Extending the economics of disorganization

Many of the states of the former Soviet Union have experienced a dramatic collapse of output during transition, which has not yet been reversed in a sustainable way. The economics of disorganization, proposed by Blanchard (1997) and tested empirically by Blanchard and Kremer (1997), reasons that this phenomenon can be explained by specificity of inputs and the breakdown of traditional domestic supply linkages. We replicate the Blanchard-Kremer study for Ukraine and Kazakhstan, and also find that longer and more complex domestic supply chains are associated with greater reductions in output. When we extend their analysis to incorporate measures of the complexity of the Commonwealth of Independent States (CIS) trade and non-CIS trade however, we find that complexity of non-CIS trade is the significant factor in explaining the output collapse. We therefore argue that the disintegration of the Council for Mutual Economic Assistance and the requirement of hard currency trade, are equally, if not more, significant in explaining the output declines experienced by Ukraine and Kazakhstan.