The purpose of economic development is not merely more construction. More importantly, it is about bringing greater happiness to people.

When reports of "accelerating economic construction and economic growth" appear widely in the mass media, we immediately think of more investments to increase production and build more infrastructure. But when the production capacity reaches a certain level, economic development should no longer be aimed at expanding it further.

Instead, it should be aimed at maximizing people's happiness and extending consumption, especially deepening financial transactions.

Even without the global economic crisis, China's growth model would have hit a bottleneck by now. We can cite some data to illustrate the current problems.

In 1952, before nationalization, China's domestic consumption accounted for 69 percent of its GDP. We always say the Americans spend too much. But the consumption of the Americans' - 71 percent of GDP - today is just 2 percent more than that of the Chinese in 1952. It should be emphasized, though, that China's economic activities then were mainly aimed at supplying enough food, clothing, houses and education to its citizens.

The proportion of domestic consumption in China's GDP dropped to about 45 percent in 1978 and 42 percent in 1993. In other words, it has been in decline during the periods of planned economy as well as the reform and opening up. The proportion of government expenditure in GDP, however, has increased to 30 percent - double that of 1952.

Generally speaking, we see two trends in China in the last six decades: a decline in the percentage of domestic consumption in GDP and an almost perpendicular rise in government expenditure. These trends have hardly changed in the years before or after the reform and opening up.

While the proportion of domestic consumption in GDP rose from 65 percent in 1952 to up to 71 percent in 2004 in the US, government expenditure declined from 16 percent in 1952 - more or less the same as China's - to 10-11 percent.

Some experts may say the US is too wealthy a nation to be used as a reference point for China. So let's take Brazil as an example, which has per capita GDP twice that of China but far less than that of the US. In 1950, domestic consumption accounted for 51 percent of Brazil's GDP, and rose to 60 percent in 2003. The government expenditure, however, is the same as in 1950: 22 percent. So China's economic transition must boost the proportion of domestic demand in GDP.

When I visited Brazil last October, a taxi driver told me that if the Brazilian government had money, it would not spend it on building airports, expressways and other infrastructure but try to distribute it among the people and let them spend it. The story is just the opposite in China.

A government-dominated economy prefers infrastructure and big industrial projects, and large State-owned enterprises demand more resources and industrial products rather than consumer goods and services that could improve people's livelihood. To build infrastructure and skyscrapers we need more resources, the use of which causes more environmental damage. Such an economic structure depends heavily on resources and energy and cannot be sustained without substantive consumption of energy.

But if people's income can be raised, followed by a consumption boom, it would guide the productive sector to put more emphasis on consumer products and livelihood services. And that would promote the development of tertiary and light industries, which would not only use resources and energy in a sustainable way, but also increase employment substantially.

The author is a professor of finance at Yale University. This article first appeared in China Reform magazine.

(China Daily 01/25/2010 page9)