Capitalism/Democracy/Rule of Law Interactions and Implications for Entrepreneurship and Per Capita Real Gross Domestic Product Adjusted for Purchasing Power Parity

An interactive CDR index combines the degree of capitalism, democracy, and rule of law associated with a particular country. In previous work, depictions of the CDR index and its implications for gross domestic product were based on approximate trends. No formal measurements were made. This paper presents a formal measurement of the CDR index based on published country market capitalization, rankings in democracy, and rankings in corruption, taking into account the effect of interactions. Consistent with the principle of parsimony, the CDR index explains per capita real gross domestic product adjusted for purchasing power parity (G) with only three variables. We show that G is a function of the CDR index as evidence that a national policy should focus on raising a country’s CDR index, whether or not it is resource rich. Countries with a low CDR index fare poorly in wealth even when they are rich in natural resources. While the importance of capitalism, democracy, and rule of law appear to remain elusive to economically unsuccessful countries, governments do have access to the means for raising them exogenously.