Using economic data for the period between 1979 and 1995 for forty-six large federal and unitary developing nations, I analyze the impact of political federalism in the developing world on a number of measures of national economic adjustment, volatility, and crisis. The findings suggest that federalism in the ten nations where it operates has, as theoretically predicted, a negative effect on macroeconomic performance and reform. I argue that the macroeconomic and fiscal imbalances experienced by these federal nations are, in part, structurally determined by their devolved political and fiscal institutions that create incentives for subnational governments to avoid the political costs of fiscal adjustment. he political economy of stabilization and adjustment in developing nations has been a central topic of comparativists for nearly two decades. In large part this interest has been a response to the increases in international trade and capital flows, collectively known as globalization, which have increased the incentives for developing nations to discard statist models of development in favor of free market policies. With globalization, the capacity of developing nations to maintain macroeconomic stability increasingly determines their success in the search for international investment, competitiveness, and economic growth. As a result, questions about the ability of nations to adjust their economies to this reality have assumed tremendous importance. Under what conditions do governments carry through politically distasteful macroeconomic reforms? What are the key political and economic institutions that mediate a nation's insertion into and relationship with the global economy? What are the political preconditions for successful free market reforms? In addressing these questions, most research has followed in the steps of political economists such as Cameron (1984) and Gourevitch (1986), emphasizing the importance of national level institutions as mediators between the international economy and domestic politics, largely ignoring the complicated relationship between market-oriented reform efforts and the decentralization of political and fiscal power inherent in federal political systems. Likewise, the literature on the reform of the state has failed to explore the implications of federalism and subnational institutions for macroeconomic management in developing nations characterized by the devolution of political and economic power from central to provincial governments. In contrast' this research takes as its central point of theoretical departure the potentially negative consequences of federalism in the developing world for economic adjustment to the challenges of globalization.' I