Federalism in developing countries can lead to economic problems due to two main reasons. Firstly, diverse countries like India and Indonesia often don't enforce common markets or proper tax decentralization, leading to financial issues. Secondly, countries without ethnic minorities like Brazil and Argentina tend to overspend due to weak budget constraints. Unlike Western democracies, ethnic diversity in developing nations hinders effective fiscal federalism. Efforts to reform federal institutions in these countries are likely to face challenges.