Developmental canalization, which leads to a reduction in the variation of phenotype expression relative to the complexity of the genome, has long been thought to be an important property of evolving biological systems. We demonstrate that a highly canalized state develops in the process of self-organization recently discovered in N-K Boolean networks that evolve based on a competition between the nodes. The model provides a simplified description of the evolution of genetic regulatory networks in developmental systems. The mechanism responsible for the evolution is shown to be a balance of two dynamical effects which compete to bring the network to a nonrandom critical steady state. Unlike other proposed evolutionary mechanisms that select for canalization, this mechanism does so while maintaining the system's capacity for further evolution in the steady state.