Why is fiscal federalism so often dysfunctional from an economic point of view? Particularly in the developing world, fiscally decentralized systems often lack hard budget constraints and an open, common market. This article argues that preventing secession can require fiscally deleterious institutions. Beyond the well-known device of "fiscal appeasement," central governments facing potential secessionist challenges try to hamstring regional tax collection and permit regional protectionism against goods and labor. While ethnic diversity has helped to preserve relatively robust forms of fiscal federalism in Canada and Switzerland, it has had the contrary effect in developing countries. Even among Western democracies, those governments unwilling to countenance secession are less likely to respond to secessionist challenges by decentralizing taxation powers. The political logic of decentralization may stymie efforts to reform decentralized institutions along the lines recommended by economists and the multilateral lending institutions. "The Catalan Government has sent another warning message about its lack of liquidity, which depends on the Spanish Executive's regular transfers since most of taxes [sic] are collected by Madrid-based services. The Spokesperson for the Catalan Executive and Minister for the Presidency, Francesc Homs, accused the Spanish Government of 'deliberate asphyxia' and asked the rest of the Catalan parties to 'pool together' to denounce the situation. According to Homs, such financial asphyxia will affect everything except salaries, which 'are guaranteed'.. . This situation started to occur when the Catalan Government began to support the self-determination process and the Spanish Government was fostering its recentralisation agenda" (CNA 2015).