We view economic environment, as how a government exercises its power in the management of social and economic resources for the region’s development. It is the ability of local governments to provide the social, physical and institutional infrastructure that forms the enabling environment for the overall growth and development of households and industries. The Economic Environment Index (EEI) that we are proposing is essentially a measure of this enabling environment provided by the local bodies for private enterprise and households. It is a comparative measure of the government influenced conditions under which the private enterprise and households (which affect business environment) operate. EEI that is constructed here is based on both objective data and survey data of users/stakeholders experience.

Good infrastructure facilitates access to factor and product markets, thereby raising productivity and profitability. Accordingly, both domestic and foreign businesses are attracted to areas with adequate roads, ports and telecommunication facilities as indicated in several studies (Ghosh & De (1998), Fan & Zhang(2004) and Demurger (2001)). Also, quality infrastructure services significantly affect a firm’s profitability via reduction in production costs and ability to reach wider markets. Infrastructure is also an outcome measure of governance and reflects effectiveness of policies and implementation. For our purpose, physical infrastructure is primarily measured by provision of roads, electricity, water and telecommunication. We have taken several indicators that measure its reach/access and more importantly, the quality of these services.

• Per capita length of the road
• Average road density – roads per square kilometer
• Average Time taken to travel a particular distance (25 kilometers)
• Percentage of villages connected through power network
• Number of hours of electricity supplied everyday
• Quality of electricity supply
• Percentage of village connected with telephone network
• Duration of tap water supply
• Quality of water supply
• Time taken to get telephone repair

Social infrastructure is about providing basic support, particularly healthcare and educational facilities and is essential for creating quality manpower. The social infrastructure sub-index captures health and educational infrastructure and services in a district. To construct this sub-index, outcome variables such as literacy rates, learning outcomes of school children, and infant mortality rate as well as access to these facilities have been considered. However, some input variables have also been included. This is because looking only at outcome variables ignores the fact that similar effort and expenditure might get different results in different scenarios. By including only outcome variables, there is a risk of over- or underestimating the efforts of local government.

• Education
  • Teacher pupil ratio
  • Percentage of Children out of school
  • Literacy rate
  • Percentage of children(STD 3 to 5) who can read
  • Percentage of children(STD 3 to 5) who can do subtraction
• Health
  • Per capita availability of hospitals
  • Population per bed ratio
  • Percentage of population with at least 5 KM of distance from nearest PHC
  • Population per Doctor
  • How often public health centers are closed
  • How often staff is available in public health centers
  • Infant mortality rate

Good Governance and a Regulatory environment are two of the major factors influencing investment decisions and investment climate. Good governance institutions are viewed as reducing uncertainty, as well as the cost of doing business. Good regulatory environment is also important to reduce compliance costs. A conducive regulatory environment implies that local governments have a positive attitude towards businesses.

Governance is perhaps the most complex dimension of the Economic Environment Index. It is possible to argue that governance includes all the other dimensions of our Economic Environment Index. Here it has been used in relatively narrower sense. Under the group of governance we are trying to capture the efficiency with which local government bodies provide public goods and services, as well as their accountability and their transparency. Apart from the crucial social services-education and health it is also important to assess how efficiently they provide identity documents (birth certificate, driving license, ration card, etc.) that act as basic prerequisites for availing government run schemes. Indicators that capture the transparency and accountability of local institutions have also been included. Since there is no clear indicator to capture concepts like transparency and accountability, proxy indicators have been used. Though they do not capture these concepts completely, they do shed some light on these relatively unmeasured aspects of governance.

• Instances of extra-legal payments made in obtaining identity documents
• Rating of the process of obtaining identity documents
• Rating of electricity connection obtaining process
• General awareness level of social schemes and services
• Percentage of people aware of public grievance system
• Rating of transparency of procedures (information available about contract procurement procedure, criteria and decision)
• Rating of public grievance system
• How many days it takes to get electricity connection
• Telephone connection time

Strong and effective law and order guarantee the security of foreign and domestic investments. They also create many positive externalities for productivity and growth. Availability of legal institutions to settle disputes is an important business consideration and ensures proper enforcement of different contracts and obligations, while ensuring safety and enabling environment for households and individuals. The law and order sub-index captures the availability and efficiency of law enforcing institutions and personnel and the users’ experience/perception about law and order.

• Cases pending in district courts
• Cases pending for Police investigation
• Per capita availability of police personnel
• Area per police station
• Perception on the accessibility of law and enforcement agencies
• Perception of law and order as being conducive for business
• Percentage change in property crime (2006 to 2007)
• Perceived problems in legal system and conflict resolution

Unregulated growth of industry can lead to degradation of the local environment and this poses serious risks – short-term and long-term – for the local populace. It is important to measure the environmental sustainability of the region to make a meaningful analysis and to ensure that the governance programmes are sustainable over the long run and are least risky to the population. Parameters such as forest-cover, water-table, waste disposal and sanitation form important part of this sub-index. Most of these variables being stock variables, the sub-index captures changes in these variables over a time period. Here we are heavily relying on established data centers rather than survey generated data.

• Change in forest cover
• Depth of water table
• Grazing to total land
• Population Density Per sq. km
• Population Growth

Business establishment and regulatory compliance cost aims to capture the kinds of costs that one has to incur while starting a new business. It includes time taken to register a new business, number of licenses required, time taken to acquire land etc. Though there is not much difference in the de-jure regulatory compliance cost across districts, the indirect costs involved such manpower hours needed, loss due to delay and cost of acquisition of land vary significantly from district to district. The indicators selected here have been primarily based on VNCI Provincial Competitiveness Index and Cost of Doing Business Index developed by World Bank.

• Months waited to startup business
• Number of licenses and permits required to start operation
• Ease of procedure to get information on how to acquire operating licenses and on kinds of permits and stamps required for business
• Rating of land title acquisition process
• Electricity connection cost
• Telephone connection cost
• How difficult is to access finance and the cost of finance in operation and growth of business
• How difficult is it to obtain business licensing and permits in operation and growth of business

The cost of doing business – after establishment – is one of the significant factors for any investment decision and like Business Establishment and Regulatory Compliance Costs, it differs from one district to another mainly due to different informal charges and the losses incurred due to poor quality infrastructure and manpower issues.

• Percentage of firms requiring electricity backup
• How important is electricity back up for core business
• Firms / Business in this district are aware of 'additional informal payment' to be paid to district authorities
• Firms’ own experience in making extra-legal payments for any purposes.