Arid environments are characterized by limited and variable rainfall that supplies resources in pulses. Resource pulsing is a special form of environmental variation, and the general theory of coexistence in variable environments suggests specific mechanisms by which rainfall variability might contribute to the maintenance of high species diversity in arid ecosystems. In this review, we discuss physiological, morphological, and life-history traits that facilitate plant survival and growth in strongly water-limited variable environments, outlining how species differences in these traits may promote diversity. Our analysis emphasizes that the variability of pulsed environments does not reduce the importance of species interactions in structuring communities, but instead provides axes of ecological differentiation between species that facilitate their coexistence. Pulses of rainfall also influence higher trophic levels and entire food webs. Better understanding of how rainfall affects the diversity, species composition, and dynamics of arid environments can contribute to solving environmental problems stemming from land use and global climate change.