# **1. Introduction**

What began as a financial crisis in a few industrialized countries is quickly turning into a job crisis, with contractions in growth taking their toll on developed and developing countries alike. The projected economic slowdown across the world, recent World Bank global estimates for poverty suggest, 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 nonpoor, both within and between countries.

Evidence from previous crises suggests that the output elasticity of wages tends to be larger during downturns than during booms, and that relative inequality falls about as often as it rises during aggregate contractions (Paci et al, 2008). Further, the crisis is rapidly shifting across countries – via trade, financing, and remittances – as well as within countries – via adjustments in domestic credit and labor markets and fiscal policies. As a result, it is difficult to predict the distributional impacts of the crisis with a high degree of confidence.

There are some hypotheses about how the impact of the crisis is likely to evolve between different groups in developing countries. The emerging consensus is that the initial impact is likely to be seen mainly on the emerging middle‐class, since they are more likely to be employed in export‐oriented industries and salaried jobs in the services sector, which appear to have suffered the largest labor market shocks.<sup>1</sup> Approximately 90% of households entering the middle‐class during 1990‐2005 joined the lower tier ($2‐9/day) (Ravallion, 2009), and thus risk falling back into poverty if they face large employment or earnings shocks. The initial impact on the poor may be limited due to the very isolation from the global markets (and the formal sector that gains the most from such linkages) in many countries that have prevented them from exiting poverty in the past.

As the crisis unravels, however, the poor in developing countries are likely to be increasingly impacted. With labor markets in the formal sector being affected, job opportunities and wages are likely to fall, pushing more people into the informal sector, which could depress earnings in the informal sector. This can be accompanied by reverse migration from urban to rural areas, increasing the burden on poor rural households and drying up remittances from workers previously employed in the formal sector, leading to higher and deeper poverty.

The distributional impact of the crisis is thus likely to be complex and dynamic. Some of the key questions an analysis of distributional impacts would need to address are: how are the impacts going to

> 1 There is little consensus in the development literature about who the “middle class” are. A number of different definitions have been used to study the evolution of the middle‐class, such us Blackburn and Bloom (1987), Beach (1989), Levy and Murnane (1992), Jenkins (1995) and Burkhauser et. al (1999). For our purpose, we define the middle‐class broadly, as those above the poverty line but below the richest decile (10%) of the population. In Bangladesh, this is the group between the 40<sup>th</sup> and 90<sup>th</sup> percentiles of per capita expenditure or income.

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