Political Insecurity and the Diffusion of Financial Market Regulation

Explanations for the international spread of financial market liberalization have emphasized either “top-down†mechanisms (globalization, pressure from international organizations and the United States) or “bottom-up†mechanisms focusing on domestic coalitions (derived from configurations of economic interests). In contrast to these broadly structural approaches that deemphasize the choices of individuals, this article focuses on the micro-mechanisms of diffusion by emphasizing the incentives facing office-seeking leaders. It argues that politically insecure leaders are potent agents of diffusion because they are particularly likely to “learn†the lessons of financial market reformand emulate the liberalizing practices of others for two reasons. First, the hefty economic boom often associated with financial liberalization provides a tempting way to buttress their near-term grip on power. As they observe other nations in their region experiencing a boom, leaders fearful of losing office will jump on the liberalization bandwagon, accelerating regional reform cascades. Second, insecure governments may be particularly susceptible to pressure from international organizations: They have motivated biases to believe the efficiency claims of liberalizers and strong reasons to seek approval for their policies.