An Anchor in Stormy Seas: Does Reforming Economic Institutions Reduce Uncertainty? Evidence From New Zealand

Abstract

If institutions are designed to create order and reduce uncertainty, poorly-functioning institutions will create `excess' uncertainty. It follows then a reform of such poorly-functioning institutions will only be successful if uncertainty is reduced. This paper, using Bayesian Structural AutoRegression models, empirically assesses institutional reform success by quantifying the reduction in uncertainty. Our application is the wide-ranging institutional reform of New Zealand in the late 20th century (approximately 1984 to 1995). We conclude that, while during the reform period uncertainty increased, the New Zealand institutional reforms were eventually successful in lowering uncertainty from domestic institutional sources. We also content that rising uncertainty immediately prior to reform could have been the spur to reform.