Interest Group Influence in Authoritarian States

Abstract

Why do countries keep their exchange rates weak and undervalued? This article argues that domestic politics is more important than systemic factors, but existing domestic political explanations do not fully explain how interest group preferences and political institutions influence exchange rate policy. The authors argue that tradable industries do not always demand an undervalued exchange rate, but do so only when they are unable to receive other compensatory policies. In addition, interest groups have a larger impact on exchange rate policy in nondemocratic regimes than is often recognized: Autocrats select exchange rate policies that correspond to the preferences of the most powerful interest groups because lobby groups have access to the political process and leaders are sensitive to their preferences. A case study of exchange rate policy in China supports these arguments. The major decisions to maintain an undervalued exchange rate in China were taken in response to demands for undervaluation from tradable industries. Second, the case study shows that exporters’ preferences for undervaluation ebb and flow with the policy mix: Tradable firms lobbied for an undervalued exchange rate when no other compensatory policies were implemented, but they did not insist on undervaluation in periods when they benefited from other state policies. The authors conclude that China keeps its exchange rate undervalued because the interest groups that support undervaluation are more powerful than those that oppose undervaluation. These findings indicate that interest groups influence exchange rate policy in authoritarian regimes, but their preferences for undervalued exchange rates are quite malleable.