Malaysia and Singapore have a long and unique relationship, one that has been forged by a shared history and cultural similarities. The proximity of the two countries and the fact that they achieved their independence in the same decade are perhaps a few of the many reasons why they are so often compared with one another.
Currency
The most common economic indicator that has been used to compare the economic strength of the two countries has always been the currency. Ask any Malaysian or Singaporean on how far ahead the Singapore economy is compared to Malaysia and they will point to you that 1 Singapore Dollar is now equivalent to more than 3 Malaysian Ringgit. Before we proceed with determining whether currency exchange rates are a good enough indicator to compare economic strength, let’s look at the history of the different currencies being discussed.
The Malaysian Ringgit and Singapore Dollar share a common history. When Singapore separated from Malaysia in August 1965, it continued to use a common currency with Malaysia and Brunei, the Malayan dollar. The currency was issued by the Board of Commissioners of Currency of Malaya and British Borneo. However, this only lasted until 1967 when the two countries decided to start using separate currencies when they are unable to agree on the terms related to the issuing and management of the reserves.
Despite using different currencies from 1967 onwards, the two countries along with Brunei signed a Currency Interchangeability Agreement. This agreement if had not been broken by Malaysia in 1973 would have kept the currency of the Malaysian Dollar exchangeable at par with the Singapore and Brunei Dollar. Many have since propagated the belief that the current weaknesses of the Malaysian Ringgit compared to the Singapore Dollar signifies how far behind the country is economically compared to its close neighbor.
However, this is an oversimplification of a complex subject, as it would be a mistake to not take into account the numerous factors that are involved in determining foreign exchange rates. Amongst the many factors that are in play, one that we will pay attention to is the number of currencies in circulation, a factor that is within the control of the two country’s central banks. According to some reports, Malaysia’s central bank prints more aggressively compared to its Singapore counterpart, thus it is not surprising that the Singapore Dollar has a higher foreign exchange rate compared to the Malaysian Ringgit.
It is worth mentioning that most economic experts agree that the Malaysian Ringgit is remarkably undervalued, according to some researches it is undervalued to the tune of 5% – 10%. The undervaluation is said to have been caused by political issues and corruption scandals, this means that the currency has plenty of room to strengthen and narrow the foreign exchange rate gap with its neighbors once the sentiment of the market has recovered.
However, the notion that a higher foreign exchange rate means that a country is doing economically better is categorically false, as that would imply that Malaysia is doing economically superior compared to richer countries such as Japan (RM1 = 26 Yen), South Korea (RM1 = 281 won), and China (RM1 = 1.54 Yuan). Albeit a stronger currency does signal stronger confidence in the country’s economy by investors, there is no guarantee that a strong economy will lead to an increase in the value of the currency. Now that we have established that the currency exchange rate is not a good enough indicator to determine economic strength, let’s dive further into the other economic indicators that we can use to give us a more holistic picture of the economic strength of Malaysia and Singapore.
Gross Domestic Product (GDP)
The GDP refers to the total monetary value of all final goods and services that have been exchanged within a country over a set time. Economists commonly use the GDP to measure economic progress. If GDP is rising, the economy is in solid shape, and the nation is moving forward. On the other hand, if the GDP is falling, the economy might be in trouble.
Many would be surprised to find out that Malaysia and Singapore’s GDP has been neck to neck since the 1960s. For the year 2020 Singapore’s GDP is $339 Billion slightly ahead compared to Malaysia’s $336 Billion. What this points to is that albeit Singapore’s economy is deemed to be a lot stronger, the gross domestic product of the two countries has been at par for the last 6 decades.
Gross Domestic Product Purchasing Power Parity (GDP PPP)
Using only the GDP as an indicator to compare economic strength however is flawed, as nominal GDP does not take into account differences of price levels in the two countries. To account for the difference in price levels, we can use the GDP PPP economic indicator.
For the year 2020, the GDP PPP of Malaysia is at $902 Billion compared to Singapore’s $560 Billion. What this means is that Malaysia’s real economic size is significantly higher compared to Singapore’s once we have removed the inflation of Singapore’s GDP due to its higher price levels. However, before Malaysians that are reading this starts celebrating, let’s not forget to take into account the fact that Singapore’s population is a lot smaller compared to Malaysia. Thus albeit Malaysia has an overall bigger economy, it does not mean that Malaysians are on average better positioned economically compared to their Singaporean counterpart. This leads us to the next economic indicator.
Gross Domestic Product Per Capita Purchasing Power Parity (GDP Per Capita PPP)
The GDP Per Capita PPP economic indicator gives us a better view of the economic condition of individual Malaysians compared to their Singaporean counterpart compared to the GDP PPP as it takes into account the size of the country’s population.
Unsurprisingly, the GDP Per Capita PPP of Singapore is far ahead compared to Malaysia. In 2020, the GDP Per Capita PPP of Singapore is $98,526, more than three times Malaysia’s GDP Per Capita PPP of $27,886. The fact that Singapore is a city-state certainly helps its micro-economic figures, as it even transcends the US that has a GDP Per Capita PPP of $63,543. If you are still not convinced that the citizens of Singapore are in an economically better position compared to Malaysians, let’s attempt to verify this information by going through the country’s cost of living and average salary to determine the living standards of the residents of the two countries.
Cost of living & Average monthly salary
The strength of Singapore’s economic progress has come with a few downsides, one of which is the high cost of living. The city-state is currently ranked 4th in the world in terms of cities that have the highest living expenses. The difference in the cost of living between Singaporeans and Malaysians is stark, consumer prices in Singapore are on average 123% higher than in Malaysia, rental costs are also higher on average by 538%, and groceries prices are also higher on average at 91.81%. There is no doubt then that the cost of living in Singapore is higher than in Malaysia.
With all that is said, does it mean that living in Malaysia is better since the cost of living there is lower? No, as despite the cost of living in Singapore is indeed higher than in Malaysia, the average monthly salary there is even higher. The salary of Singaporeans is on average 386% higher compared to Malaysians, this helps tremendously to offset the higher cost of living due to higher rental and consumer prices listed previously.
Conclusion
Once we have compared all of the relevant economic indicators, we can surmise that Malaysia has an overall bigger economy compared to its Singaporean counterpart once we have discounted the inflation caused by higher price levels. However, the average Singaporeans have a much stronger purchasing power compared to their Malaysian counterpart. This is reflected in the country’s GDP Per Capita PPP and higher average salary. The reason for this phenomenon is plenty, as a myriad of factors have helped the Singaporean economy to progress at a much faster rate compared to Malaysians. Amongst them are the relatively small population of Singapore, its focus on developing a knowledge-based economy, its strategic location, its business-friendly policies, as well as its political stability. Some of these traits can be replicated by Malaysia if the country is serious in developing its economy to be as competitive as its neighbor. Quoting from a popular ancient Chinese proverb “The best time to plant a tree was 20 years ago. The second best time is now”.