1 Who follows the leaders? Foreign economic policy diffusion 1978‐2004 Christian W. Martin* Centre for Globalisation and Governance University of Hamburg Gerald Schneider** Department of Politics and Management University of Constance Draft version, April 2007 Abstract Foreign economic policy liberalization is marked by remarkable variation across countries. While there has been a general trend towards less restrictive trade and capital account regulations, important differences remain. We present a model of foreign economic policy making in which a country’s specific liberalization costs interact with levels of foreign economic policy regulation in other countries. Specifically, by changing opportunity costs of restrictive policies, liberalization steps in other countries change the optimal level of foreign economic policy restrictiveness in a given country. However, changes to current account regulations do not occur automatically. Rather, they are conditioned by domestic costs of liberalization. Diffusion processes, therefore, do not necessarily result in policy convergence. We test the predictions of the model by drawing on a data set that covers policy measures in the area of trade and capital account regulation. The data cover 140 countries in the time from 1978 to 2004. Using an empirical model of conditional policy diffusion, we show that the data match the predictions of uneven patterns of liberalization. Paper prepared for presentation at the Annual Meeting of the Midwest Political Science Association, Chicago, April 12‐15, 2007 * Assistant Professor, Centre for Globalisation and Governance, University of Hamburg, Allendeplatz 1, D‐20146 Hamburg, Germany. E‐mail: christian.martin@uni‐hamburg.de ** Professor of Political Science and Executive Editor “European Union Politics”; Department of Politics and Management; Box D 86; University of Konstanz, Phone: +49 7531 88 2608; Fax: +49 7531 88 2774; E‐mail: gerald.schneider@uni‐konstanz.de