On August 9, 1965, then Malaysian Prime Minister Tunku Abdul Rahman had bluntly informed his Singapore counterpart that the merger of the two countries had failed, and the island must fend for itself.

Four decades later, Mr Lee and Singapore as a whole, can afford to smile at how well they have accomplished that task. Singapore is one of the most prosperous societies in the world, with one of the busiest ports, an efficient airport, and it is a preferred location for multinationals to set up shop. Singapore achieved this by accepting that nobody owed the island a living. It played the role of an efficient middleman, one the market couldn't do without.

Malaysia has also made great strides during the past 40 years, emerging from being primarily known as a rubber plantation, tin mine, and timber forest, to become a more diversified economy. But Malaysia also has some serious thinking to do about what went wrong, and to set that right, it needs to shed its stubborn nationalism.

To understand the separate trajectories of Singapore and Malaysia, look at the two "national champions" the two countries pinned their hopes on, and how they were nurtured. Singapore's best-known brand is Singapore Airlines (SIA); Malaysia's, the automobile Proton. And those choices reveal a lot about the two countries.

From the beginning, the managers of SIA were told that the airline had to perform or perish. It's true that the airline, like all national flag carriers, enjoyed the advantages that come with restrictive international air-rights agreements. But, beyond that, SIA enjoyed no special protection and had to sink or swim in a highly competitive market. Realizing its domestic market was too small, SIA focused on attracting international customers by providing better service than other airlines. It kept its fleet young (it is the world's biggest operator of Boeing 777s). Its staff, management, and crew, were drawn from around the world; its aircraft made in America. What was Singaporean about it was the way the airline was managed. SIA became the metaphor of Singapore, Inc. It also made it one of the world's most profitable airlines. Lately, hard times in the region have affected the airline, requiring layoffs and labor unrest. But in spite of that, it has remained in black. Despite rising fuel costs, its operating profit in the last quarter was S$253 million (US$153 million).

In contrast, Malaysia chose a different national champion, Proton. In building the national car, Malaysia paid little attention to international markets. Proton was a national project in a command economy. It was at least a decade late in taking advantage of the global auto boom, and the only way it could establish dominance domestically was through the stiff tariffs imposed on competitors.

Even that was not sustainable. In 1999, two-thirds of all cars sold in Malaysia were Protons; today the figure is 40%. Exports have also declined. As industries around the world, and particularly in East Asia, have shown, closing the door to competition by erecting tariff walls and insisting on local content are, in the long term, losing propositions. Realizing this, the Malaysian government recently replaced Proton's CEO, Tengku Mahaleel Ariff, partly because he opposed auto imports. Volkswagen, itself a troubled giant, may now emerge as Proton's savior.

To be sure, Singapore's success hasn't been trouble-free. It too has made bad business decisions, at home and abroad. It has also experienced domestic recessions and suffered from regional crises. But it has been able to bounce back because it has been pragmatic, with relatively flexible labor markets which allow it to respond with agility, and it has constantly sought opportunities where it could add value. This approach has given Singapore a ruthless,unemotional edge -- witness the lack of emotions when a city icon, the Raffles Hotel, was acquired by an American investment group. In many other countries there would have been emotional debates about it, something Singapore doesn't encourage. Debates are a luxury, Singapore's leaders would argue, because they delay decisions.

By emphasizing efficiency above much else, Singapore has acquired the look and feel of a corporate town, with the symmetrical dullness that comes from a city that hasn't really known chaos. Predictability may not be exciting for everyone, but for multinational companies requiring up to the minute logistical certainty, Singapore is ideal.That quality allows Singapore to respond more effectively to changing currents, to survive amidst volatility, and to remain an asset for the global economy.

In contrast, when Malaysia has faced crisis, it has often taken quixotic decisions, spurred by nationalism. Former Prime Minister Mahathir Mohammed's Look East policy was partly devised to spite the West, although it was also intended to lure Japanese investment. Mr Mahathir's response to a political dispute with Britain was to launch a "Buy British Last" policy. In the mid-1990s, Dr Mahathir spent vast amounts on building projects, some of which had questionable economic value: a new capital in Putra Jaya, a high-tech city called Cyberjaya, a new airport in Sepang, an offshore financial center in Labuan.

The projects were well executed, but they were built as monuments, and the underlying intent seemed to be to offer Singapore at a discount. But Cyberjaya did not take away business from Singapore's IT sector because Singapore not only allowed free import of equipment, but also liberal entry for overseas IT professionals. By comparison, it was hard for companies to recruit foreigners for projects in Cyberjaya.

Similarly, Singapore built skyscrapers in the Shenton Way/Raffles Place corridor because the island's high population density and limited land demanded such construction. Petronas Towers emerged in Kuala Lumpur because Dr. Mahathir wanted the world's tallest buildings at home. And when currency speculators attacked the ringgit in 1997, Dr Mahathir's response was to impose capital controls. He locked up the ringgit (as well as his able finance minister and deputy, Anwar Ibrahim, a formidable rival who the markets loved) and resorted to domestic solutions.

Malaysia has begun taking steps to emerge from such isolation since Abdullah Ahmad Badawi succeeded Dr. Mahathir as prime minister in October 2003. By unpegging the ringgit and initiating management changes at Proton, Malaysia appears to be retreating from the narrow nationalism of the past. As political scientist Garry Rodan, director of Asia Research Center at Perth, puts it: "The prospects of reform and of developing a stronger, independent domestic business class are better in Malaysia because of the apparent unraveling of some of state companies and the problems of crony capitalism."

Clearly, challenges exist for both countries. Maintaining and increasing prosperity will be tough for both because many things the two can do, others -- particularly China and India -- can do cheaper. The trick lies in shedding dogma and developing flexibility. In that, Singapore may seem to have an inbuilt advantage, but the demographic and political landscapes are changing. Economist Mukul Asher, professor at the Lee Kuan Yew School of public policy in Singapore, says the main test for Singapore now is how to address the challenges of an affluent and rapidly aging society requiring better balance between policies which increase competitiveness of Singapore as a business location and those that satisfy only the material needs of the population. Singapore needs to realize that markets matter, and so do people. Malaysia, for its part, needs to accept that people matter, and so do markets.

Mr Tripathi is a London-based writer.

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