The Pattern of Growth and Poverty Reduction in China by Jose G. Montalvo and Martin Ravallion, The World Bank Development Research Group
China’s phenomenal growth has been the envy of the world. It has lifted millions from poverty to prosperity within a single generation. But it has also been accompanied by imbalances between regions and rising inequalities between town and country.
Jose Montalvo and Martin Ravallion from the World Bank Development Research Group attempt to find out what kind of growth is best suited to reduce poverty. They also examine whether the Chinese experience bears out the Pattern of Growth hypothesis, which says that it isn’t just growth which matters—if poverty is to be reduced, much depends on the sectors and regions which grow.
The researchers compare China’s attempts to reduce poverty with India’s and find that in China “only the growth rate of agricultural output matters for poverty reduction in rural areas”. This is very different from the Indian experience where, “growth in the tertiary (mainly services) sector has had more impact than the primary (mainly agriculture) sector, while the secondary (mainly manufacturing) sector appears to have brought little direct gain to India’s poor”.
Why should the experience be so different for the two countries?
One reason is that while China placed a high emphasis on agriculture right from the beginning of their reform period, India’s commitment to the sector has been patchy. But the authors also refer to “an important historical-institutional difference. The relatively greater importance of agricultural growth to poverty reduction in China than India probably reflects, at least in part, the difference in the distribution of agricultural land. While India has a large landless population in rural areas, such landlessness is rare in China”. In other words, a larger share of agricultural land held by the poor allows them to capture a larger share of the gains from agricultural growth. Simply put, land reform matters.
For India, Ravallion had in an earlier paper argued that the country hadn’t done very well on the poverty reduction front because growth hadn’t occurred in the poorest states of the Hindi heartland. The conclusion: Growth is not enough, it has to be spread evenly. Unbalanced growth, whether across regions or sectors, reduces the pace of poverty reduction.
Institutional Investor Preferences and Firm Value
by Gwinyai Utete
It’s common knowledge that the participation of institutional investors increases the value of a company.
And conventional wisdom tells us that institutional investors are attracted to a stock if the company is transparent, has good accounting policies and the management has a clean reputation. Gwinyai Utete of Auburn University examines the relationship between the preferences of institutional investors and the value of a company.
To do that, Utete classifies institutional investors. He says that “institutional investors differ quite dramatically in their preferences… Short term, high turnover (transient) institutional investors are found to be attracted to companies that perform well (in both an accounting and financial sense) but have a high level of informational uncertainty. Institutional investors with a longer term focus (quasi-indexer and dedicated) are found to be attracted to firms with features that facilitate oversight of managerial behaviour.”
The results of his study show that while the presence of long-term institutional investors does increase transparency, it doesn’t have any correlation with an increase in a company’s value (as measured by Tobin’s Q ratio, which is the market value of a company divided by the replacement value of the firm’s assets). On the other hand, the transient institutional investors, or those which trade frequently “possess superior information to other market participants and actively seek out situations in which they can exploit this informational advantage. Their presence, particularly under conditions where firm-level information quality is poor, is associated with both higher returns and higher subsequent firm values”.
In particular, transient institutional ownership is positively associated with firm value when cash flow volatility is high and when they buy stocks that have a lot of speculative reports about future earnings. Ironically, the research suggests that traders, who normally do not place much importance on regularly monitoring the firm, are the ones who can spot the big opportunities.
Illustrations by Jayachandran / Mint