This article first appeared in Forum, The Edge Malaysia Weekly, on March 28 - April 3, 2016.

I drove to Kuala Terengganu over the weekend that the recent school holidays started, and decided to take the East Coast Expressway that now stretches from Karak all the way to the Kuala Terengganu exit. The Karak to Kuantan portion (with an exit at Jabor) was opened in 2004 but the rest of the highway was only opened last year, after a long delay.

I had driven on the first stretch many times before and knew it was uneven, but driving on the second stretch towards Kuala Terengganu was even worse.

This 200km-odd portion of the expressway is a prime example of poor construction and on top of it, its users have to pay toll! The stretch is undulating and dotted with patches of new surfacing to correct the original shoddy work, making for a rough and possibly unsafe ride. One can almost guess that wherever there is a bridge of some sort, there will be a marked bump between the road and the bridge.

I am sure all of this has nothing to do with the design of the highway. The shoddiness is simply the result of poor project management and oversight. Apart from the delay in completing the project, which would have resulted in a huge cost overrun that, in all likelihood, was borne by the taxpayers, the loss to the economy as a whole is much more than that.

I have come across many other such stretches of roads and highways that make me wonder how the contractors get away with such bad work. Are they paid? Who is ultimately responsible and what are the consequences of such poor quality of work and loss of public funds?

These are issues of accountability — public accountability and the integrity of the governance system. These incidences and, dare I suggest, their prevalence imply that public accountability in this country is questionable.

This is a matter that concerns me as a citizen and taxpayer but putting on my economist’s hat, my argument is that such poor public accountability will not only undermine the institutional integrity of the country but also damage its economic prospects and, therefore, the future of the country.

Nobel Prize-winning theorist Kenneth Arrow made a simple but obvious observation in a 1962 publication entitled “The economic implications of learning by doing” that productivity is the result of practice, repeated doing with minor innovations in that process of doing — a learning by doing model. Specialisation and increasing scale of operations result in learning and call for innovation. That is why both specialisation and scale at the company level contribute to improved productivity. There are inherent positive dynamics that come from repeated doing.

In aggregate, if the companies populating the economy are of this kind — ones that learn by doing, deepening their specialisation and increasing their scale of operations — economic growth becomes endogenous; something that happens within the economy itself and is not the result of an exogenous change to the dynamics of the system.

This argument is the basis of what is now known as the endogenous growth model compared with growth models that depend on the level of savings, capital accumulation, population or even technology. In this model, which depends on innovation as the driver of productivity, human capital becomes crucial.

Economies that have broken out of the middle-income trap are those that exhibit the features of endogenous growth, driven by productivity that resulted from learning and innovation rather than simply increasing input via investment. The economic logic of growth must change but it will only change under the right conditions.

The total length of roads in the country is an elusive figure but available data suggests it is from 82,000km to 110,000km, including 2,000km of highways. That is a lot of roads that have been built and need maintenance. Yet, more roads and highways are being planned.

Going by these numbers, Malaysian companies involved in road design, construction and management should have become very good, having had ample opportunities to learn by doing. They should have deepened their specialisation, becoming more competitive by becoming more efficient.

In this scenario, not only will the cost of construction go down in real terms, benefiting customers such as the government, but the companies will be able to compete regionally, becoming more specialised and bigger in size as they expand their footprint. They may emerge as more specialised entities dealing with just bridges or even steel structures or those specialising in materials for road surfaces or as project management companies.

The dynamics of emerging specialisation, made possible by increased general demand, is what is sought in the transformation of the economy. Is it happening? If it is happening, it is the exception rather than the norm. That is why, in aggregate, while still growing, we have stalled.

The main reason for this is that while we do, we do not learn, thus the “learning by doing” mantra does not apply. We do not learn because we were never failed when we did not make the cut — a demand-side failure. If we accept shoddy workmanship, whether in road construction or something else, the company will never learn to do things the right way and it will not get anywhere.

Another way of looking at this company upgrading story is to use the growth diagnostic framework developed by Harvard economist Ricardo Hausmann. His thesis on this subject is that an economy develops as companies within it upgrade what they produce to something more sophisticated or complex.

He introduced the idea of product space to show the inter-relatedness between products to demonstrate that companies are likely to upgrade into related but more sophisticated products. In a 2007 publication entitled “Structural Transformation and Patterns of Comparative Advantage in the Product Space”, co-authored with Bailey Klinger, this idea is explained thus:

“Our metaphor is that products are like trees, and any two trees can be close together or far apart, depending on the similarity of the needed capabilities. Firms are like monkeys, who derive their livelihood from exploiting the tree they occupy. We take the forest — the product space — as given and identical for all countries ... The process of structural transformation involves having monkeys jump from the poorer part of the forest to the richer part, but the probability of doing so successfully will depend on the expected productivity of those trees and to how close the monkeys are to unoccupied trees where proximity is related to the usefulness of the specific assets the country has for the production of the new good.”

If we are not demanding where the performance of companies is concerned, we will not get companies that can upgrade themselves. To use the Hausmann-Klinger metaphor, we will have monkeys that cannot even climb their trees, what’s more jump to higher trees in their proximity.

Our monkeys will generally populate trees in the poorer part of the forest, stuck with a narrow range of products at a certain level of quality. An economy will never have strong companies if the demand side does not exert pressure on them to compete and perform.

Public development expenditure is deemed public investment because not only does it provide public infrastructure but it also develops capabilities that endogenously create increasing returns for the economy and its source of competitiveness and growth.

One of the reasons our growth trajectory has stagnated and, in fact, been declining in the last two decades is the inefficiency of public investment — it did not generate the positive externalities that it should, and part of the reason for that can be seen from our example.

The companies that implemented the projects did not learn or innovate and develop new capabilities to do other and better things. If they remain in business, these companies stay on the same trees in the familiar, poorer part of the forest.

This is what we get when we tolerate shoddiness and even dodgy deals — we do not get to live in the richer part of the forest.

Dr Nungsari Radhi is an economist and managing director of Prokhas Sdn Bhd, a Ministry of Finance advisory company. The views expressed here are his own.

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