8 - Trade Performance of South Korea and Taiwan: A Second Test of the Model

Summary

In his review of the book Trust: The Social Virtues and the Creation of Prosperity, by Francis Fukuyama, Robert Solow makes the following remarkably candid comment:

… I, for various reasons, would like him to be right. Academic economics likes to pretend that economic behavior is pretty much the same, always and everywhere, almost uninfluenced by socially conditioned perceptions and norms. If Fukuyama's thesis could be proved to be right, it might help to loosen up the profession's view in other contexts as well.

(The New Republic, September 11, 1995, p. 37)

Unfortunately, the book does not meet Solow's criterion of proof, and he concludes:

I believe that the sorts of things that Fukuyama wants to talk about are more important than my colleagues in economics are willing to admit. I would rather they are talked about imprecisely than not discussed at all. But imprecision is not a virtue, and “for example” is not an argument.

(p. 39)

To convince economists that organizational structure matters, it is necessary to point to objective measures of economic performance that are affected. We have argued at length that the business groups in South Korea and Taiwan are different, and that these differences are rooted in the exercise of authority and market power in the two countries. We have also shown that the predictions of the authority/market power model – in terms of the size, vertical integration, and horizontal diversification of business groups – match up remarkably well with contrasting structure of the groups in South Korea and Taiwan: this was our first test of the model, in Chapter 4.