Problems of the rural economy, which is centred on the slowing of increases in farmer incomes, can find their roots in the national economy. Without proper macroeconomic reforms, the issues will not be effectively dealt with.

To solve rural problems, economic restructuring is indispensable.

Statistics show that contribution from the tertiary or service industry to the gross domestic product (GDP) has not changed significantly from 1990 to 2000. It rose from 31.3 per cent to 33.2 per cent.

In 2000, the ratio of labourers in the tertiary industry to the total number of labourers was 27.5 per cent.

These figures show contribution from the tertiary industry to the national economy in both output and employment is abnormally low. In countries above the international average level of development, the ratio is generally over 50 per cent.

The problems surrounding the rural economy stem mainly from the redundancy of rural labourers.

The proportion of agriculture and industry in the GDP will shrink as the economy develops, and so will their capacity to absorb labourers. But China's low-level development of its tertiary industry cannot provide much room for the transfer of redundant rural labourers.

Which is why it is urgent to accelerate the development of the tertiary industry.

The main cause of the inadequate tertiary industry is the special industrial policy we have adopted in the past.

The country carried out decentralized industrial distribution and encouraged urban residents to go and work in rural areas before the launch of the reform and opening up policy.

Later the State advocated for farmers to leave their cultivated land to find other jobs without leaving rural areas.

Those policies restricted the country's urbanization drive.

Urbanization can provide space for the nonagricultural employment of farmers, which will lead to increases in incomes and more development of the rural economy.

Restrictions on urbanization are being gradually relaxed. But the urbanization process still lags behind industrial growth and becomes a bottleneck to the growth of the tertiary industry and the transfer of rural labourers.

The government plays a vital role in accelerating urbanization. The drafting and effective implementation of a proper urban development strategy will be a top priority.

All types of cities should be encouraged to grow in accordance with the different conditions of different regions.

In the past, huge cities were thought to be problematic. But it is evident now that such cities have irreplaceable advantages and problems with their development can be warded off by proper planning.

The economic and social development planning in all regions should be re-examined to make them abide by market demand. Necessary adjustments in infrastructure and public facilities construction should be made accordingly.

Future-oriented planning and construction are necessary, which can lower costs and avoid waste of resources.

It is also urgent to adjust the current administrative division. Administrative division is an obstacle to the development of urbanization in many countries as well as in China.

Many big cities are encompassed by independent smaller cities or counties. Those big cities have little room to expand.

Other problems to be solved include the residence registration system. The impact of the system on farmer employment in urban areas is great.

Many cities have discriminatory policies that forbid the entry of farmers without local residence into certain industries.

Extra taxes are imposed on farmers going to cities to work to subsidize local fiscal expenditures. Many primary and middle schools refuse to take children of farmers without a permanent residence card unless they pay a huge sum of extra fees.

Prompt efforts should be made to devise policies that can fill the systematic gap in employment, residence and social security - areas that have differentiated policies towards rural people.

For example, in pension, unemployment and medical care, reserves should be made for the entry of farmers into these systems in the future.

The country's current social security system is virtually limited to urban employees. Gradually, the scope will be expanded to include rural people going to the cities when the residence registration system is relaxed.

Urbanization is certainly not the only way to solve rural economic problems.

One basic method to increase farmer incomes is to industrialize agriculture and promote rural environmental protection.

Fixed asset investments should also be made to increase employment opportunities for farmers.

The development of the tertiary industry in the rural areas, such as tourism, finance, medical care and education, should be pushed to create more jobs.

Many infrastructure projects, such as energy, transportation and water power are being carried out. They often involve large-scale relocation of farmers.

The relocation move should be combined with the construction of small cities and towns. Relocated farmers should also be encouraged to go to small cities and towns, as well as big cities.

The author is vice-governor of the People's Bank of China.