Optimizing economic structure and refashioning the economic growth pattern is an old topic that has been discussed and implemented for years. But we have still made little headway in this respect and there has been a tendency for heavy industries to overemphasize efforts to modify the economic growth pattern.

Why?

To a large extent, the government, which fails to fully respect the role of the market in allocating resources, is behind the tendency.

First, it is necessary to clarify what "refashioning economic growth pattern" actually means.

In the late 1960s, the former Soviet Union found that although its economy was growing much faster than that of its arch rival, the United States, the quality of the growth was poor and the economic gap between the two countries did not narrow as it had expected.

The Soviet leadership came to the conclusion that the growth pattern was problematic and must be changed. It was unsuccessful and the economy collapsed in the early 1990s.

In the late 1960s, some Chinese scholars introduced the idea "refashioning the economic growth pattern" but was not adopted as a policy until the Ninth Five-Year Plan period (1996-2000).

In drafting the plan, the then State Development Planning Commission put forward the idea that the most urgent economic problem for China to solve was the shift of the growth pattern from an extensive mode to an intensive mode.

What defines the two sorts of growth pattern is whether economic growth is supported by continual input or an improvement in efficiency. The extensive mode is backed up by continual input, while the intensive mode is supported by an improved efficiency.

The extensive economic growth pattern is the inevitable product of the old planned economy. The central authorities, in drafting the Ninth Five-Year Plan, put forward the idea of "two changes" - one the change in the economic growth pattern, the other systematic modification.

The country has made some headway in refashioning the economic growth pattern.

But during the 10th Five-Year Plan period (2001-05), there has been a nationwide tendency for heavy industries to be emphasized in the current economic restructuring.

In the late 1990s, it seemed a consensus had been reached across the country that China had entered the industrial development stage that is centered on heavy industries, and that economic structure should be made heavy industry-oriented.

Why is there such a tendency?

The overemphasis on heavy industries in economic development is rooted in the so-called Hoffmanian theory, which advocates continuity of the traditional extensive development mode.

Based on the British and US experiences from their initial and medium-phased industrial development, the theory stresses that the heavy and chemical industries should continue to dominate economic growth.

Since last year, the theory has been popular in this country.

One reason is that the government has played the dominant role in economic restructuring. Out of consideration for fiscal revenue and the performance records of government officials, this will definitely lead to an overemphasis on heavy and chemical industries, which can provide more taxes.

For example, Beijing is a city that boasts rich technological resources and it is better for the city to be a high-tech and innovation center. The fiscal revenue and gross domestic product, however, have not seen rapid growth and so the manufacturing industry has become a choice of the municipal government. Last year, it launched its auto industry.

The second reason for the overemphasis on heavy industries is that the government is capable of developing those industries. It has the power of land use and loan extension. The banks are, to a large extent, still influenced by administrative force.

However, economic systematic restructuring is an adjustment of resource allocation, which improves efficiency.

The US and British experiences in the 1920s and 1930s did not support the Hoffmanian theory.

According to US economist Paul Samuelson, economic growth is not fuelled by material and capital accumulation and resource input, but by improved efficiency.

At the later stage of industrial development, the driving force comes from development of tertiary industries, which promotes employment, and small businesses. They can significantly improve efficiency.

The current situation shows that some local governments have based their economic restructuring on the Hoffmanian theory, which has led to serious shortage of resources.

In East China's Zhejiang Province, for example, power has fallen short of demand since last year as the province started to shift its focus to heavy industrial development.

Heavy and chemical industries are also weak in creating jobs. Zhejiang used to boast good employment, but now its urban employment has become a problem.

The government holds the key to rationally refashioning the economic growth pattern.

First, the government need to adopt market-based and price-driven measures to manage microeconomic matters, including the allocation of resources among different regions, departments and enterprises.

Second, the government should concentrate on provision of adequate and high-quality public goods.

In macroeconomic regulation, the government takes heed of the adverse effects of administrative means. It would be strange if certain government agencies still decided which projects should be given the go-ahead and which enterprises should be extended loans.

If things went that way, we would still be carrying out a planned economy.

The author is researcher with the Development Research Center of the State Council

(China Daily December 11, 2004)