Interest Group Influence in Authoritarian States: The Political Determinants of China's Undervalued Exchange Rate

Posted: 13 Aug 2009 Last revised: 18 Oct 2009

See all articles by David Steinberg

David Steinberg

Northwestern University; University of Pennsylvania - Department of Political Science

Date Written: 2009

Abstract

Why has China kept its exchange rate weak and undervalued for most of the past fifteen years? A large literature in IPE argues that interest groups influence exchange rate policy, but many believe that Chinese policymakers are immune to interest group pressures due to high degree of state autonomy in China. This paper argues that interest group lobbying strongly influences exchange rate valuation policy - even in the “least-likely” case of China. I contend that exporters have various channels through which they can influence exchange rate policy in China, and Chinese leaders keep their exchange rate undervalued because export-oriented industries are more powerful than interest groups that support exchange rate appreciation. Although interest group theories (e.g. Frieden 1991) can explain why China typically undervalues its exchange rate, they cannot explain why China appreciated its exchange rate rapidly during several brief periods. My policy mix theory borrows from Frieden’s model, but claims that tradable producers do not oppose exchange rate overvaluation when they are compensated with a stable nominal exchange rate and high government spending. The case-study of Chinese exchange rate politics over the period 1994-2009 demonstrates that Chinese exporters frequently lobbied for an undervalued exchange rate, and shows that Chinese policymakers chose to undervalue the exchange rate to satisfy the demands of this powerful interest group. Exporters were supportive of exchange rate appreciation during periods where they received other compensatory policies, and this explains why the government appreciated the exchange rate in 1997-99 and 2006-07. I conclude that interest group preferences provide a more convincing explanation for Chinese exchange rate valuation choices than the alternative theories.

Keywords: international political economy, interest groups, China, exchange rates

Suggested Citation

Steinberg, David and Steinberg, David, Interest Group Influence in Authoritarian States: The Political Determinants of China's Undervalued Exchange Rate (2009). APSA 2009 Toronto Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1449827

David Steinberg (Contact Author)

University of Pennsylvania - Department of Political Science ( email )

Stiteler Hall
Philadelphia, PA 19104
United States

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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