties between Singapore and Malaysia. But it’s driven by the same basic economic logic that spurred industrial development on Batam. And even though the agreement has not been officially ratified, we can already see some of the effects.
Much of the area that will form the Johor-Singapore SEZ is part of the Iskandar Malaysia investment corridor, established in 2006 and managed by the Iskandar Regional Development Authority. Over nearly two decades, Iskandar Malaysia has attracted investment primarily in manufacturing and real estate, with a lot of recent inflows coming from China. But it hasn’t been a complete success, with controversial projects like Forest City being labeled a “Chinese-built ghost city” by the BBC. The Iskandar Development Authority reported in 2022 that the total cumulative foreign investment since 2006 was roughly $34 billion.
The idea for the JS-SEZ was first announced in 2023, followed by the signing of an MoU in 2024. Almost immediately, investment surged into the area with the Iskandar Regional Development Authority recording $13.5 billion in new foreign investment commitments from January 2023 to June 2024. The majority of these are from Singapore and China. We will have to wait a couple of years and get more data, but the initial reports indicate investors and businesses, especially from Singapore, are responding positively to the idea of the Special Economic Zone.
This has some in Indonesia worrying that the Johor-Singapore SEZ might siphon investment away from Batam. But Indonesia’s Coordinating Minister for Economic Affairs Airlangga Hartarto took it in stride, telling reporters: “We cannot bar other countries from copying us. What we can do is compete against them.”
I think he’s probably right to downplay the threat this poses to Batam. Deeper economic integration between Singapore, Malaysia, and Indonesia is not something to be feared, for both economic and geopolitical reasons. And as long as the region keeps growing as it is projected to do, it’s a good bet that there will be sufficient economic output and opportunities to support SEZs in Batam, Johor and beyond in the years ahead.
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