China is facing a problem which has an opposite target to that of federal countries, i.e. how to encourage rather than constrain resource-rich western provinces to benefit more from their natural endowments. It already implies the need of reform in many aspects such as ownership of natural resources, use and rent distribution, pricing, taxation and general transfer payment. In a mature market economy, since the ownership, rent distribution and pricing systems are relatively complete, it does not have much experience to offer for us.
Problems in the policies of developing natural resources in China are many folded. Ownership obscurity leads to “the tragedy of public land”. Price distortions still exist, while there are no clear rule to levy taxes on natural resources. A stable and generally accepted distribution formula is absent to guide local residents, enterprises, municipalities, provinces and the central government to share revenues from natural resources.
Many western provinces have the advantages to develop resource industries. Under a rational ownership arrangement, pricing mechanisms and taxation system, efficient development of these resources will help local economic growth, and distribution of basic revenues between the central and local governments. In distributing rents of resources, a stable and appropriate share will enable local governments to reserve for financing development, as well as reduce the transfer payment of the central to poor provinces. It will also encourage local governments to participate in developing resources cooperatively and reduce political friction in distributing revenues.