Disorganization in the process of transition firm-level evidence from Ukraine

Abstract

Most post-communist economies are characterized by an initial collapse in aggregate output. Blanchard and Kremer (1997) and Roland and Verdier (1997) have recently modelled supply-side distortions — disorganization in the links of production — that can lead to a short-term output contraction after market liberalization and a recovery thereafter. This paper is the first to illustrate and test the effects of disorganization in the transition process by using a unique dataset of 300 Ukrainian firms. Our results show that for firms that existed under central planning, disorganization constrains employment and productivity growth during the transition process to a market economy. We also show that the effects of disorganization are greater the more out-dated the capital stock inheritance from the planning system. In contrast, disorganization plays no role in the determination of employment and productivity growth in newly established private firms.