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Although joining the WTO will most likely accelerate China’s restructuring and liberalization, its ongoing transition to a market economy owes much of its success to market-enhancing federalism—the idea that fiscal decentralization gives local governments the incentive to improve regulatory and operating environments for both public and private enterprises. The progress of China’s transition to a market economy can be assessed by how well its program of increased federalism and private ownership has affected business productivity. While privatization has been an important contributor, the shift toward federalism has been less recognized as a success factor of the Chinese reform program.
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