Since the early 1970s, most East Asian countries have undergone major changes in their financial sector. The timing of this process differed for each country, but by the late-1980s, practically all countries in the region had revamped their financial sectors. Similar financial liberalizations happened around the same span of time, despite a wide diversity of historical backgrounds, stages of economic development, and degrees of financial market complexity.; Traditional theories are ill suited to explain this pattern of policy convergence. Theories like "race to the bottom" argue that countries will competitively open their financial sectors in order to attract foreign capital. The prediction is that there will be a uniform downward movement in financial barriers around a specific point in time. The prediction of this competitive dynamics, however, cannot be reconciled with pattern of policy convergence. Nor are standard theories of coordination helpful in explaining decentralized efforts by different countries.; I conceive policy convergence as a by-product of the dynamics of information aggregation. Countries mimic policy decisions of other countries in response to the informational cues from their policy decisions. It accounts for the seemingly unpredictable way in which policy innovations diffuse across a region. It also offers an explanation for the brittleness of our understanding concerning the "correct" model of statecraft and the fickleness with which a new policy innovation displaces a widely accepted policy. This dissertation does two things: One, it tests the hypothesis with time-series and cross-sectional data on forty-two countries between 1960 and 1990 and finds statistical significance of information cues and discount most previous hypotheses (financial openness, educational level, institutional quality, foreign direct investment and spill-over effects). It also demonstrates that some of the previously cited hypotheses (institutional quality and international reserves) are actually nested hypotheses of the informational model. Second, in a formal model, the dissertation delineates the process of information aggregation, defines the conditions under which informational externality leads to a widespread diffusion or collapse of policy innovation, and points out the cases in which policy convergence ends as errors of type I and type II.
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