_30_ _Ways Out of Povertv - Diffusing Best_<sup>_Practices and Creating Capabilites_</sup> supports risk-taking in the productive<sup>sectors.The "NewSwedish Model",whether we</sup> call it "capitalism with a heart" or<sup>"socialism with a head" appearsto be the mainavenue</sup> ahead.

**Partial and heterodox** reform.<sup>The question remains how good governancein society</sup> at large arises and what can be done<sup>to promoteit.A critical point is that we do not know</sup> how to engineer good governance. It<sup>is perfectlypossible and plausiblethat pure chance</sup> and luck play a large role in the creation<sup>of successfulsocieties.65Itisequally clearthat</sup> highly incomplete reforms have to<sup>be sufficientfor growthto take off.Otherwise no</sup> country could ever have developed.<sup>For example, countrieslike Bangladeshor China</sup> have seen progress, admittedly of<sup>varying degrees,by pursuing only partial reforms and</sup> despite continuing and pervasive governance<sup>issues.It is alsoclear that many successful</sup> countries have pursued policy mixes<sup>that appear "heterodox",like Japan, Korea,China or</sup> Vietnam. Others have successfully<sup>pursued relatively"orthodox" policieslikeChileand</sup> El Salvador, again with success of<sup>varyingdegrees.But partial reform and heterodox</sup> policy may equally be associated with<sup>arrested developmentasin the case of countries</sup> that unsuccessfully pursued import<sup>substitution.Likewisea heavy dose of orthodoxy has</sup> not by itself helped some countries,<sup>for example in Latin America, to grow rapidly.</sup>

**Creative destruction.** Also successful<sup>developmentmay requiredestructionof vested</sup> interests, i.e. some form of revolution.<sup>66It can thus be quite disruptivefor sometime</sup> with unavoidable winners and losers.<sup>Arguably Germany,Japan, Korea and Taiwan all</sup> benefited to some degree from the disruption<sup>of war andfrom policies in part imposed by</sup> the United States after World War<sup>II.It remains unclear how much disruption is</sup> unavoidable and how much disruption is excessive.

**Competition among jurisdictions.**<sup>Given the uncertainty about the exact mix of</sup> reforms and institutional change that<sup>makesfor successful development,it must surely be</sup> valuable to allow experimentation<sup>with differentmixes of institutional and governance</sup> reform. The reason we have advanced<sup>economiestoday is the industrialrevolutionthat</sup> came out of Europe. Competition<sup>amongsquabbling Europeanstatesand principalities</sup> led to the world's growth miracle,<sup>the "European Miracle"as historian EdwinJones</sup> called it.<sup>67</sup> China, the previously<sup>moreadvanced nation was left behind,however, as</sup> central control and the domination of<sup>mandarinsover merchantsarrested development.</sup>

So for the development of good governance<sup>a selectionmechanismisalsoimportant,</sup> namely competition among nations,<sup>or moregenerally among various typesof</sup> jurisdictions - across states or within,<sup>for example, federalsystems.Both for the firm</sup> and the government, a symbiosis of<sup>competition and rule-based co-operationseems</sup> required for complex societies to emerge<sup>and to allowtheir citizensto prosper.</sup> To sum up, effective wealth creation<sup>requirescapable institutions.A complex symbiosis</sup> of competition and co-operation on<sup>the basis of acceptedrules characterizessuccessful</sup>

> **65** Easterly, 2001. **6** Olson, 2000. **67** Jones, 1987.