Tap potential of market forces

Updated: 2012-07-10 13:28

By Chi Fulin (China Daily)

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Government changing investment-dominated development approach to ensure sustainable and equitable growth

China's economic growth has been moving in line with a market economy. However, while the transitional institutional arrangement has boosted China's economic growth, it has been dependent on administrative forces and failed to give the market full play. Nor has it paid enough attention to seeking equitable and sustainable development.

Without changing the status quo, it will be difficult for the market to play its fundamental role in the allocation of the country's resources and for China to change a long-established economic growth model characterized as quantity-dominated expansion.

To accelerate the transformation of its long-controversial development model and embark on an equitable and sustainable development path, China should forgo its government-spearheaded economic development approach in order to facilitate its long-anticipated transformation to a consumption-driven economy.

Unlike the United States and European countries, China's economy will maintain an upward development momentum for a long period of time if it can release the enormous potential of consumer demand. It is estimated that China's household consumption will increase from 16 trillion yuan ($2.5 trillion) in 2011 to 50 trillion yuan by 2020. Such a considerable rise in household consumption will support an average economic growth rate of 8 percent in the decade ahead.

However, releasing this potential requires changes to the established market institutions and an improved market economy environment.

Statistics show that the final consumption contribution to economic growth declined from 62.3 percent in 2000 to 47.4 percent in 2010, while household consumption declined from 46.4 percent to 33.8 percent. One fundamental reason China managed to maintain its rapid economic growth during those 10 years, was the government's zeal to spearhead the national economy on an investment-dominated track. But this model has exacerbated imbalances in the national income distribution. It has also negatively affected people's inclination to spend and hampered a same-pace rise in household consumption capability and national economic growth.

At the same time, the investment-driven growth model has unavoidably tilted toward the development of heavy industries at the expense of the service sector. As a result, the country's supply and demand structure has failed to adapt to the rapid rise in domestic demand for public products and services, which has aggravated the imbalances and lack of sustainability. To resolve these problems, the government is changing its development approach and promoting a transition from an investment-led to consumption-led model.

China enjoys huge potential, not only in consumption but also in investment. It is expected that the country's urbanization ratio and the proportion of its service sector will increase by 10-20 percentage points over the next decade. Despite its crucial role in helping maintain national economic growth in the short term, investment will only be a major driving force for national economic growth if it adapts to the changing social demand structure. To this end, the country should integrate its investment activities into its consumption-led economic transformation.

A transformed economic structure and an optimized investment structure will only be achieved with a fully fledged market system. Excessive dependence on investment, energy consumption and the excessive prioritizing of heavy industries have resulted in a distortion in the country's investment structure, which has led to its failure to adapt to the changed social demand structure.

Due to its dependence on administrative means and forces, the government-led growth has been unsustainable. Based on emerging changes in its social demand structure, the country should give market mechanisms full play in adjusting and optimizing its investment structure and try to create long-term conditions for the development of a consumption-driven economy while maintaining a limited scale of investment.

The distribution of resources by the manipulation of administrative forces results in a waste of resources. The over-pressed prices of land, resources, capital, labor and other elements of production will inevitably fuel investment impulses and squeeze people's consumption. More importantly, it will cause a misdistribution of national resources and dampen household consumption. This situation, if it persists, will inevitably weaken market forces.

China's economic experiences over the past three decades indicate that market forces, rather than administrative forces, will sustain the nation's economic growth in the future.

The author is president of Hainan-based China Institute for Reform and Development.