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This paper analyzes the link between the degree of democracy and overvaluation of the exchange rate. Given the difficulty in identifying such a relation in a cross-country analysis, we consider a country case where the necessary conditions for observing this relation are in place. Here we argue that, given the characteristics and the history of Madagascar, the dictatorship used exchange rate overvaluation to secure urban sector support. Co-integration analysis between the variables shows that the degree of democracy, as measured by a Freedom House index, was one of the long-run determinants of the evolution of the real exchange rate between 1972 and 2003. The low degree of democracy in 1972–1987 explains the significant overvaluation of the exchange rate during this period.