effect of the crisis in 2009 and 2010. Finally there is very little impact on the sectoral _shares_ in employment, although each sector is worse affected in 2010 than in 2009.

# **_Aggregate impact on poverty and inequality_**

_Average household income_ is expected to be 2.2% lower in 2009 and 3.6% lower in 2010 as a result of the crisis, compared to the benchmark (no‐crisis) scenario. The drop in 2009 income is mainly due to a 3.0% drop in labor income, along with a marginal (0.6%) drop in non‐labor income. In 2010, the larger impact is due to drops in both labor income (4.6%) and non‐labor income (1.9%). The significantly higher loss in non‐labor income in 2010 is due to a larger (2.3%) loss in remittances in 2010 compared to a 0.5% drop in 2009 (see Annex 2, Table B for the detailed estimates on household income).

The poverty headcount rate is expected to be 1.45 and 2.07 percentage points higher as a result of the crisis in 2009 and 2010 respectively. The impacts on poverty gap and severity are smaller (between 0.71 and 1.02 percentage points) for both years, but again slightly higher for 2010 than 2009. The impact of the crisis on aggregate measures of inequality is negligible.

Interestingly, the impact on household income and poverty is higher in 2010 than in 2009, in spite of the fact that the impact of the crisis on GDP growth is expected to be larger in 2009 (refer to Table 1, Section 2). There are two main explanations for this apparent puzzle. Firstly, remittances flows from abroad – which contribute significantly to a household’s non‐labor income – show no decline in 2009 due to the crisis but are expected to be lower in 2010 due

|**Table 3: Poverty a**<br>**with**|**nd inequality with and**<br>**out crisis**|
|---|---|
||Percentage point<br>difference between<br>crisis and benchmark<br>scenarios|
||2009<br>2010|
|**Poverty**||
|‐Headcount rate|1.45<br>2.07|
|‐Poverty gap<br>‐Severity of|0.71<br>1.02|
|poverty|0.1<br>0.59|
|**Inequality**||
|**(per capita exp.)**||
|‐Gini|0.001<br>0.001|
|‐Theil|0.002<br>0.005|
|_Source_: Own calculatio<br>simulations using mac<br>(2006)|ns based on micro‐<br>ro projections and FIES|

**Box 1: Price adjustments underlying the poverty projections.** All projected incomes are at 2006 prices. This would normally imply that no adjustments are necessary for the poverty line (defined at 2006 prices) as well, had it not been for the fact that food prices have risen at a faster rate than the general Consumer Price Index (CPI) since 2006 (by 19.3% as compared to the general CPI rise of 18.8%). Given that the poverty line is anchored to a fixed basket of food items necessary to meet the basic minimum calorie needs of an individual in 2006, a higher appreciation of food prices relative to general inflation would imply that the same poverty line may no longer be sufficient to purchase the basic food basket in 2009 or 2010.<sup>1</sup> This would imply that the poverty line for 2009 and 2010 must be adjusted upwards (as described above) to reflect the same level of welfare as in 2006.

Food prices – most significantly rice prices – in Philippines rose sharply during 2008 in response to the worldwide food price shock, which likely led to a temporary spike in poverty rate. Since rice prices have moderated since late 2008, the food CPI projections for 2009 and 2010 are likely to reflect the expected trend of prices rather than the temporary spike in 2008. That said, the poverty projections will change if the financial crisis were to have a further significant dampening (or upward) effect on domestic food prices, _beyond_ what is reflected in the projected price indices used for our simulations.

to the crisis (relative to the no‐crisis scenario). Secondly, the impact on household income and poverty 13