There are alternative approaches to estimate the impact of the price shock on the poor. Compared with recent papers on the same subject (Ivanic and Martin, 2008, Wodon et al. 2008), the present paper differs on several grounds. First, we use household survey data for 73 countries<sup>2</sup> covering 88 percent of the population living in developing countries in 2005; second, in addition to measuring the impact of food price changes on the headcount poverty rate, we differentiate between the cost attributable to the “new poor” versus that one of the existing poor before the price increases; and third, our approach focuses only on urban households, ignoring income effects for food-producing households. Similarly to Ivanic and Martin, 2008 and Wodon et al. 2008, the present study focuses on the shortterm micro-economic impacts, ignoring second-round or multiplier effects which could occur in the longer run.<sup>3</sup> Despite the methodological caveats and data limitations, this paper is a useful first step to identify countries facing the highest risk level of severe disruption in their fight against urban poverty as a result of the food price shock. The note also gauges the order of magnitude of a ceiling for the cost of these interventions, understood as aiming to offset the impact of food price spikes on urban poverty at US$1 or US$2 a day.<sup>4</sup>

# **II. Methodology and Stylized Facts**

# **A. Methodology**

Define<sup>_y_</sup> _h_ as the per capita household income of household “ _h_ ” and _z_ as the minimum income required to purchase a basket of goods that satisfies a required level of consumption (the poverty line), most of which of food. If _q_ individuals fall below _z_ , the total monetary cost of providing those individuals with the required consumption level is defined as: The increase in food prices will raise the monetary cost of affording the same basket of goods. Assuming that incomes remain constant (consistently with our focus on consumption effects), the change in the poverty deficit (PD) due to an increase in the poverty line can be defined as follows:

> 2 Since the household survey data for China is not available, the computations for this country relied on the PovCal parameterization of the Lorenz curve.

> 3 Ivanic and Martin (2008) also  account for changes in unskilled wages rates so as to capture higher factor remuneration in agriculture. According to the authors, citing Ravallion (1990), such a wage response could take several years. Passa Orio and Wodon (2008) estimate the longer term impact of specific commodity price spikes on the price of other commodities through a social accounting matrix multiplier effect approach, and suggest that indirect effects are much more pronounced for oil than food. Dessus (2008), using a computable general equilibrium model, assesses the impact of imported inflation on domestic prices accounting for behavioral effects and substitution effects in the short, medium and long run in Tanzania. 4 This paper consistently uses poverty lines and GDP expressed in purchasing power parities derived from the ICP 1993, as new poverty lines derived from the ICP 2005 have not yet been disclosed.