Amid the gentle sea breezes, a CommonWealth Magazine reporter stands on the quay of Port Klang, Malaysia, gazing out across the waters of the Strait of Malacca attempting to solve a puzzle: Are free trade zones an effective paradigm for spurring national economic transformation?

In Malaysia, the answer appears to be: Indeed they are.

At present, per capital annual income in Malaysia is less than half that of Taiwan. Yet at the end of last year, Port Klang, Malaysia's largest container port, officially eclipsed Kaohsiung Harbor, Taiwan's biggest port, to become the world's 12th largest container port in terms of cargo handled.

Nipping at Singapore's Heels

"In the 1980s, Kaohsiung was the world's fifth-largest container port, and Port Klang was not even in the top 30. On our visits to Kaohsiung Harbor, we were learning by emulating a leader," says Kuan Leng Chia, who has led numerous fact-finding delegations to Taiwan during his 30 years in harbor administration. "Today, we're catching up," says Chia, now serving as CEO of Port Klang Free Zone, a satisfied smile lighting up his suntanned face.

Eclipsing Kaohsiung Harbor, however, is but one step in Malaysia's vision and blueprint for the future.

"Our objective is to overtake Singapore as the world's number three container port, something that probably will not happen in my lifetime, but I'm confident it will come to pass some day," Chia says.

Port Klang's development has been a sort of microcosm for the entirety of Malaysia.

Just 15 years ago, the Malaysian economy still lagged behind the then-so-called "four Asian tigers" (South Korea, Taiwan, Hong Kong and Singapore). Over the past five years, however, Malaysia's gross domestic product (GDP) has soared by 56 percent, drawing global attention as the "new Asian tiger."

"In 2020, [Malaysian] per capita annual income will exceed US$15,000, officially placing us in the ranks of high-income nations and making us a regional economic power," says Dato Mah Siew Keong, chairman of the Malaysia External Trade Development Corp. ("Matrade").

To achieve that end, Malaysia will no longer be able to content itself with relying solely on exports of rubber, palm oil and other natural resources to drive economic development.

State Power Boosts Port's Fortunes

Three years ago Malaysian prime minister Najib Razak unveiled his "New Economic Model," a concerted attempt to "transform the Malaysian economy" by developing newly-established special economic zones in a bid to become a trade and transshipment entrepot for the Association of Southeast Asian Nations (ASEAN) region, and by attracting large amounts of foreign investment capital to assist development of the domestic high-technology, telecom and logistics industries.

Beginning in the 1990s, Malaysia's national government tried all sorts of measures in developing its major ports, including Port Klang. In addition to improving basic infrastructure and privatizing the port authority, performance indices were prescribed for each port, and tax incentives were granted to encourage increased cargo handling in hopes that performance would improve through market competitiveness. But the results were limited.

"Simultaneously developing all the ports couldn't make the pie any bigger. It merely pitted them against one another, and they were reduced to ancillary harbors to major ports like Singapore," Chia says.

Ultimately, the government acknowledged that a better approach would be to bring the power of the state to bear in first developing a single port and then competing directly with top-tier major global ports.

In 2002, the Malaysian government mandated that outgoing containers shipped from other domestic ports all be transshipped through Port Klang, in line with its role as a "National Loading Centre."

Meanwhile, Malaysian authorities adopted the Dubai model and proceeded with plans for the region's biggest free trade zone within the harbor district.

It was these two policies that changed the destiny of Port Klang.

"The world's freighter fleets are perennially chasing containers [of goods] to ship. If the aim is to become a transshipment center, you need to get containers to stop here," Chia explains. Concentrating exports immediately boosted the scale of Port Klang's cargo operations 1.6 fold, cementing the foundations for the development of the free trade zone. Once the innovative free trade zone policy was in place, more international freighter traffic and investment would be attracted, creating a virtuous cycle.

Clear Direction: No Export Processing Zone

In addition to policy incentives, a concise strategic direction has also been key to the success of Port Klang Free Zone.

Port Klang has eschewed the path of the traditional "export processing zone," instead positioning itself as a "trade center."

Aside from beating Kaohsiung to the punch in securing accreditation from the London Metal Exchange, allowing warehousing and settlement of global futures and spot trading contracts in metals other than steel to take place here, Port Klang has also been accredited by the International Cotton Association, so that much of the massive cotton production of the Indian subcontinent is shipped here for separation and duty-free trading before being shipped off to various ASEAN markets.

Port Klang has also seized upon the commercial opportunities inherent in the US$1.5 trillion market for halal foodstuffs in the Muslim world and elsewhere.

The Free Zone has set to work on planning a brand-new halal foodstuffs trading center. Once completed, global food merchants will be able to carry out processing in the free trade zone of ingredients from around the world and obtain halal certification from Malaysian authorities, before shipping their goods to Indonesia and the countries of the Middle East.

A formalized procedure for halal certification will greatly enhance the added-value of foodstuffs. The added allure of Port Klang Free Zone's innovative duty-free policies has also succeeded in attracting interest among numerous major Chinese food producers in testing the waters to the tune of an estimated US$2 billion in investments in creating a halal food export center here.

"Developing a special economic zone has been a process of reorienting ourselves to make best use of our advantages in facing down intense international competition," says Matrade's Dato Mah Siew Keong. "You keep trying, keep innovating; nothing is impossible."

For Malaysia, continually trying to find a new national economic direction through special economic zones is the top policy priority in the current phase.

Old Rivals Make Peace for Better Future

Amidst this strategic milieu, Malaysia has even been able to extend an olive branch to "old rival" Singapore in a proposed cooperative development of a new special economic zone.

The two neighbors have now joined in developing a brand new special economic zone in Iskandar in the southern Malaysian state of Johor.

"Singapore and Malaysia have now entered a completely new phase in their relationship," observes Lo Yu-chung, chief consul with the Taipei Economic and Cultural Office in Malaysia.

For the past two decades, Singapore and Malaysia have been political and economic rivals more often than cooperative partners, largely due to the mutual antagonism that took root between Prime Minister Mahathir Mohammed and Prime Minister Lee Kuan-yew, the former strongmen of Malaysia and Singapore, respectively.

But as the two countries' economic development encountered successive bottlenecks, the two sides came to the realization that a breakthrough could be made only by combining the human resources and international financial clout of Singapore with the abundant land and natural resources of Malaysia.

Against this backdrop, the supra-national Iskandar development project, with three times the land area of Singapore itself, is being financed by Singaporean and Malaysian sovereign funds (Temasek Holdings and Khazanah Nasional Berhad), prompting the rarely-seen spectacle of the two nations' prime ministers appearing on the same dais together for the project's groundbreaking ceremony.

"Right now, the eyes of the entire world are on us," says Ken Lim, director of Waterfront Holdings, the Iskandar project's single biggest general contractor.

Representatives of major developers, private funds and sovereign funds from Japan, South Korea, the U.S., the U.K. and China have been arriving in an endless stream for more than a year, he notes.

"I've been kept so busy, I've had to set up camp here," Lim says.

Lim, 26, brings a lot to the table himself. He is the second-generation heir of well-known ethnic Chinese Malaysian businessman Lim Kang Ho, the biggest landholder in the Iskandar Development Zone. The Lim family's interests in Malaysia include Ekovest, PLS Plantations Berhad, TRS Holdings and three other companies listed in Malaysia. The group's businesses range from construction, natural resources and metals to foodstuffs, and its assets exceed RM$40 billion (about NT$360 billion). The family has been a key behind-the-scenes driving force for the Iskandar project.

Building a Malaysian Shenzhen

"I remember coming here with my dad when I was 13, and I'll never forget what I saw," the younger Lim recalls. Looking across the strait from Johor Bahru to Singapore, the Malaysian side seemed like a barren grassland, while Singapore sparkled with myriad lights.

"My dad told me at the time how the other side was like Hong Kong and how we would one day build a Shenzhen on this side."

At that time, back in 1999 just a couple years after the Asian financial crisis, Malaysia had been swept with a nationwide wave of business and property foreclosures. Yet amidst this, the family patriarch, Lim Kang Ho, saw opportunity. He began buying up Johor property along the border with Singapore, and even entering into an arrangement with the local state government to foot the bill for land reclamation projects.

Following a decade of Lim's shuttling back and forth between Malaysia and Singapore as an ethnic Chinese businessman, in 2007 when the governments of Singapore and Malaysia finally agreed to cooperate on the Iskandar project, Lim's dream finally began to come true.

"The two sides finally realized that cooperation was the only way, much better than taking opposite sides," he says.

The Iskandar development project has become something of a major test case for the two countries.

10-Year Tax Holiday Draws Foreign Capital

At this point, the governments here have simplified customs procedures in a major way. The Malaysian government is now offering tax incentives of up to 10 years for high-technology, financial consulting, logistics and tourism businesses. Meanwhile, income tax exemptions are being offered for mid- and high-level executives to bring in more businesses and qualified personnel.

In the blink of an eye, the Iskandar project has become one of the world's hottest investment destinations. According to statistics provided by the Iskandar Regional Development Authority, the region has drawn in US$37.16 billion in investment capital as of June of this year. Foreign investment dollars account for US$12.6 billion of that figure, exceeding total inbound foreign investment to Taiwan last year three-fold.

Driven by the Port Klang and Iskandar economic zones, Malaysia is taking its place as a regional power in Southeast Asia. Yet daunting problems also persist: The government has spearheaded the development of the zones with direct investment, causing the national debt-to-GDP ratio to swell from 30 percent three years ago to 58 percent today. Malaysia is also facing worries over inflationary pressure from the wave of hot money pouring in and an overheated property market.

Realizing the dream of becoming "the new tiger of Asia" is not without its challenges. Yet judging from the unending surge of new ideas and new investment tied to these projects, Malaysia is without a doubt on the cusp of a brave new era of possibility and potential.

Translated from the Chinese by Brian Kennedy