Brazil became a highly decentralized country following democratization and the 1988 Constitution. The consequences of decentralization at the federal level are quite clear: the federal government is facing ®nancial constraints and diculties in building governing coalitions, allowing the Presidents to govern and to implement public policies, especially those concerning ®scal control. At the level of the states, however, the results of decentralization are quite heterogeneous given the country's high degree of regional inequality. The article identi®es the cleavages and tensions surrounding federal±state relations, as well as the mutual dependency of the states and the federal government. It argues that the Brazilian experience of political and ®nancial decentralization has contributed to the prospects of democratic consolidation and has forced the federal government to negotiate and compromise with subnational governments the implementation of national policies. On the other hand, the Brazilian experience highlights the constraints of decentralization in countries with deeprooted regional disparities. Furthermore, the ®nancial weakness of the federal government which has been brought about by decentralization and by ®scal control brings new tensions to the federal arrangements and to public policies.