Summary:

Lee Kuan Yew, Singapore's elder statesman and ex-prime minister, is in the midst of his first trip in a decade to neighboring Malaysia. The visit is meant to mend fences between the two rival nations, whose animosity stems from Singapore's secession from Malaysia in 1965. But more is at stake than just the bilateral politics of two small nations. Malaysia and Singapore have the ability to influence the economic survival of southeast Asia.

Analysis:

MALAYSIAN Prime Minister Mahathir Mohammad and Singapore's Lee Kuan Yew are among Asia's most seasoned survivors and leaders. Both led their countries for decades - Mahathir still does - through economic and political storms. Both have been successful. And both economies weathered the Asian financial crisis better than their neighbours.

Lee's visit marks the first time a national leader from one country has crossed the line into the other since 1990. In the midst of uncertain economic times in the region, the two leaders are likely to focus their relationship on long-term concerns, like the rise of Chinese power. To preserve themselves, the governments of Singapore and Malaysia are likely to move quickly to iron out differences over economic policy. In terms of security, both governments will also focus on terrorism and insurrectionist movements.

But relations between Malaysia and Singapore have suffered for decades. When Singapore broke from Malaysia, it took with it the economic benefits of a major port and financial centre. Lee was prime minister at the time. Since then, the two have squabbled over a string of issues. Malaysia threatens to cut off Singapore's sole water supply; Singapore is rumoured to be working on a spy satellite. And so on.

Besides nettling disputes, the two nations differ on economic and political policies. Both are export-based economies that rely heavily on foreign investment. But Lee's embrace of take-no-prisoners capitalism is a marked contrast to Mahathir's unorthodox capital controls and his desire to reform the international financial system in favor of developing nations. Politically, tiny Singapore has to stay friendly with most nations - but keeps close ties with the United States. Malaysia, however, wants to keep foreign powers as far away from southeast Asia as possible.

With his visit, Lee makes it clear that he means to change the 35-year status quo. He means to resolve at least some of the issues that divide southeast Asia's two economic anchors. Normally a subtle politician, Lee is overtly displaying his willingness to patch up the relationship - in a matter of months. Lee has even made the symbolically important gesture of driving to the Malaysian capital along the same route that he left in 1965.

The two leaders will likely talk about concerns like terrorism and a decline in the region's economic power. But Lee's real concern is miles down the road, focused on China's emerging strength. In an interview with the (Singapore) Sunday Times, Lee said, "In 30 to 50 years, [China] will become a considerable economy, which means a considerable power. It's just a matter of time." His concern is simple: A militarily and economically powerful China could dominate southeast Asia.

Lee's solution is likely to emerge as equally simple. Economic strength breeds military strength. Alone, no nation in southeast Asia, especially tiny Singapore, could ever challenge China. But after decades of growth, the region could collectively be strong enough to gain Beijing's respect. Some of Lee's comments suggest he is looking at Thailand and the Philippines as potential cornerstones in this strategy.

While China is the long-term challenge, the short-term challenge is money. Malaysia and Singapore are regional economic hubs - but both could face another economic crisis. Malaysia and Singapore's economies are humming along nicely with yearly growth rates up 11.7 and 7.7 percent respectively.

But the rest of the region has to concern the two leaders. The neighbouring Philippines is only up 3.4 percent. And Thailand's currency keeps falling, despite government intervention in the financial markets. If economies in the Philippines and Thailand fall, the economies of Malaysia and Singapore will be hit - just like in 1997. Worse, twice-burned investors will flee from the region altogether.

The two leaders are also likely to focus on security. The spectre of cross-border terrorism has risen, along with smoke from the bombing at the Philippine embassy in Jakarta on Aug. 1. Islamic militancy is on the rise and disparate insurrectionist groups now appear to be working together.

Major differences are likely to occur over economics. Do they opt for pure capitalism, as in Singapore, or capital controls, as in Malaysia? The question is thorny.

But the answer may be less difficult than it first appears. Mahathir's proven approach - especially capital controls - is far less controversial than it was just a few years ago. Lee is a pragmatist, and can bend his economic orthodoxy in the name of politics. Besides, the two agree on other issues - like a mutual currency bailout scheme.

Southeast Asia faces serious problems. The meeting of the two leaders is the region's first serious step toward confronting the challenges.