# **1. Introduction**

The economic slowdown across the world caused by the financial crisis has taken its toll on poverty in developing countries. Recent World Bank global estimates for poverty suggest that the global slowdown caused by the crisis could add an extra 50 million to the number of people living below $1.25 a day and 64 million to the number below $2 a day, compared to a scenario of uninterrupted growth in the absence of the crisis. By 2010, the crisis is projected to add an estimated 89 million to the number of people living below $1.25 a day and 120 million to the number below $2 a day (Chen and Ravallion, 2009). Along with the impact on poverty numbers, the crisis is also likely to have significant impacts on the distribution of income and consumption _among_ the poor and non‐poor, both within and between countries. It is difficult, however, to predict the distributional impacts of the crisis with a high degree of confidence. Evidence from previous crises suggests that relative inequality falls about as often as it rises during aggregate contractions (Paci et al, 2008). Furthermore, as the crisis rapidly spreads across countries and _within_ countries (through adjustments in domestic credit and labor markets and fiscal policies), its impacts across different groups, sectors or areas have become all the more difficult to track.

An analysis of how the crisis has affected poverty and distribution of welfare in a particular country – including Philippines, the subject of this paper – would need to address a few key questions. These are: how are the impacts going to be shared across the distribution of income or consumption, which sectors and regions are likely to be impacted, and what are the characteristics of those who would become poor as a result of the crisis? In order to be useful to policymakers, these questions would have to be analyzed _ex ante,_ with available data that in most cases pre‐date the crisis, rather than be delayed till the time post‐(or during) crisis data become available. In the case of Philippines, the latest available household data is from 2006, which would imply that _any_ analysis of how the crisis is likely to affect poverty and income distribution must rely on _ex ante_ simulation methods. Even if some real‐time data from households were available, an _ex ante_ approach would still be needed to simulate impacts for hypothetical scenarios that have not yet occurred, or the impacts of other, unanticipated shocks to the economy (in the case of Philippines, typhoons that occurred very recently) .

Current approaches to analyze _ex ante_ the impact of a macroeconomic shock, with the limited data available in most countries, are somewhat inadequate in addressing the kind of questions posed above. To improve upon existing approaches given the typical data constraints seen in most developing countries, including Philippines, we use in this paper a microsimulation model to evaluate _ex‐ante_ the distributional impacts of the crisis in a country. Section 2 below provides a brief background of poverty trends in Philippines in recent times and the macroeconomic impact of the crisis in the country. Section 3 outlines a rationale for our microsimulation model and presents the model, starting with an overview of the approach and subsequently outlining each step in detail, and ending with the key limitations and caveats to the model. In Section 4, we discuss the results of our simulations on the poverty and distributional impact of the crisis in Philippines. Section 5 concludes the paper summarizing key findings and discussing a few implications of the results for the country.

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