This article first appeared in Forum, The Edge Malaysia Weekly on August 15, 2022 - August 21, 2022

The late great economist Kenneth Arrow wrote an influential paper back in 1962 titled “The economic implications of learning by doing”. He proposed an endogenous model to explain productivity at the micro level, that when aggregated, pushes forward the production frontier of an economy, that is, it improves the economy’s production capacity.

The classical view is that the production function of an economy embodies a certain level of technology — taken to be exogenous — usually measured by the capital-labour ratio, a view Arrow did not deny. However, he introduced the notion of learning, of doing things repeatedly as a way of gaining knowledge, which becomes a means of improving performance and growing in capability. In a sense, this is akin to Malcolm Gladwell’s 10,000 hours rule that asserts true expertise is simply a matter of practice.

The converse to Arrow’s thesis would be “doing without learning” and that too would have economic implications, which would be the opposite of what he proposed. It would be about spending resources and not learning anything from doing an activity, which would be wasteful and would put the economy on a declining trajectory as more and more resources are needed just to remain stationary. Doing the same thing repeatedly and expecting different results is also the definition of insanity. The inability to learn from past mistakes is therefore a form of insanity.

I was reminded of this as I spent time reading, in between gasps of awe at what I was perusing, the Hansard and report of the Public Accounts Committee (PAC) meetings on the Malaysian Navy’s procurement of six littoral combat ships (LCS). I am now, like many Malaysians without a background in naval matters, more informed about the different types of naval vessels. The LCS are not cruisers or destroyers or frigates. They are smaller than frigates and are meant for coastal patrolling, as the word “littoral” suggests.

The extent of the incompetence in evidence, and one would also assume the blatant disregard of rules and procedures, is simply mind-boggling. That this has gone on for over a decade and that 70% of the RM9 billion budget has been expended without a single of the six vessels being delivered just left me speechless. The cherry on this sorry cake is that the launch ceremony, officiated by the Sultanah of Perak, was held for one of the vessels five years ago, with everyone from the defence minister onwards being part of this shameful deception. And it took parliament’s PAC to finally reveal everything, which suggests that the system has failed.

There are several “doing without learning” lessons here. The first, and this is a lesson never learnt, is that the governance and oversight on a project like this is simply poor. Basic principles of separation of roles between principal and agents, and monitoring by the various government agencies, including central agencies such as the Economic Planning Unit and Treasury, were clearly wanting. There was even the complaint that the navy actually wanted a different ship than the one contracted for. This is one of those vendor-driven procurements that is quite prevalent in those so-called private finance initiative projects. But in this case, it involves the specific security needs of the country and we would expect the final call to be made by the navy, not the vendor that proved to be incompetent anyway.

The contractor for the procurement, under a different name before it was taken over by the present shareholders, was the contractor for a similar navy contract over two decades ago. It too failed to deliver on the six offshore patrol vessels (OPV) — smaller than the LCS — that the navy procured in 1998 for RM5.4 billion. The liabilities were assumed by the present shareholders, and as pointed out in this paper recently, part of the payments for the present project was utilised to extinguish debts for that failed project. So, we awarded the same company that failed to deliver on a smaller, less demanding procurement to do something bigger, and it was a company that was known to be financially weak. This sounds like déjà vu because it is a familiar unlearnt lesson. Companies do not get blacklisted for non-performance and they are rewarded with more projects.

Another instance of mismanagement is the justification that a non-performing company needs to be bailed out because some fund or other is a shareholder. Usually, this involves one of the statutory funds like the Employees Provident Fund or Kumpulan Wang Persaraan (Diperbadankan), or the likes of Lembaga Tabung Haji and Permodalan Nasional Bhd, which are also deemed to be aligned with the bumiputera agenda. Instead of punishing these fund managers for their incompetence in choosing where to invest the money, public funds are expected to be used to bail out non-performing companies they invested in. The lesson not learnt is that these funds should be pure equity investors that stay when the company performs and exit when it does not. It is about time that the term “GLC” be retired as it is a confusing term. There are government-owned companies and the rest, including those in which statutory funds have equity stakes, and they should be treated like any other company.

Another (living) economist, economic historian Joel Mokyr, published a book titled Culture of Growth a few years ago, an insightful and influential book on the origins of economic growth that explains European economic growth beginning in the 18th century after a millennia of stagnation. Mokyr, as the title of his book suggests, attributed this growth to “culture”, which is a big concept. However, he used it to refer to beliefs, and therefore values and norms that shaped the formation of institutions — the rules of the game, so to speak. He also spoke about the culture that allows for the emergence of a robust marketplace of ideas and their contestations among those learned in the subject, about the ability to have robust knowledge enterprises that constantly challenge the status quo and spur innovations of all sorts.

A culture of not learning from experience, as seems to be the case in Malaysia, is bad culture. A culture of the inconsequence of failures and mistakes, a culture lacking in accountability, and one that does not differentiate between the consequences of doing the right and wrong things are all bad cultural values. Unfortunately, we have these in abundance and there seems to be an absence of leadership, not just political leadership but leadership in various spheres, to speak out for the common good, for doing the right things. Far too many who know better and are in a position of privilege behave selfishly instead of altruistically, or simply professionally.

The ongoing trials involving 1Malaysia Development Bhd (1MDB), for example, show the complicity of so many in the commission of wrongdoings by keeping quiet or looking the other way. This dereliction of duty was not the exclusive domain of politicians — there were plenty of bureaucrats and professionals who were complicit. This culture of acquiescence, of not speaking truth to power, actually weakens those in power and destroys institutions. Instead of valuing ideas and believing that a robust market of ideas is necessary for the discovery of better ideas, we inhibit such contestations and punish those who deviate from the acceptable narrative, including the narrative of corruption and deception.

Mokyr made the observation about how pre-Enlightenment Europe started to develop what was called the “republic of letters”, a commonwealth of learning, that eventually became a highly competitive market of ideas with low entry barriers. He also made the point that political fragmentation in Europe between the various monarchs and principalities at the time was actually good for this development as the fragmentation led to competition for ideas between them. It eventually made the suppression of new and different ideas a lost cause. We must therefore not despair at the political fragmentation in the country today. It is not a bad thing if there are also freedoms. On this eve of Merdeka, we must resolve to protect the fundamental liberties and freedoms enshrined in the constitution, for without these, the market for ideas degenerates into bigotry instead of enlightenment.

If values are inverted, when the judgement of what is right and wrong becomes blurred for whatever relativist arguments, then the culture degenerates and so will society. The economy is just a reflection of society, and that too will deteriorate. The sustainability of economic growth and all that comes with it depends on its cultural strength. While there may be various explanations as to why most economies fail to break through the middle-income trap towards being a developed economy, one of the most compelling explanations is that an economy needs to grow steadily over an extended period — what is called macroeconomic stability — for decades, if not centuries, to get to the point of having the critical mass of capacity and capability and institutional strength that the occasional crises, pandemics or wars will not derail its development. We are far from being there.

Dr Nungsari A Radhi is an economist

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