Structural Policies for Shock-Prone Commodity Exporters

Countries that are reliant upon commodity exports periodically face large adverse price shocks. Given past volatility, the present high world prices for commodities may be a precursor to such shocks. Unsurprisingly, adverse price shocks reduce the growth of constant-price GDP and we analyze which structural policies help to minimize these losses. Structural policies are incentives and regulations that are maintained for long periods, contrasting with policy responses to shocks, the analysis of which has dominated the literature. We show that structural policies have large effects. In particular, policies which enable flexibility in labour markets and which ease the entry and exit of firms, are particularly well-suited to shock-prone commodity exporters. We show that these gains are systematically unrealized. Indeed, we find a political economy paradox that the larger are the gains from good structural policy, the worse are the policies actually adopted. We account for this paradox in terms of the lack of responsiveness to the needs of the economy that resource rents induce.