It is a beacon for sound corporate governance in the region. And it is a services-oriented economy that feeds off the inefficiencies of its neighbours. But the competition is closing in.

The results are making themselves felt. Unemployment is now at record levels and the government recently cut its growth forecast for the year from 3-4 percent to 2-2.5 percent.

The most important competitor is Malaysia. Singaporeans tend to be fairly dismissive of Malaysia. Its inefficiencies are derided as is its general 'messiness'. But that messiness permits a certain amount of creative thinking. There is a plurality of ideas and dynamism in Malaysia that is beginning to see its entrepreneurs kick some significant goals in the region.

A sound rule of law and putting in place excellent infrastructure are the two things that allowed Singapore to boom. But these are two things that Malaysia has been working on. It does it with more chaos and less focus than Singapore but Malaysia is heading in the right direction. And every Malaysian step forwards is a step back for Singapore in the race for relative comparative advantage.

The business that the Singapore Port Authority has lost and will continue to lose to Johor's Tanjong Pelapas port is an obvious headline example of this.

Singapore has always prided itself on attracting regional headquarters of multinationals. But Kuala Lumpur is becoming more competitive in this regard.

BMW cars, BHP Steel and Philips Luminaires have announced in the last 12 months that they would move their Asian headquarters from Singapore to Kuala Lumpur. Philips cited Malaysia's 'lower costs', 'excellent infrastructure' and 'highly trained workforce' as the reasons for its decision. Singapore too has these last two factors but it's on the first that Kuala Lumpur wins. Increasingly, KL represents better value for money.

Singapore's government linked-companies (GLCs) have served Singapore well. But it's time for new thinking in this area. The GLCs have become so large and so successful that there is a real danger of crowding out private sector entrepreneurship. It's a danger that is not faced in Malaysia.

Malaysia was hit hard by the region's 1997-98 economic crisis. But look at how it has recovered. Incompetence got Malaysia into the crisis but its recovery was managed with surprising competence.

The work of the economic restructuring agencies Danaharta, Danamodal and the CDRC rightly received praise far and wide. The professionalism and efficiency of these bodies ensured that they will serve not just as models for the region in future but for all countries in future when they run into severe financial difficulties.

Malaysia now has a better Securities Law, fewer and bigger banks and stock broking firms and better bankruptcy provisions. The work of the KLSE in educating directors and in enforcing codes for better governance has been exemplary. The fines that it can impose on aberrant companies are too low, but the KLSE has shown that it is prepared to reprimand and fine companies without fear or favour.

Singapore remains ahead of Malaysia on all these counts. But Malaysia is closing the gap.

Singapore now faces the problems that all mature economies face: how to stay ahead when its competitors can play catch-up?

So what choices does Singapore face? One is to drop its standards and pursue any opportunity. This is the Boat Quay option. By that I mean that Boat Quay used to have a certain elegance. But as business has dropped off, gradually that elegance is being lost as ugly bars that emit loud and competing music with girls who hang out front to push cheap beer spring up along the Quay. Increasingly, Boat Quay offers shades of Pattaya or Patpong.

One manifestation of the Boat Quay option is the proposal that Singapore should open a casino. Fortunately, it's unlikely to be entertained, but even the suggestion smacks of desperation.

Another is the ease with which Singapore has accepted the inflow of Indonesian money. This has given the Singapore economy a substantial boost but it cannot help but change the character of Singapore. Indonesians, more used to the rough and tumble of Jakarta's relatively unstructured economy must learn how to do business in Singapore's more regulated environment. The fact that Singapore does not have an extradition treaty with Indonesia also means that not all the Indonesians who have come to Singapore have done so for the right reasons.

The other option is one that offers fewer short-term gains but longer-term stability. It is simply that Singapore must pedal faster on offering first rate systems of governance and infrastructure but at the same time allow more room for genuinely private sector solutions. Possibly this will mean breaking Temasek's hold over important companies, including Singapore's media. Allowing greater media freedom and diversity in ownership so that Singapore can steal away Hong Kong's role as the regional information clearing house as the latter moves to clamp down on media freedom will help foster a local environment of greater transparency and creativity. One bright spot has been the ongoing debate within Singapore about the role of the GLCs. The debate isn't over but the fact that it was started at all is a promising sign.

Probably Singapore will choose the right option. It usually does in the end. But what's more certain is that Singapore is on the edge of change. The competition demands it.

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