Exchange rate policy has profound consequences for economic development, financial crises, and international political conflict. Some governments in the developing world maintain excessively weak and "undervalued" exchange rates, a policy that promotes export-led development but often heightens tensions with foreign governments. Many other developing countries "overvalue" their exchange rates, which increases consumers’ purchasing power but often reduces economic growth. In Demanding Devaluation, David Steinberg argues that the demands of powerful interest groups often dictate government decisions about the level of the exchange rate.
Combining rich qualitative case studies of China, Argentina, South Korea, Mexico, and Iran with cross-national statistical analyses, Steinberg reveals that exchange rate policy is heavily influenced by a country’s domestic political arrangements. Interest group demands influence exchange rate policy, and national institutional structures shape whether interest groups lobby for an undervalued or an overvalued rate. A country’s domestic political system helps determine whether it undervalues its exchange rate and experiences explosive economic growth or if it overvalues its exchange rate and sees its economy stagnate as a result.
Introduction1. A Conditional Preference Theory of Undervalued Exchange Rates2. Cross-Country Patterns in Exchange Rate Policy and Preferences3. Why China Undervalues Its Exchange Rate: The Domestic Politics of Currency Manipulation4. The Political Appeal of Overvaluation: Industrial Interests and the Repeated Overvaluation of the Argentine Peso5. Interests, Institutions, and Exchange Rates in South Korea, Mexico, and IranConclusionAppendix: Author Interviews
"In Demanding Devaluation, David A. Steinberg addresses an enduring and fundamental puzzle of developing economies: Why, despite sound economic theory and strong empirical evidence that an undervalued exchange rate benefits long-term growth, do so many countries have an overvalued exchange rate? For Steinberg, the answer is politics. Skillfully mixing quantitative tests and compelling case studies, Steinberg shows how sectoral policy interests and state power intersect to shape the exchange rate. Scholars, students, and policymakers interested in understanding the political foundations of economic performance in the developing world will benefit from Steinberg's insightful and lucid analysis."
William T. Bernhard, University of Illinois at Urbana-Champaign, coauthor of Democratic Processes and Financial Markets: Pricing Politics
"Why does China maintain an artificially weak currency whereas Argentina and Mexico have historically maintained overvalued currencies? In Demanding Devaluation, David Steinberg offers an analytical framework centered on the preferences of manufacturers, the rights of workers, and the extent of state control over the financial system. This excellent book—with its compelling quantitative tests and in-depth case studies—will quickly become an essential read in the field of exchange rate politics."
David Andrew Singer, MIT, author of Regulating Capital: Setting Standards for the International Financial System