What is the role of the government in the transition to a socialist market economy? What is the meaning of "focusing on economic development?"

The functions of the government in the socialist market economy are in dire need of a shift from direct involvement in economic activities to stabilizing the economy, establishing a legal and social framework, maintaining competition, providing public goods and services, redistributing income and wealth, and correcting negative externalities.

It is necessary for government functions to be adapted to promote sustainable growth. In the past two decades, China's economy has achieved dramatic progress. However, the rapid economic growth over the past 27 years has experienced ups and downs fluctuations that are unlike business cycles in a mature market economy.

One of the characteristics of China's economic fluctuations is that the ups and downs are usually caused and then regulated by administrative forces, leading to large amplitude, low efficiency, a serious waste of resources and environmental degradation.

The 16th National Congress of the Communist Party of China (CPC) clearly suggested the government functions of economic regulation, market supervision, social administration and public services should be improved; administrative procedures for examination and approval should be reduced and standardized, and the basic role of the market in the allocation of resources should be given fuller play.

China's economic system has changed profoundly since 1978. It was in that year that China began to shift its focus from class struggle to economic development, when the State and collective economy accounted for 95 per cent of the national economy. It was not necessary to enact economic regulation because almost all economic activities production, circulation, exchange and distribution in all industries were controlled by governments at various levels.

The shift in focus to economic development meant the governments at various levels had to focus on economic activities rather than carrying out a class struggle. This was a brilliant new starting-point for China's economic reform and opening up to the outside world and it was absolutely right at that given time.

Thereafter, China's economic system changed substantially and a socialist market economy was established. The 16th National Congress of the CPC put forward the idea that the country should continue to focus on economic development to solve new developmental challenges.

But given the changes in the economic environment, the meaning of "focusing on economic development" has changed. Now that the market economy is maturing, the Chinese economy has become a multi-polar structure, with only one-third remaining State-owned. Most enterprises have become independent and equal in a legal sense and, with the guidance of market pricing signals, they can decide what goods and services are produced, how they are produced, and to whom they are sold.

Distribution has also changed dramatically. Egalitarianism has been replaced by a production factor-based mode in which the market and enterprises play a predominant role. The government only decides the distribution system for public servants and State-owned enterprises. It uses taxation for redistribution and social security to maintain minimum living standards to reduce poverty.

The government has retreated from its former direct involvement in employment, and the non-State economy has become the main arena for creating jobs. The market has also replaced government in playing a role in the pricing mechanism.

At present, the prices of 95 per cent of commodities and services are set by the market. Therefore, "focusing on economic development" in this new situation means that the function of government should shift from managing economic projects directly to stabilizing the economy, establishing a legal and social framework, maintaining competition, providing public goods and services, redistributing income and wealth, and correcting externalities.

In the planned economy, the government was the major player in the economy. In a market-based economy, the market, including numerous families and enterprises, is the major player. In a transitional economy, the government, families and enterprises work together to bolster economic development.

China remains a transitional economy. The government is still a major factor in economic activities. Its "visible hand" has not yet retreated from the market. The role of the "invisible hand" is limited due to the inherent desire of local governments to pursue high economic growth rates given current official promotion standards.

Although the central government has required that a scientific development concept be adopted, many local government officials are still coveting high growth rates and so-called image projects to promote their political careers. In other words, "focusing on economic development" has been taken to mean direct involvement in economic construction to raise local economic growth rates.

Some local governments have shifted their focus from direct involvement in the management of economic projects to supervision of law enforcement, social management and public services. Law enforcement mainly involves protecting property rights and contract enforcement, as well as protecting human rights and the people's assets, combating criminal activities, and imposing taxation in accordance with the law.

The government should concentrate on supervision; keeping an eye on market order and environmental protection. An important part of social management involves registering the population and assets, especially fixed assets. This is the basis of property rights protection.

In addition, taxation will help solve social disputes. Social security and relief for disadvantaged groups is also the responsibility of government. Public services include provision of compulsory education, community medical care, a social safety net, public transport networks and information services.

If more officials could shift the focus of their work to social management and public services, the Chinese economy would develop more smoothly, environmental protection will become more efficient, the legal environment will be improved, and ultimately society will become more harmonious.

The author is assistant governor

of the People's Bank of China