Political institutions have been shown to play a key role in determining economic outcomes. Where do these institutions come from, and how do they change over time? Examining the puzzle of institutional divergence on the island of Hispaniola, this dissertation identifies conditions under which international economic crises lead to the emergence of a developmental state. Haiti adjusted to the global economic crisis of the 1930s through rent-seeking policies that reinforced existing patterns of state predation and economic decay. Why, despite many similarities with Haiti including geography, regime type, and agro-export dependency, did the Dominican Republic pursue developmentalist policies of import substitution when adjusting to the same crisis- policies that transformed the economic purpose of state institutions and culminated in the fastest growing economy in Latin America over the second half of the twentieth century? Among non-industrialized countries I find that the costs of a prolonged foreign exchange crisis, and the import scarcities that ensue, are borne disproportionately by the middle classes. I also find that the ability of markets in non-industrialized countries to replace foreign imports with domestically produced substitutes is constrained by investment coordination problems. Thus, where income distribution favors a proportionally larger middle class, the political coalitions that emerge out of shared economic hardship exert adaptive pressures on state institutions to resolve coordination problems associated with import substitution. In countries where income distribution favors a proportionally smaller middle class, conversely, these political coalitions falter and attempts at import substitution succumb to market coordination failure. Highlighting the importance of global trade integration beginning in the 1850s for reshaping class structure across Latin America, these findings challenge recent explanations of post-colonial development that emphasize geographic or colonial path dependency.