Finally, it is remarkable that Latin America has achieved fiscal discipline even as it advances rapidly toward democratization and decentralization in areas such as the provision of social services and fiscal and tax administration. It could be assumed that these changes would put serious pressures on the public treasury, but that has not prevented a major fiscal consolidation, as mentioned above. As explained in the report, stabilization and reforms completed by many countries in recent years have produced spending and credit booms in excess of what local economies could absorb, in spite of the better framework for growth created by these very same reforms. The high rate of growth for the region in 1997 could be partly influenced by this temporary overabundance of spending and credit. Such financial booms lead to financial, external and fiscal vulnerabilities.
Banks become overextended and take on excessive risk.
External debt increases at an unsustainable rate, while the real exchange rate appreciates and exports lose competitiveness. With abundant external financing and tax resources, governments tend to increase spending. However, those means of financing may prove to be temporary, and the deficits unsustainable, forcing painful corrections. Another reason for caution is decentralization, which still could become a factor in the destabilization of public finance. In a number of countries, systems of fiscal transfers to the regions tend to reinforce procyclical public spending and facilitate excessive indebtedness of state and local governments.