Note: this article is an excerpt from a full report published on Medium, visible here. If you like this article, or to understand the context of the model, I suggest consulting the complete text!
Incentives are the primordial determinant in nearly every metric essential to the performance of economic systems. Free market systems are defined by the invisible hand theorem and the incentive of self-interest. Command systems, on the other hand, attempt to incentivize action and innovation based upon social prestige and moral requisites. Across this spectrum, government and government regulation form the basis of country-wide incentive systems.
The regulatory quality variable indexes the ability of a given government to formulate and implement the policies and regulations that promote private sector development. Regulatory quality was shown to strongly infer a similar degree of economic complexity and economic freedom. This alludes to regulatory quality as heralding a central position in the index; this is most clear in its .84 correlation with the raw index, versus .35 for growth and .48 for equity. The question must then come to the question of whether regulatory quality creates a better overall system, or whether a better overall system brings about better regulatory quality.