Disorganization in the process of transition

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. JEL classification: P0, O0, D0.