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Abstract

This article tests the proposition that changes in how society allocates the rewards of entrepreneurship towards either productive or unproductive activities corresponds to cross-country rule variations. The proposition is directly relevant to China’s growth policy of pragmatism and its underlying principle that it is not the choice of economic system that matters, but whether or not it works. A pragmatic approach has allowed policy makers adapt and respond to on-the-ground conditions. A potential shortcoming of such flexibility is that it lacks clear guidance on the allocation of rewards. This is illustrated using a natural experiment of China’s overseas banks since 1949. This focuses on the removal of ethical restrictions on market participation that existed from 1949–78. This freed state-owned banks to engage in commercial and speculative lending, but it also went hand-in-hand with an alarming deterioration in banking practices and a substantial misallocation of state resources. This indicates that it rule variations not internationalisation or the supply of entrepreneurship that leads to deterioration and corrupt practices.