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Recent fluctuations in global commodity prices have revived an interest in the relationship between adverse shocks and growth, with particular reference to developing countries. So far, analysis has focused on policy responses to shocks, looking at the adjustments in public spending, for instance, that governments must make. But there has been little investigation of the role structural policies can play in mitigating the adverse consequences of shocks. Looking at two types of such shocks - large declines in the price of a country’s commodity exports and severe natural disasters – this research considers structural policy options that can help governments deal with growth fluctuations.

Structural policies are incentives and regulations that are maintained for long periods. When governments realise that their economies are prone to shocks, they act as precautionary measures prior to the occurrence of an adverse shock. 

Using data for some 130 countries between 1963 and 2003, the report shows how adverse commodity export price shocks and natural disasters harm short-term growth. It then investigates the consequences of various structural policies in mitigating such losses, paying particular attention to flexibilities in firm exit and labour markets using data from the Doing Business surveys of the World Bank.

Amongst others, the report finds that:

• policies that support financial depth, financial openness, international reserves and remittances do not have a significant shock-mitigating effect
• regulations which reduce the speed of firm exit substantially increase the short-term growth loss from adverse export price shocks in the case of non-agricultural products
• natural disasters typically have only relatively small adverse effects on aggregate output
• natural disasters appear to be better accommodated by labour market policies, perhaps because such shocks directly dislocate the population

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