But the real challenge to Singapore is far more practical, and is contained in Malaysian Prime Minister Mahathir Mohamad's latest warning of no-holds-barred economic competition. For, as Singapore's veteran Senior Minister Lee Kuan Yew drills into people, prosperity is the island republic's raison d'etre.

Though Dr Mahathir cannot be faulted for trying to develop Malaysia's trade and shipping, Singapore understandably sees every such move as an attempt to undermine its own regional supremacy.

"It is fair competition," the Malaysian leader told the recent inaugural issue of the World Economic Forum's Global Agenda. "There is no reason for Malaysia not to try to compete with Singapore in any field."

It sounded like gloating when he listed Singapore's recent misfortunes - bad and costly investments, a shrinking economy, high unemployment - and added, "We know that their economy is down, they lost Maersk, Evergreen." Those two shipping lines moved their trans-shipment hubs from Singapore to the new Malaysian port of Tanjung Pelepas.

But economic rivalry, political rhetoric and loose talk of war did not stop Singaporeans crossing the causeway last weekend for some cheap shopping in Johor Baru. Nor will it stop Professor Jayakumar and his Malaysian counterpart, Syed Hamid Albar, signing an agreement on Thursday to take the dispute over Pedra Branca island (Pulau Batu Putih to Malaysians) to the International Court of Justice at The Hague.

Meanwhile, the two defence ministers, Singapore's Tony Tan Keng Yam and Malaysia's Najib Tun Razak, are going ahead with plans for joint military exercises in September as part of the Five Power Defence Arrangement in which Australia, New Zealand and Britain also participate. Set up in 1971 for the defence of Malaysia and Singapore, the agreement could acquire renewed relevance from the threat of Muslim militancy in both countries.

Ideally, a joint campaign against terrorism should blunt the edge of grievances that are rooted in history and geography. Their acrimonious divorce left many loose ends, such as Singapore's dependence on water from the Malaysian state of Johor, and the Malaysian-owned railway that runs right into the heart of Singapore. The diversion of foreign investment to China is another reason for co-operation.

What prevents a rational view of shared problems is Singapore's sense of insecurity as a secular Chinese-majority state surrounded by Muslims, and Malaysia's sense of inferiority over its neighbour's economic dynamism. The psychological underpinning magnifies every little difficulty.

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