http://worldcat.org/entity/work/id/35586170

Disorganization or self-organization?

January 2001 During the period of widespread disorganization experienced during the former Soviet Union's transition to a market economy, business associations emerged spontaneously to share information about an uncertain environment. Joining a business or trade association helped firms reduce transaction costs by providing them with access to information about the location and reliability of potential trading partners. Disorganization may provide the proper conditions for the development of certain nonmarket institutions, which in turn affect firms' behavior in the face of market failures. The transition from plan to market provides a rare opportunity for insight into the endogenous development of economic institutions. Economic activities under the Soviet regime were coordinated by a central authority. Soviet coordinating mechanisms were disrupted during the transition period, leading to an increase in firms' transaction costs. Blanchard and Kremer (1997), among others, emphasize the negative impact of this "disorganization" on output behavior at the beginning of the transition. Although their argument is correct, Recanatini and Ryterman believe that their work and similar analyses stop short of fully characterizing the transition by concentrating only on reform's disruptive effects. Recanatini and Ryterman start where the earlier work ends, examining the business associations that emerged spontaneously in response to the transition's challenges. They provide empirical evidence that institutions that help coordinate production and trade emerge spontaneously in a widely "disorganized" environment. Using a largely unexplored set of firm-level data, they document the emergence of business associations at the beginning of the transition and provide evidence that these new coordinating institutions mitigated the initial decline in output. Building on the growing literature on complexity and transaction costs, they interpret the emergence of these informal institutions as the firms' rational attempt to coordinate activities in a decentralized economy. In other words, the creation of complex organizations such as associations is the spontaneous result of a natural tendency in every system to create order at the edge of chaos. Business associations are more likely to emerge where there is disorder, to provide their members with stability, coordination, and the information needed to improve performance. This paper--a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region--is part of a larger effort in the region to analyze the impact of the transition process on institutional development. The authors may be contacted at [email protected] or [email protected].

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