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This article makes a conceptual and theoretical contribution to the study of diffusion. The authors suggest that the concept of diffusion be reserved for processes (not outcomes)characterized by a certain uncoordinated interdependence. Theoretically, the authors identify the principal sources of clustered policy reforms. They then clarify the characteristics specific to diffusion mechanisms and introduce a categorization of such processes. In particular, they make a distinction between two types of diffusion: adaptation and learning. They argue that this categorization adds conceptual clarity and distinguishes mechanisms with distinct substantive consequences.
Keywords: diffusion; clustering; convergence; policy reform; adaptation; learning; cluster decision making.

One of the most important developments over the past three decades has been the spread of liberal economic ideas and policies throughout the world. These policies have affected the lives of millions of people, and yet our most sophisticated political economy models do not adequately capture influences on these policy choices. Evidence suggests that the adoption of liberal economic practices is highly clustered both temporally and spatially. We hypothesize this clustering might be due to processes of policy diffusion. We think of diffusion as resulting from one of two broad sets of forces: one in which mounting adoptions of a policy alter the benefits of adopting for others, and another in which adoptions provide policy relevant information about the benefits of adopting. We develop arguments within these broad classes of mechanisms, construct appropriate measures of the relevant concepts, and test their effects on liberalization and restriction of the current account, the capital account, and the exchange rate regime. Our findings suggest that domestic models of foreign economic policymaking are insufficient. The evidence shows that policy transitions are influenced by international economic competition as well as the policies of a country?s socio–cultural peers. We interpret this latter influence as a form of channeled learning reflecting governments? search for appropriate models for economic policy.

One of the most important developments over the past three decades has been the spread of liberal economic ideas and policies throughout the world. These policies have affected the lives of millions of people, yet our most sophisticated political economy models do not adequately capture influences on these policy choices. Evidence suggests that the adoption of liberal economic practices is highly clustered both temporally and spatially. We hypothesize that this clustering might be due to processes of policy diffusion. We think of diffusion as resulting from one of two broad sets of forces: one in which mounting adoptions of a policy alter the benefits of adopting for others and another in which adoptions provide policy relevant information about the benefits of adopting. We develop arguments within these broad classes of mechanisms, construct appropriate measures of the relevant concepts, and test their effects on liberalization and restriction of the current account, the capital account, and the exchange rate regime. Our findings suggest that domestic models of foreign economic policy making are insufficient. The evidence shows that policy transitions are influenced by international economic competition as well as the policies of a country's sociocultural peers. We interpret the latter influence as a form of channeled learning reflecting governments' search for appropriate models for economic policy.

The process of globalization has been made possible by a series of technological, institutional, and policy changes over the course of the last several decades. As the introduction to this project suggests, governments have often made conscious policy adjustments in the face of innovations perceived as advantageous by competitors, new ideas of policy success, and sometimes as the result of explicit or implicit political pressures from powerful governments or international institutions.

A very important part of this process involves government choices to alter the international legal structure in which economic transactions take place. The most salient accomplishments in the development of an international legal structure to further economic liberalization has clearly been in the trade of goods and services, where the World Trade Organization commands a focal presence. In the monetary and exchange rate area, a growing number of governments have committed themselves through Article VIII of the International Monetary Fund?s Articles of Agreement to keep their current accounts free from restrictions, assuring traders and lenders that hard currencies will be made available to pay for imports and service international debts.

Interestingly, there has been very little multilateral development of the legal rules surrounding international investment, and in particular foreign direct investment (FDI). Nevertheless, such investment has grown substantially over the past several decades. According to the United Nations, total foreign direct investment inflows peaked at about 1,450 billion in 2000, before falling back to $735.1 billion in 2001. The growth in global FDI has far outstripped both world GDP and world trade growth. But direct investments are highly skewed geographically: developed countries account for over 93 per cent of outflows and 68 percent of inflows, and these shares have not changed too drastically over the past decade.

The primary legal innovation in the area of foreign direct investment in the post–world war two period has been the proliferation of bilateral agreements that seek to make explicit the contractual arrangements under which a firm invests in a local jurisdiction. Bilateral investment Treaties (BITs) are defined as an agreement establishing the terms and conditions for private investment by nationals and companies of one country in the jurisdiction of another. They are negotiated between governments precisely to create a legal environment to encourage foreign direct investment, typically in those jurisdictions that find it difficult to credibly commit to treat foreign capital in ways that are perceived by investors as transparent, fair, and predictable. These agreements are a way to tie the hands of the host country by agreeing to a wide range of pro–investor terms. By surrendering part of its legal sovereignty – notably the right to use its own courts to adjudicate any disagreements that may arise from a contract to invest – developing countries hope to convince foreign firms that their investments will be safe and sound.

As such, BITs should be understood as a part of the broader neo–liberal project to encourage the free flow of goods, services, capital, and ideas across national borders. They typically include provisions requiring investing nationals of the BIT partner to be treated as well as national firms or as well as the most favored foreign firms (MFN treatment); establish limits on expropriations of investments and require compensation when it occurs; and guarantee investors? right to transfer funds into and out of the country using a market rate of exchange. Sometimes these agreements also explicitly prohibit "performance requirements" on the part of foreign investors, though such clauses are more typically found in US rather than European agreements. Thus, we view these agreements as consistent with the market–oriented trend the editors of this volume have identified.

This article seeks to explain why BITs have proliferated over time. The popularity of BITs is puzzling when contrasted with the collective resistance developing countries have shown toward pro–investment principles under customary international law. Our central contention is that bilateral investment treaties intensify the inter–state competition for foreign investment. Because signing a BIT gives a state an advantage in this competition we expect the probability of acceptance of a BIT by a state to increase when rival states sign such a treaty. The model we have in mind is squarely consistent with the competitive models laid out in the introductory chapter to this project.

The article is organized as follows. The first section describes the BITs terrain in some detail: the history, rationale, and spread of these bilateral arrangements over time. The second section presents a model of competition for investment that could lead to the pattern of treaty diffusion we observe. In this model, one country exogenously "breaks ranks" and agrees to investors terms in order to enjoy the benefits of investment inflows. While competitors may not have preferred to do so, BITs effectively create a negative externality by presenting the prospect of diverting capital to hosts who agree to BITs. One obvious way to mitigate this outcome is to enter into a BIT as well. We entertain the possibility of more sociological explanations which may be plausible in explaining some investment treaties witnessed in more recent years.

The third section reviews the evidence of competitive diffusion. Competitive pressures for BIT proliferation are consistent with the data, but even some of the non–diffusion influences on the pattern of BITs suggest the broader reputational story we develop is apt. While socialization influences appears to be present in recent years, the most important explanations for the growing web of bilateral arrangements are those that postulate rational responses to the globalization of capital.

One of the most important developments over the past three decades has been the spread of liberal economic ideas and policies throughout the world. These policies have affected the lives of millions of people, yet our most sophisticated political economy models do not both temporally and spatially. We hypothesize that this clustering might be due to processes of policy diffusion. We think of diffusion as adequately capture influences on these policy choices. Evidence suggests that the adoption of liberal economic practices is highly clustered resulting from one of two broad sets of forces: one in which mounting adoptions of a policy alter the benefits of adopting for others and another in which adoptions provide policy relevant information about the benefits of adopting. We develop arguments within these broad classes of mechanisms, construct appropriate measures of the relevant concepts, and test their effects on liberalization and restriction of the current account, the capital account, and the exchange rate regime. Our findings suggest that domestic models of foreign economic policy making are insufficient. The evidence shows that policy transitions are influenced by international economic competition as well as the policies of a country's sociocultural peers. We interpret the latter influence as a form of channeled learning reflecting governments' search for appropriate models for economic policy.

No idea is more enticing to policymakers and academics alike than the proposition that economic interdependence encourages peaceful international relations. Policymakers are gratified that trade is a policy lever that governments can influence. Academics are encouraged by the (relative) ease of constructing long time series of bilateral cross–border transactions in goods for most countries. On top of this, economists tell us trade is economically efficient. Policymakers, scholars, and consumers should all be thrilled that trade and peace are robustly correlated.

This is why it is essential to submit the pax mercatoria hypothesis to severe scrutiny, both methodologically and theoretically. This chapter does the latter and focuses on one particular theoretical issue to which few scholars have given serious attention: what is the theory of the state that provides a plausible mechanism linking private trade to public conflict behavior? The first section argues that this question deserves attention. The second section outlines three general approaches to state–society relations and discusses the implications of these for empirical research. The third section concludes and calls for research that includes more meaningful tests, informed by more explicit theories of state–society relations.

Why should governments delegate decision–making authority over territorial issues to an international institution? This study argues that governments are motivated to reach territorial solutions to reduce the opportunity costs associated with a festering dispute. The evidence suggests that domestic political incapacity to negotiate concessions is associated with a commitment to arbitrate. Compliance is a function of the net costs and benefits involved in accepting the arbitral decision. These costs include the loss of valuable territory, but noncompliance also exacts costs with respect to governments? reputation, both domestically and internationally. This research speaks to a broader debate about the role of international legal institutions in foreign policy making and international outcomes. It shows that governments have good reasons, under certain political and economic conditions, to use international legal processes as a substitute for domestic political decision making.

Journal of Conflict Resolution 46, no. 6 (2002): 829-856.

International institutions have become an increasingly common phenomenon of international life. The proliferation of international organizations (IOs) (Shanks et al., 1996), the growth in treaty arrangements among states (Goldstein et al., 2000) and the deepening of regional integration efforts in Europe all represent formal expressions of the extent to which international politics has become more institutionalized.

The scholarship on international institutions has burgeoned in response. Moreover, in the past decade, theories devoted to understanding why institutions exist, how they have functioned and what effects they have on world politics have become increasingly refined and the methods employed in empirical work more sophisticated. The purpose of this chapter is to draw together this divergent literature, to offer observations on the development of its various theoretical strands and to examine progress on the empirical front. We predict that a broad range of theoretical traditions – realist, rational functionalist, constructivist – will exist alongside one another for many years to come, and offer some suggestions on research strategies that might contribute to a better empirical base from which to judge more abstract claims.

This paper seeks to understand the factors that cause disputes at the World Trade Organization to move from the negotiation stage to the panel stage. We hypothesize that transfer payments between states are costly to arrange and that the lowest–cost transfers are those that relate directly to the issue in dispute. This implies that when the subject matter of the dispute has an all–or–nothing character and leaves little room for compromise (for example, health and safety regulations), the parties? ability to reach an agreement through the use of transfers is restricted. In contrast, if the subject matter of dispute permits greater flexibility (for example, tariff rates), the parties can more easily structure appropriate transfer payments through adjustments to the disputed variable. We conduct an empirical test of this hypothesis, finding support for it among democratic states.

International borders are usefully conceptualized as international political institutions that provide joint gains for the polities whose jurisdictions they distinguish. Far from irrelevant in an age of globalization, settled political borders help to make economic integration possible. But the international relations literature that focuses on territorial disputes has put too much emphasis on territory per se and far too little on the institutions of boundary settlement that produce joint gains. Students of international politics have cast the issues relating to territorial settlement in overly zero–sum terms, and may very well be missing an important impetus to conflict resolution in many cases. This paper shows empirically for the case of Latin America that territorial and border disputes entail opportunity costs (operationalized here as bilateral trade foregone). Mutually accepted borders mitigate these costs by reducing uncertainty, transactions costs, and other bilateral externalities of disputing. Theories of territorial settlement should take into account the possibility of such joint gains in their models of state dispute behavior.

This research note presents evidence on the conditions that influence governments? decisions to commit themselves to international human rights regimes. Are governments pressured by powerful state actors to make such commitments, as some realists have suggested? Or rather do governments to cede the right to review internal rights policies to external authorities as the result of socialization through persuasion? What role do domestic political conditions and institutions play? This research note offers empirical evidence that addresses these issues. Using global data relating to the six "core" UN human rights treaties, I find the strongest evidence of external socialization, although governments presiding over common law legal systems tend to resist formalizing their rights commitments in external treaty form. There is little evidence of democratic "lock–in" using these data, although this remains a persuasive interpretation of the origins of the European human rights regime.

My primary focus is on the mechanisms that drive regulatory harmonization in international finance. Just as we would like to know whether firms have arrived at similar prices for a good through collusion or competition, we want to know whether harmonization occurs through political or market pressures. My argument also informs a discussion about whether international institutions will play a role in the process of harmonization, and if so, what that role will be. In short, the dependent variable of this study is primarily harmonization processes. By focusing on process mechanisms, I provide a theoretical and practical explanation of the relative roles of market incentives, political pressure, and multilateral institutions in the coordination of regulatory policies.

In Dinah Shelton (ed.) Commitment and Compliance: The Role of Non–binding Norms in the International Legal System. Oxford University Press, 2000, 244–263

The explosion of international financial activity over the last decade has been a central fact of international economic life. Balance of payments statistics indicate that cross–border transactions in bonds and equities for the G–9 states rose from less than 10 percent of gross domestic product in 1980 to over 140 percent in 1995. International bond markets have reached staggering proportions: by the end of 1995, some US$2.803 trillion of international debt securities were outstanding worldwide. Capital flows to developing countries and countries in transition grew from US$57 billion in 1990 to over US$211 billion in 1995. Foreign lending in form of international syndicated credit facilities has surged since the 1980s, to over US$320 billion at the end of 1995. Foreign exchange transactions – which represent the world?s largest market – reached an estimated average daily turnover of nearly US$1.2 trillion in 1995 compared to US$590 billion daily turnover in 1989.

The explosion of international financial activity over the last decade has been a central fact of international economic life. Balance of payments statistics indicate that cross–border transactions in bonds and equities for the G–7 states rose from less than 10 percent of gross domestic product in 1980 to over 140 percent in 1995. International bond markets have reached staggering proportions: by the end of 1995, some US$ 2.803 trillion of international debt securities were outstanding worldwide. Capital flows to developing countries and countries in transition grew from US$ 7 billion in 1990 to over US$ 211 billion in 1995. Foreign lending in the form of international syndicated credit facilities has surged since the 1980s, to over US$ 320 billion at the end of 1995. Foreign exchange transactions – which represent the world's largest market – reached an estimated average daily turnover of nearly US$ 1.2 trillion in 1995 compared to US$ 590 billion daily turnover in 1989...
Money laundering cannot be handled effectively on a unilateral or bilateral basis. Significantly different rules across jurisdictions invite "forum shopping," the shifting of business to countries with weaker controls. When the United States passed the Bank Secrecy Act of 1970, tightening reporting requirements for cash transactions over US$ 10,000, illicit money moved to Europe... To yield significant benefits, near–global cooperation is a virtual necessity...

Why do sovereign governments make international legal commitments, and what effect does international law have on state behavior? Very little empirical research tries to answer these questions in a systematic way. This article examines patterns of commitment to and compliance with international monetary law. I consider the signal governments try to send by committing themselves through international legal commitments, and I argue that reputational concerns explain patterns of compliance.

One of the most important findings is that governments commit to and comply with legal obligations if other countries in their region do so. Competitive market forces, rather than overt policy pressure from the International Monetary Fund, are the most likely "enforcement" mechanism. Legal commitment has an extremely positive effect on governments that have recently removed restrictive policies, which indicates a desire to reestablish a reputation for compliance.

Sovereign control over money is one of the most closely guarded national prerogatives. Creating, valuating, and controlling the distribution of national legal tender is viewed as an inherent right of a nation–state in the modern period.Yet over the course of the twentieth century, international rules of good monetary conduct have become "legalized" in the sense developed in this volume. This historic shift took place after World War II in an effort to bolster the confidence that had been shattered by the interwar monetary experience. If the interwar years taught monetary policymakers anything, it was that economic prosperity required credible exchange–rate commitments, open markets, and nondiscriminatory economic arrangements. International legalization of monetary affairs was a way to inspire private actors to once again trade and invest across national borders.

This article seeks to contribute to our understanding of international law compliance by focusing on a particular area – the public international law of money. This is a critical terrain for examining compliance with international commitments, for money has traditionally been one of the key aspects of national sovereignty. The creation, valuation, and convertibility of a state's national currency has long been considered a national legal prerogative, as well as a potent symbol of national autonomy. Yet, after World War II, governments established for the first time in history a public international law of money, which required adherents to maintain par values for their currencies, maintain a unified exchange rate regime, keep their current accounts free from restrictions, and consult on a regular basis regarding these matters. The development of these rules allows us to ask and attempt to answer questions that go to the very purposes of international law itself: Why do sovereign governments commit themselves to international rules that will bind their future behavior? Once committed, what conditions are associated with compliance? Do governments that make specific behavioral commitments behave any differently than similarly situated countries who do not commit?
The argument developed here suggests that an international legal commitment is a signaling device that governments use to convince private market actors as well as other governments of a serious intent to eschew the proscribed behavior...

Ch. 2 in John Stephens, Herbert Kitschelt, Peter Lange, and Gary Marks (eds.), Change and Continuity in Contemporary Capitalism. New York: Cambridge University Press, 1999, 36–69

The internationalization and integration of capital markets has been the most significant change in the political economy of the industrialized countries over the past three decades. From the Great Depression to the Bretton Woods period, capital markets developed largely within national boundaries. Yet the past three decades have witnessed historically unprecedented growth in cross–border capital movements that have surpassed those of the late nineteenth century, often thought of as a golden age of international finance. Moreover, since World War II, the integration of capital markets has been far more rapid and complete among the industrialized countries than has the integration of markets for goods and services. No other area of the economy has been so thoroughly internationalized as swiftly as have capital markets since the 1970s.

The purpose of this essay is to describe the recent internationalization of capital, and to explore the implications for the industrialized countries of the Organization for Economic Cooperation and Development (OECD). The first section describes capital controls under the Bretton Woods regime and their subsequent liberalization. Bretton Woods endorsed capital controls, but these were relaxed in the 1970s and virtually eliminated in the 1980s and 1990s in most OECD countries. The second section describes the increase in transnational capital movements, and the third reviews the evidence of capital market integration since the 1960s. The fourth section explores the consequences of more integrated capital markets on national politics and policy making, and the final section offers conclusions.

This chapter examines the role of international legal approaches to the settlement of territorial disputes. What are the conditions that make resort to negotiations inadequate for the settlement of a territorial dispute? Why do governments make legal commitments that bind their future behavior with respect to how a territorial agreement is to be resolved? That is, what conditions make a formal legal commitment to arbitrate a dispute an attractive alternative? And, finally, why do states sometimes actually go through with such commitments to submit to third–party review of their territorial claims?
Motivating this study is the question of the role that international quasi–judicial processes can play in the resolution of territorial disputes among states. Previous research suggests that international law may play an important role in reducing the incidence of territorial disputes. Paul Huth (1996), for example, has found that clear legal agreements reduce the probability that a dispute will arise in the first place. By his estimate, some 142 border agreements were concluded between 1816 and 1990, and 126 of these were still in force and honored by both states in 1995 (Huth 1996, 92; see also Kocs 1995). If supranational authoritative rulings contribute to such agreements, then there are good reasons to expect them to make a positive contribution to settling the dispute peacefully.