Poor countries’ economies are more volatile than the richer ones. For instance, low income countries have experienced commodity price shocks on an average of one every 3.3 years for the last three decades. Exogenous shocks have significant direct adverse effects on growth and the secondary effects of negative terms of trade shocks can be large. Collier and Dehn (2001) show, for a sample of cases where the direct income loss averaged 6.8 per cent of GDP in the year of the shock, that the total correlated loss of income amounted to about twice that much (14 per cent of GDP), through the reduced growth channel. Shocks have a significant impact on fiscal and external balances. An IMF study shows that terms of trade shocks and adverse weather conditions have played an important role in creating debt problems1. A recent study by Koren and Tenreyno (2007) investigates the links between volatility and development and points out that understanding the sources of volatility in less developed countries is of primary importance as income fluctuations are more abrupt in these countries and their ability to hedge against these fluctuations is limited by the weakness of their financial infrastructures.