Differences in wage growth, job‐creation patterns and how remittances are distributed help explain the widening East‐West gap in poverty. Wages grew robustly in the eastern part of the country but stagnated in the West. While both East and West created employment to match the rise in working age population, the East created many more jobs that are better paid and in a robustly growing non‐ agricultural sector. In contrast, a large proportion of jobs created in the West consisted of daily wage work or agricultural self‐employment. The eastern region has increasingly benefited from integration with growth poles, namely Dhaka and Chittagong urban areas, in contrast to the more isolated West and Southwest. These two cities have emerged as the main centers of economic activity of the country – Dhaka alone accounts for 80% of the country’s Ready Made Garments (RMG) output and half of manufacturing sector employment. There is wide East‐West disparity in the distribution of remittances as well: in 2005, 24% of households in Chittagong division and 16% in Sylhet received remittances, compared to less than 5% in Rajshahi, Khulna, and Barisal.

**The recent shocks.** The rapid pace of poverty reduction is likely to have slowed during 2007‐08, due to the cumulative impact of natural disasters in 2007 (a severe flood and a cyclone) and more significantly for the population as a whole, the food‐price shock during 2007‐08. The food (mainly rice for Bangladesh) price shock is estimated to have increased the poverty headcount rate in 2008 by around 3 percentage points compared to what it would have been in the absence of the shock (World Bank 2008). While the effect of the rice price shock is likely to be temporary, with prices reportedly coming back to their trend levels in 2009, the financial crisis is expected to have some adverse impact on poverty reduction in 2009 and 2010. The cumulative impact of successive shocks on the poor is also a cause for concern. The poor may have exhausted their options in terms of increasing their labor supply to deal with rising food prices, which could worsen the impacts of the current crisis.<sup>17</sup>

The story of poverty reduction outlined above also suggests the likely channels through which the financial crisis can slow the pace of poverty reduction. These are likely to be: (i) labor market adjustments due to the impact of the crisis in the manufacturing sector, which includes RMG exports; and (ii) adverse impact on remittances. Some impact can be expected in the service sector as well, primarily due to the forward linkages between this sector and manufacturing.

Given that the poor were less likely to be employed in the nonfarm sector and receiving external remittances in the first place, we would also expect that the impact of the crisis will be skewed towards those who are relatively better‐off. Moreover, given that the industry sector and remittances are concentrated more in the eastern part of the country than the west, the impacts are also likely to be higher in the east. Our simulation results that follow confirm, to a large extent, these intuitions and provide an outlook of how the impacts are likely to be distributed, across different income groups, regions and urban/rural areas.

> 17 A World Bank Rapid Survey of Food Price Impact found that 95% of households in the sample were adversely affected. Most had to adopt some coping strategy, such as reducing their food intake (76%), switching to lower quality food (88%), cutting education expenses (39%), taking out loans (55%) and drawing down savings (45%). A third of all households attempted to cope with higher prices by increasing their work effort (World Bank 2009).

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