Existing research has failed to address the impact of subnational politics on economic adjustment. This article attempts to fill this gap by outlining theoretical reasons for anticipating policy divergences across levels of government and by offering three hypotheses to account for variation at the subnational level. The authors explore these ideas on the basis of the Argentine experience. The study traces the impact of subnational policy on Argentine economic adjustment and tests hypotheses about subnational policy variation on the basis of provincial fiscal data. The authors' findings underline the importance of subnational policy choice for national performance and suggest a revised understanding of the role of political competition in the economic adjustment process. The authors find considerable evidence that interactions between party competition and the structure of the public sector shape provincial fiscal performance and thereby condition the capacity for economic adjustment at the national level.