Federal politics and market reform in the developing world

Prior research on the politics of market reform in developing nations has generally ignored the significant role of federal political and economic arrangements in shaping adjustment processes. In contrast, this research develops a model of macroeconomic reform that accounts for the significance of subnational economic policy in the developing world’s nine major federations. I examine five hypotheses which are expected to influence the capacity of developing federations to conduct polity consistent with the exigencies of market pressures. With the use of a cross-sectional time-series analysis of fiscal and monetary policies, I show that the policy divergence between levels of government shrinks when provincial governments have greater fiscal power and there are high degrees of party centralization across levels of government. These findings have important implications for the political economy of market reform, the widespread move toward fiscal decentralization, and the design of regional supranational institutions. This research is based on work supported by the National Science Foundation under Grant SBR-9809211. I would like to thank Karen Remmer, Ken Roberts, Wendy Hansen, Alok Bohara, and excellent reviewers for helpful comments.