By Zhou Tianyong

Labour-intensive industries and small and medium-sized enterprises (SMEs) could be the key to resolving the heavily unbalanced investment and consumption structure in the economy. This gnawing issue has long afflicted China.

The high proportion of investment in the gross domestic product (GDP) has long been a problem in China.

Its percentage in GDP has never been lower than 35 since 1983.

It reached 43.5 percent in 1993 and fallen to 37.1 percent in 1999, then resurged to 42.9 percent in 2003.

The investment-led development model could be attributed as the main engine behind China's economic take-off since it embarked on reform and the opening-up track more than two decades ago.

Although such a model does have its advantages -it could quickly accumulate immense capital by tapping into the cheap land and labour resources to produce a sizzling economy - it also has serious consequences.

Under the investment-led development model, the national economy is more likely to witness huge swings.

Because the economic growth is mainly propelled by the investment, and when the investment soars, it is likely to drive up prices. Under such circumstances, in order to keep rising prices at bay, the government will be forced to take macroecnomic measures to tighten the credit, which, in turn, could choke the economy and send it into the doldrums and thus create a vicious circle.

This is indeed a dilemma. Macroeconomic controls will lead to an economic slowdown, but when such measures were loosened to spur the economy, then there would be an economic spurt - often an overheated one.

Such an awkward situation has repeated itself twice in recent history between 1989 and 1991 and between 1997 and 2003.

Another problem associated with the investment-led development structure is a significant number of labour can not be fully utilized causing a high unemployment rate.

Because a huge portion of GDP is being made as investment, those who make a living from their capital are likely to gain more while workers are likely to suffer, leading to a widening income gap between rich and poor.

The unbalanced investment and consumption structure has also made the country's economy overdependent on exports.

While heavy investment made in capital-intensive industries has dramatically increased production, the relatively tepid domestic demand has made many commodities experience a glut in the markets, making exporting a necessary gate to solve the overproduction issue.

Although exporting is another powerful engine driving the growth, over dependence on it, however, could make the national economy vulnerable to fluctuations globally.

In order to tackle the gravely unbalanced investment and consumption structure in the GDP, it is imperative to pinpoint its causes in the first place.

Much more investment has been made in capital-intensive industries than in labor-intensive sectors.

China has long favored setting up large-scale capital-intensive enterprises while suppressing the development of SMEs and self-employed groups - a practice that has been scrapped but still has residual influence.

Currently, the portion of the workforce working as self-employed or at SMEs accounts for 53 percent of the total labour force, lower than 65-80 percent recorded in many countries.

The investment environment is still not favorable for the development of SMEs and the self-employed.

In particular, the relatively complex administrative approval procedures and high capital requirement for starting up an SME and the relatively high tax burden on them greatly hamper their development.

The lukewarm domestic demand can not be stimulated unless farmers become better-off.

Urbanization has been long considered as a way to make China's millions of farmers rich. However, farmers' right and interests have not been protected well during the urbanization.

Under the current land-use system, farmers can not fully reap their due gains when their land-use rights are traded.

They can only get a meagre portion of economic benefits for land reclaimed by the government, while more cash went to governments and real estate developers.

The government then in turn took those increased revenue to invest in urban infrastructures, while the purchasing power of those farmers whose lands were reclaimed were not enhanced significantly.

Migrant workers' back pay issue has become more prominent in recent years, especially in some government-invested projects.

It is a practice tantamount to embezzlement of migrant workers' income to be used as investment, a practice that clearly increases investment percentage in GDP while slashing consumption accounts figures.

Some other factors also contribute to causing the unbalanced investment and consumption structure in the GDP.

The fragile social security network means that a considerable amount of money ended up as reinvestment that otherwise should have been made as contributions to the social umbrella funds.

Otherwise, those diverted money could have ended up as consumption.

Also, the mammoth foreign investment further increases the portion of investment in the GDP.

Because foreign investors either reinvest their profits or simply send them back.

To resolve the unhealthy unbalance, more needs to be done.

Although, in short term, such imbalance would be modified by raising interest rate or tightening credit and the investment scale, it can not solve the fundamental problems inherent in it in the long run.

Promoting the development of labor-intensive industries and SMEs could be an effective way to alleviate the imbalance.

To that end, it is well advised that the market entry barrier for SMEs be abolished. And tax burdens on SMEs should be reduced and ad hoc fees levied on them by various government bodies be banned.

While for farmers the compensation for their lands reclaimed by government needs to be raised drastically so as to increase their incomes and curb investment in real estate.

A mandatory medical and pension insurance for migrant workers should also be put into place.

Note: the author is deputy director of the Office of Economic Research under the Party School of the CPC Central Committee.

(China Daily October 27, 2004)