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ECONOMIC GOVERNANCE INDEX

Sharing good practices and lessons

Bangladesh's first District Economic Governance Index (2010 EGI) is a partnership between The Asia Foundation and the Bangladesh Investment Climate Fund (BICF)
IF the government offices do not have copies of laws, regulations or circulars then how will they help us? And where would we seek help in solving our problems?” This expression of exasperation from a poultry farm owner in Rajshahi illustrates the frustration that many local business owners feel about not receiving the services and support that they expect from their local authorities.
Governments at all levels can help or hinder private sector development and economic growth through their policies and actions. They can help by improving the business climate — pursuing business-friendly policies, removing unnecessary regulations, creating business-supportive infrastructure, and providing quality public services in adequate quantities and in a timely manner. They can also hinder private sector development by not being responsive to the practical needs of the business community in terms of policies and provision of quality public goods and services.
In Bangladesh, a dynamic and healthy private sector is essential for long-term economic development. As in many developing countries, the private sector, particularly micro, small and medium enterprises (MSMEs), represents a dominant source of employment and, therefore, of poverty reduction for the population. Unfortunately, the private sector is often severely limited in its ability to grow and create jobs because of institutional barriers and constraints. Although national level policies and decisions are crucial to the country's overall economic environment, the decisions and actions taken at the subnational level also play an important role in shaping the business environments for MSMEs. In Bangladesh, government agencies at the upazila (sub-district) and district level are the principal public interface for small business operating at local levels. Their capacity and willingness to respond to the demands of the local private sector can vary tremendously from one district to another. Accordingly, it is important to better understand how businesses interact with government at the local level and how the quality of local governance varies among districts.
This first edition of Bangladesh EGI covers 19 districts, ranking them on the quality of their enabling environment for private enterprises.
The economic governance subindices that underlie the overall EGI indicate particular strengths and weaknesses within each district. The EGI thus serves as a useful guide for local officials, the private sector, and other stakeholders to compare the performance of their area with that of other localities, and identify the strengths and weaknesses of their respective business environments. The public sector can then use the EGI as a practical tool to map out an actionable policy agenda, in consultation with the pri-
vate sector.
In-depth analyses of the overall EGI results and the various sub-indices in different districts will be carried out by District Public-Private Dialogue (DPPD) fora that are being established and strengthened through the Local Economic Governance Programme — Enhancing the Sustainability and Stakeholder Ownership of Investment Climate Reforms in Bangladesh --implemented by The Asia Foundation with BICF funding and partnership. EGI: Design and Methodology Composite Index of Ten Sub-Indices
The Bangladesh Economic Governance Index (EGI 2010) is a composite index measuring the economic governance of 19 districts and ranking them against each other based on a 100-point scale. Like other Economic Governance Indices conducted in Vietnam, Indonesia, Cambodia and Sri Lanka, the Bangladesh EGI is composed of 10 sub-indices— developed from the academic literature on economic transition and growth — that capture the key elements of the local business environment that can be influenced by district regulations and public service delivery.
The EGI scores for each sub-index are generated from a combination of "soft data” from survey questions posed to
local business owners and “hard data” collected from government sources and other published materials.
These data are grouped into 10 broad sub-indices (categories), which are then assessed on a comparable 1-10 point scale. Added together, these 10 subindices create an un-weighted 100-point overall score for economic governance. To acknowledge the fact that some subindices are more important than others and to make it more relevant and useful to policymakers, weights are statistically determined for each sub-index. This weighting is based on the correlation of each sub-index with a question on firms' plans to expand. The sub-indices that are most strongly and significantly with positive responses are given greater weight. The overall score is then recalculated to obtain a final weighted index.
Choosing the 19 EGI Districts
The 2010 BEGI covered the headquarters of 19 districts throughout the country, including four districts where BIFC and The Asia Foundation currently implement activities and facilitate Public-Private Dialogues — Barisal, Bogra, Rajshahi and Sylhet.
The other districts were selected to ensure that the survey would cover the 19 district headquarters, which are the largest urban centres in the country. The
survey was conducted mainly in the city corporation or municipal area in each of the district headquarters and within a three-kilometre radius around the city.
The 2010 EGI Rankings: Explanation and Analysis Overall Rankings
Figure 1 presents the overall results of the 2010 BEGI. This is the sum of the district scores on all 10 weighed subindices. Since 10 points are possible for each sub-index and the sub-index weightings add up to 100, the final rankings are on a 100-point scale. To achieve a perfect score, a district would need to have the highest score on each subindex. Faridpur, Dinajpur and Kushtia are top-ranked and can be considered as the best performing districts in Bangladesh in terms of business environment.
The rankings are relative and based on the best practices in Bangladesh, not against an arbitrary, external or idealised standard. In addition, since districts can receive similar scores (often within 1 point), it is more useful to interpret the results in terms of "tiers” rather than just the standard rankings. These tiers are created from the natural “breaks” in the overall index based on point scores.
Consistency in Rankings
As noted, within the overall rankings there are distinct tiers. The results suggest that the districts on these tiers are performing consistently across the majority of sub-indices. They are ranked with the highest scorer at the top and the lowest at the bottom and broken into 4 quartiles. The consistent top performers were Faridpur, Dinajpur and Kushtia. These three districts constituted approximately 16 percent of the districts surveyed, but accounted for 42 percent of the places in the top quartiles and only 0.25 percent of the places in the bottom quartiles.
The Special Case of Dhaka
Among the high and low performers, the capital city of Dhaka represents a special case. Dhaka ranks a relatively low 16 on the unweighted index. However, on the final weighted index, Dhaka ranks 10th. The primary reason for this result is that Dhaka scored relatively well on the most highly weighted sub-indices in the overall weighted index. For example, Dhaka scored in the top quartile of districts on the law and order sub-index, which accounted for 15 percent of the weighted overall subindex. It also scored in the second quartile on transparency, which accounted for 12.5 percent of the weighted index, and dispute resolution and land access, each of which accounted for 10.5 percent of the index. On the other hand, many of its lowest scores were on low-weighted subindices such as entry costs (5.5 percent of weighted index) and participation (2.5 percent of weighted index).
Dhaka did score poorly on two important and heavily weighted subindices — infrastructure (10.5 percent of weighted index) and informal charges (15 percent of weighted index). To some extent the infrastructure sub-index ranking is a direct result of Dhaka's urbanisation and population density. As the largest city in Bangladesh, and the centre of economic and political activity in the country, it has the greatest infrastructure needs and faces enormous challenges in meeting them. This problem extends to other large cities in Bangladesh as well, as evidenced by the similarly low rankings obtained by Chittagong and Khulna on the Infrastructure sub-index.
However, Dhaka's poor informal charges sub-index score cannot be explained by urbanisation alone, indicating that governance issues are at the heart of Dhaka's low ranking. Indeed, approximately 76 percent of firms in Dhaka, the most of any district, reported having to pay bribes in their line of work.
The EGI as a Tool for Reflection
The EGI index ranking is meant to inspire the desire for improvement and act as a practical tool for officials to use in developing an actionable policy agenda in consultation with the private sector.
EGI as a Tool for Policy Reforms
By focusing on economic governance, the EGI emphasises policies, initiatives, and performance of the district authorities, thus setting the stage for needed adjustments and reforms. An important function of EGI is to serve as a policy analysis tool for national and sub-national governments to help diagnose and address economic governance. As mentioned previously, the EGI is a useful tool for local officials and business people to compare the performance of their district to the performance of other districts.
Another useful EGI application is the identification and dissemination of practical examples of best practices at the district level. By identifying the best performing districts in key economic governance areas, the EGI offers an opportunity to identify initiatives and potentially applicable best practices that may be implemented in their own districts.
Building Public-Private Coalitions for Improved Competitiveness
Studies conducted by The Asia Foundation on the sub-national business environment reveal that most affected enterprises tend to take economic governance constraints as a given, seek little assistance from local government officials or other actors, and do not initiate opportunities to engage with these officials. A principal aim of the EGI is to help build broader stakeholder support for policy reform using the EGI's empirical information on the business environment at the subnational level. District-level dialogues can provide the platform for the private and public sectors to raise issues, identify solutions, prioritise areas of reform, disseminate information, and determine and implement a series of practical interventions for an improved business environment.
The EGI can play a catalytic role in fostering a more open and constructive relationship between the public and the private sector, at the district level through the following suggested steps:
l.Developing a culture of dialogue and participation among the private sector, public authorities and civil society;
2 .Using the EGI to set local priorities based on the strengths and weaknesses of each district;
3 .Conducting in-depth diagnostics of priority areas and identifying problems;
4 .Setting key recommendations and action plans to implement these recommendations;
5.1dentifying and learning from other districts' best practices; and
6.Broadening dialogue and ensuring information dissemination.
The EGI can also be used at the national level to foster beneficial change by:
1.Streamlining the regulatory process and disseminating clear information on the regulatory environment and ongoing reform processes;
2. Ensuring that national level policies and reforms are adapted to the local level and then understood and implemented;
3.Strengthening linkages between national and the sub-national levels for increased transparency and efficiency; and
4.1mproving interaction among the different levels of government for a better coordination of policy reforms that benefit a large portion of the country's business community.
This is an abridged version of the Bangladesh Economic Governance Index report launched yesterday.