Contrary to the federal systems, in China western regions rich in natural resources are usually under developed areas and often have fiscal difficulties. Resources being gifts of the nature, why can they benefit the people who are luckily closest to them? This is a question of distributing the rent of natural resources.
There are three factors. First is the total amount of rent. The bigger the amount is, the more benefits can be shared by different players. The second factor is the ways of distribution, market or administrative means. The third is who are entitled to the rent. The first two factors are matters of efficiency, while the latter is a matter of justice.
1. Factors determining the total amount of rent
The first factor is about the scarce of the given resource. The more it is not substitutable, the higher is the rent. Higher-grade resources have higher rents as well. Marginal resources hardly or do not at all generate any rent until high-grade products are consumed completely.
The second is social demand. Bigger demand results in higher rent value, so it is difficult to measure. In open market conditions, competition from other suppliers increases market risks in the process of achieving rent values. Garnaut and Clunies Ross (1975, 1977) worked out an equation: estimate rent value = sales revenues of natural resources - overall cost of exploitation.
2. Ways and rights of sharing rents of natural resources
1) Distribution of market rents and rights of sharing them. When the value of rent is achieved in a market, it is shared by owners, users, and governments of different levels and local residents. The right to share the rent comes from the legally defined ownership of natural resources, and is a compensation of opportunity cost of transferring partially the ownership of natural resources. Users (usually referring to enterprises or individuals who exploit or process natural resources) obtain partially some rights through contracts to use, benefit from and handle natural resources, and share rents in the form of profit in the process of operation and management. Governments of different levels share the rents through taxation. If a government is the owner of natural resources, it can collect rents accordingly. If the exploitation and use of natural resources increase job opportunities of local residents and their income, the increased income can be regarded as their share in the rent. The revenues governments obtain from the rents and spent on local public programs increase the share of local residents. Although there is no absolute reason to support local residents to claim precedence over other people in sharing the rent, the idea is generally supported that they have more rights in view of the environment cost local people sacrifice for the exploitation and use.
2) Administrative distribution of rents
Administrative distribution of rents is achieved through strict system of prospecting, exploiting and managing mineral deposits and price control of natural resource products. In China, just to make an example, legislation such as the Constitution and “Act of Mineral Resources” first defines the their ownership, and then funding is made available from the central budget to do prospecting before organizing teams to do so by local authorities. The geological materials and results of prospecting gathered are submitted to the state without reservation. The state planning and development departments of mineral deposits make plans of exploitation according to national long- and medium-term plans and annual plans, and include them in general national plan. State-owned mines participated in exploiting and washing mineral resources which are allocated and transferred to processing enterprises.
From 1950 to 1980, the years of the industrialization strategy, the state in the form of “scissors difference” between resource products, primary products and industrial products, transferred a great deal of natural resource rent to the profits of state-owned enterprises, and further transferred them to fiscal revenues by asking enterprises to turn over profits and taxes. The state again through administrative plans allocated directly the funding to industrial departments, which satisfied national industrialization program. Twenty years after the launch of market reform in China, the administrative allocation of rent still exists. Data collected by some scholars show even after more than twenty years, 90% of the raw materials in Gansu Province are still transferred to other provinces under mandatory plans, while consumer goods have to be brought in the province at market prices because of inadequate development of the industry. The two-way loss of benefits costs Gansu as much as a few dozen billion yuan annually (Zou Lan, 1999).
3. Rent dissipation
Not all rent values can be achieved, because rent dissipation is very common in different links of using resources and distributing rent and in the action of various institutional factors. This means the loss and waste of value of natural resources. Rent distribution proper is not rent dissipation, but different ways of distribution have different stimulating effect on the efficient use of resources, therefore causing rent dissipation.
First, ownership arrangement inadequate to economic features of natural resources causes the dissipation. Under public ownership arrangement where everybody and no one is the owner, resources which can be of an exclusively owner are artificially treated as public goods. This is the origin of the tragedy of public land. The owner of state resources is not clear with the absence of a direct representative. It gives the nature of public goods to state resource and leads to rent dissipation. In the investigation, it is shown that where natural resources are found, there are enterprises of “five smalls”. It demonstrates that everybody thinks he or she is entitled to the benefits of natural resources, and this causes the waste of energy and mineral ores and environmental pollution.
Secondly, the unclear owner increases transaction cost of using resources. Although mineral resources are owned by the state, the ownership as right in rem does not have real significance in daily market transactions. In market transactions, the absence of clearly defined property rights increases contracting and implementing cost, and therefore causes rent dissipation.
Thirdly, the belief in just distribution of resources affects people’s opinions on the existing ways of distribution and therefore stimulates rent dissipation. To give an example, a distribution method which ignores the benefits of local government and residents often encourages behaviors of illegal use of resources in an inefficient way.
4. A few additional remarks to the conclusion in the third part
It is noted in the third part that resource tax is insignificant in formulating regional disparities of fiscal capacity in China. In view of historical and present factors in China, there are three more points to be put in the conclusion:
First, the conclusion does not deny the disparities between regions of different natural endowments in collecting taxes. In the terms of their tax capacity, regions of advantages of natural resources undoubtedly are stronger (only in collecting resource tax). However the existing resource tax system does not reflect their disparities in this regard.
Secondly, the conclusion does not exclude that resource rents may outflow the region of production in other forms, particularly in the forms of scissors difference between primary and industrial products. Since during the planned economy China formed a low-price policy of resource products, a great number of tax revenues are transferred through scissors difference between raw materials and manufactured goods, to developed regions where industrial goods are produced, and therefore causes reverse adjustment of regional disparities. In this sense, in the process of distributing rent of state resources, there exists non-market non-equilibrium leading to value transfer between regions and departments.
Thirdly, the conclusion does not deny the irrational arrangement of the present ownership system. Large rent dissipation is a great waste which neither benefits the government, or enterprises or individuals.