The biggest spur to ending their animosity is that the regional economic crisis helped both sides see the mutual advantages of cooperation over competition. Cooperation, analysts say, will trigger more investment in Malaysia by cash-rich Singapore firms, previously alienated by hostility. Further ahead, closer links could also lead to a push by Southeast Asia's two most economically advanced countries to fashion what they tried to build 35 years ago: a common market.

Despite his at-times undiplomatic tone, Lee is apparently thinking along the same positive lines. In an interview in late May with the REVIEW, he ruled out Singapore ever rejoining the Malaysian federation it left in 1965 in a political context, but suggested that economic union was possible within a larger bilateral context.

Ironically, the economic crisis helped both sides to see their mutual interests by making Kuala Lumpur more realistic and Singapore more secure. It also highlighted the way that these two, similar, societies have diverged. And the more different they become, the easier it is to cooperate.

Back in 1995, Malaysia was on a roll. "It was flying high, catching up fast," says a Singaporean who is a consultant to several regional governments. "There was a lot of nervousness here." Growth in Malaysia sizzled at 9.5 percent in 1995 and Prime Minister Mahathir Mohamad had just unveiled the Multimedia SuperCorridor, his vision of a Silicon Valley-style project that would be the country's next source of growth. Foreign direct investment was soaring and several multinationals moved some units to Malaysia because of Singapore's rising costs.

But as soon as the Asian Crisis hit, the contrast between the two countries' approaches to recession couldn't have been starker. Malaysia adopted capital controls and scoffed at globalization; Singapore liberalized and deregulated, and began wooing foreign talent.

Both countries bounced back. But there is a sense in Singapore that Kuala Lumpur fell behind. "Malaysia has been taken back 10 years," says the regional consultant. Following the crisis "on one side there was a muted sense of triumphalism while the other side felt cheated," says Simon Tay, chairman of the Singapore Institute of International Affairs.

Traditionally, many Malaysians saw Singapore as superior and condescending, insensitive to their feelings and overly fond of legalistic nit-picking. To hear it from Lee in his memoirs From Third World to First: The Singapore Story, Malaysians wanted an abang-adik, or big brother-little brother, relationship. "When non-vital interests are at stake, we were prepared to humour abang, but not when adik had legitimate interests to defend," Lee writes.

The defensive little brother of yesterday, however, has grown up stronger, and richer. This year, the republic's 4 million people are expected to produce $91 billion in output--11 percent more than what 22 million Malaysians will produce. Malaysia's average income, at $3759, is a sixth of Singapore's.

CHILLING COMMENTS Nor is Singapore a weakling. It has the region's most sophisticated air force, a fact that wasn't lost on the Malaysian elite who turned up in droves to hear Lee speak in Kuala Lumpur. In reference to Singapore's military build-up and Malaysian fears that ultimately it is aimed at invasion, one participant pointedly asked: "Who is the enemy?" Lee equivocated. He made no secret of his country's military capabilities, but also said it was better to have peace all round. Then, however, he sent a collective chill down the spines of many in the audience: "Yes, we can capture territory--but can we retain it?"

Much of the countries' mutual animosity stemmed from racial issues. Malaysia's leaders fretted that their Chinese looked to Singapore for leadership, and worried that Malays in Singapore, who make up 14 percent of the city's population, would be at a disadvantage to the Chinese there, who comprise 77 percent. Meanwhile, Singapore wondered about the loyalty of its Malays.

These fears, however, are no longer big concerns. For one thing, Singapore Malays now have fewer ties to Malaysia than they used to. Listen to Jamaluddin Mohamad Isa, 56, decked out in formal Malay attire as he goes to a mosque for Friday prayers. Does he hanker for Malaysia? "Sometimes I think I want to retire there," he says wistfully. "But I don't think I ever will. My children wouldn't dream of it."

A young Malay professional working for an American company in Singapore is forthright about her position on long-standing complaints. "Yes, I often feel discriminated against, and yes, we belly-ache and complain among ourselves," she says. "But we don't look to Malaysia for answers."

Though neither side will admit it, the two countries act as mutual safety valves. In Malaysia, resentment among bright non-Malays who find it difficult to advance in Malay-dominated firms and the civil service is defused by the availability of opportunities in nearby Singapore. More than 200,000 Malaysians--many skilled and mostly non-Malays--work in the city-state. Meanwhile, Singaporeans can escape the island's rising costs and lack of space by shopping and holidaying in Malaysia. The Singapore dollar is equivalent to slightly more than two Malaysian ringgit, one big reason why over 800,000 Singaporeans cross the border each month.

The only likely downside to better relations is continuing political uncertainty in Malaysia. On his visit in August, Lee was characteristically frank about the way authorities had handled the ouster and trial of former Deputy Prime Minister Anwar Ibrahim. It was, he said, an "unmitigated disaster," and Mahathir had made several "errors of judgment."

Perhaps at the back of his mind, as voiced by analysts in Singapore, was the way that a Malay backlash over the Anwar affair has helped the Islamic Party of Malaysia, or Pas, to gain seats in parliament and win control of the oil-rich state of Terengganu. Deep down, many Singaporeans fear that any federal government dominated by Pas would inevitably grow estranged from secular Singapore.

An overall Pas victory is unlikely, however. Much more likely is that both countries will still back each other's authoritarian style of leadership. Says Karim Raslan, a Malaysian lawyer and writer who tracks bilateral relations closely: "The top-down approach in Singapore's leadership inevitably feels comfortable with a similar approach in Malaysia. The politics of the region are changing but not among the two."

Commercial considerations also point toward stronger relations, according to Friedrich Wu, head of economic research at DBS Bank. "Among the region's big five countries," he says, "only Malaysia and Singapore are treading water, with the rest in economic disarray. We have to stick together."

This may explain why Lee made his first visit in 10 years to Kuala Lumpur. The trip was clearly appreciated, a fact that was reinforced by the uncharacteristic silence in the media from Malaysian officials in reaction to Lee's blunt characterization of the Anwar affair. People close to the ruling United Malays National Organization say Mahathir told at least one high-ranking Umno leader, who was annoyed by Lee's comments, to ignore them and concentrate on building bridges.

Lee's visit was reciprocated by a high-level Malaysian delegation. Now analysts expect amicable resolutions to problems over water, air space, railway land and withdrawals by Malaysian workers from the republic's state pension fund; progress on these issues had been stalled for three years

But despite the spirit of forgiveness, ultimately long-term stability will rely on the next generation of leaders. Malaysian Minister of Youth and Sports Hishamuddin Hussein certainly thinks so. Visiting Singapore in September, he pointed to Singapore's minister of state for defence, David Lim, and said: "I believe we represent the new 30-something generation, for whom separation is a historical fact, not a living trauma. What, I ask, is the point of adding to past grievances?"