Disorganization or Self-Organization?

The transition from plan to market provides a rare opportunity for insight into the endogenous development of economic institutions. Economic activities during the Soviet regime were coordinated by a central authority. These coordinating mechanisms were disrupted during the transition period, leading to an increase in the transaction costs for firms. Blanchard and Kremer (1997), among others, emphasize the negative impact of this "disorganization" on output behavior at the beginning of transition. Though this argument is correct, we believe that this and similar works stop short of a fuller characterization of transition by concentrating only on the disruptive effects of the reform process. This paper begins where the former works end by examining one of the key institutions that have emerged spontaneously in response to the challenges of transition: business associations. Its main contribution is to provide empirical evidence that institutions that help coordinate production and trade spontaneously emerge in an environment characterized by widespread "disorganization". Using a largely unexplored, firm-level data set, we document the emergence of business associations at the beginning of transition and provide evidence that these new coordinating institutions mitigated the initial output decline. Building on the growing literature on transaction costs and complexity, we interpret the emergence of these informal institutions as the firms' rational response to coordinate activities in a decentralized economy