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Although the Chinese economy has experienced miraculous growth in the last three decades, the per capita gross domestic product only reached $2,050 in 2006. That's equal to about 5 percent of developed countries' per capita GDP.

Further growth remains threatened by the unfair distribution of income and the widening income gap among different social groups.

The shortest path toward balanced development is to boost the economy and improve the average income. Meanwhile, arrangements should be made to help the poor's income increase more rapidly than that of the rich so that the income gap is gradually narrowed.

This is a way to reach both fairness and efficiency in the first round of income distribution.

Carrying out the strategy involves developing the country's economy according to its comparative international advantages. Industries with comparative advantages can easily gain strength in the global market, helping achieve domestic economic prosperity.

China's major international advantages are its relatively abundant labor supply and lower labor costs.

Accordingly, labor-intensive industries and labor-intensive sections of capital-intensive industries are the best choice for China. This development would create more jobs and allow more poor people whose only money-earning capability is to sell their own labor into the labor market.

Thanks to the comparative advantages, these industries are also profitable enough to realize a quick accumulation of wealth.

Once capital is available as a result of the economic boom, the country's industries with comparative advantages would be slowly upgraded to capital-intensive ones.

During the process, labor becomes relatively scarce in comparison with capital. As a result, the price of labor rises. The poor are more highly paid and the income gap is narrowed.

Therefore, economic development in line with China's comparative advantages would not only be efficient, but also help realize a fair distribution of income.

If the decision-makers do not follow this strategy or take the country's comparative advantages to the wrong industries, they will fail to create enough employment opportunities.

When the poor are not allowed into the job market, they will continue to lag further behind the rich.

It would also be difficult for industries without comparative advantages to prosper in free competition. They may need State protection or subsidies. Such a development mode is obviously inefficient and works against fair income distribution.

Hence, a flexible price system which faithfully reflects the availability of all factors in production is of great importance in boosting the economy in different stages of development.

When labor is abundant and capital is scarce, the price of labor is low and the price of capital is high. When these basics change, the price system should reflect the change.

Guided by realistic prices, business developers will choose favorable industries, products and technologies. As signals change, businesses will respond accordingly.

China's economy is in transition from a planned economy toward a market economy. Under the planned economy, the economy grew in a way not in line with the country's comparative advantages.

The current transition has yet to establish an income distribution mechanism that realizes both efficiency and fairness.

To make better use of China's comparative advantages and stimulate sustainable economic growth, several key policy changes are essential.

The authorities should revise financial, taxation and industrial policies so that small- and medium-sized privately owned businesses can get more support for development.

Currently, industries with comparative advantages, namely, the labor-intensive sectors, are mostly composed of small- and medium-sized businesses.

They have great difficulty getting basic financial services from banks or the stock market because the financial sectors still focus on big businesses and State-owned enterprises.

The small- and medium-sized businesses are also subject to inferior treatment in industry access and taxation policies to State-owned enterprises and foreign invested ventures.

It is key for the decision-makers to set up financial institutions such as regional banks or privately-invested banks catering to the needs of smaller businesses.

The government should also lift the limits on market access for private businesses, offer them favorable tax policies, and give support to private businesses to encourage technological innovation.

Under the planned economy, the government chose to develop industries in which China did not have comparative advantages. As a result, it had to control the prices of different production factors to facilitate the growth of the selected industries.

The distorting effects to the pricing mechanism have not been erased even now as the authorities are trying to implement a market economy.

Under such conditions, fair income distribution cannot be carried out in a reasonable way. Individuals and administrative departments that want to manipulate their power for profit have ample opportunity to do so.

Therefore, the authorities should try their best to establish a pricing mechanism for production factors free from administrative intervention. This is vital to the establishment of the market economy.

The author is director of the China Center for Economic Research at Peking University

(China Daily 04/16/2007 page4)