It would be a mistake if China failed to strengthen the role of the government in co-ordinating economic development and social policies, according to Nobel Prize-winning economist Joseph E. Stiglitz.

The comments by the Columbia University professor of economics come amid intense debate in the country on whether calls for the government to launch social programmes would hamper the market economy.

On the contrary, Stiglitz said in an interview with China Daily, a government that understands and performs its functions is essential for the market economy to continue its progress in a harmonious social environment backed by changes in the rural sector and domestic consumer spending.

"There is a risk of China moving from over-emphasizing the role of government to over-weakening its role," the former chief economist of the World Bank warned. "The risk is due to the naive understanding of the market economy."

Every successful example of the market economy has involved the role of the government, and it is clear that China is seeking a distinct form of the market economy, he said.

There is not one form of the market economy but many. "And governments can play an important role together with Adam Smith's invisible hand," Stiglitz said.

Smith, the 18th century Scottish economist and philosopher, is credited with laying the intellectual framework for the free market; and is famous for the expression "the invisible hand," which he used to demonstrate how self-interest guides the most efficient use of resources in a nation's economy, with public welfare coming as a by-product.

Stiglitz defined the government's role as providing public services such as education, health, pension and other social safety nets and enabling the market to function well.

He said he was glad to note that the Chinese Government has recognized the need for a transition in its role from setting growth targets in the past to building what he called an "institutional infrastructure" for a working market economy. China's 11th Five-Year Plan (2006-10) can be a major step in this transition, he said.

A market economy with Chinese characteristics emphasizes balance, including limiting disparities between urban and rural areas, between the advanced and less developed regions, between the rich and the poor, which are necessary for both social and political stability and economic progress, he said.

On China's "new socialist countryside" programme, he said, by preventing the urban-rural income gap from growing wider and providing farmers with basic welfare coverage, the initiative will be conducive to not just harmonious social relations, but also healthy growth in domestic demand.

He said the programme should offer a comprehensive cure for the problems in rural areas, which includes improving farming productivity, helping farmers increase income and strengthening medical and educational systems.

"Meanwhile, rural migrants to the cities should also be on top of the government agenda," Stiglitz said.

He added that occupational training, housing and education for their children should be included in the government package of social policies.

On the Sino-US trade surplus, Stiglitz said China has been engaged in what might be called vendor finance providing manufactured goods to the US and, at the same time, lending billions of dollars to the US (in form of buying US treasury bonds) to finance the purchases.

"Does it not make even more sense for China to provide vendor finance to support its own people or investment that the country needs to sustain its own growth?" Stiglitz asked.

He said "it is imperative" that new investment projects be carefully chosen, that funds for purchases of housing or consumer durables are provided at levels commensurate with individuals' ability to repay, and there is a legal framework and a credit culture that ensures that money lent is repaid.

He said China's growth has been largely based on exports and foreign direct investment, but since it may be difficult to sustain the pace of export growth, it should encourage domestic consumption.

The key to boosting consumption is for China to improve its social security coverage so that people are confident about spending, he said.

(China Daily 03/21/2006 page1)