TVE and the Economic Environment

In almost all of the literature about China’s economic transition, the most frequently mentioned term is perhaps ‘market environment’ or ‘economic environment’. A feature of the literature is that it almost always assumes that the market environment is an exogenous variable, although there is very little theoretical discussion of how such variables might be observed. In terms of empirical studies, the most systematic attempt at quantitative research on the market environment is captured in the ‘Index of Marketization of China’—including both national and provincial indexes—constructed by the National Economic Research Institute (NERI) of the China Reform Foundation (CRF) (zhongguojingjigaigeyanjiuhui, 中国经济改革研究基金会). The NERI marketization index of China and other similar indexes share a similar goal, which is to track and measure the process of marketization in China and its regions (Fan, Wang and Zhu 2011); more specifically, it regards the activities of China’s private sector as the standard measurement by which to evaluate the market system. When the institutional environment is seen to favour the private sector or enhances the performance of the private sector, the index is closer to its optimal value; and vice versa.