Today all 26 members of the IDB are democracies, and 17 countries have direct election of mayors compared with only three countries at the beginning of the 1980s. Decentralization has advanced in other areas, such as the provision of social services and fiscal and tax administration. As explained in the Economic and Social Progress Report, stabilization and reforms completed by many countries in recent years have generated spending and credit booms greater than what economies could sustain, in spite of the better framework for growth engendered by these very same reforms. The high rate of growth for the region in 1997 could be partly influenced by such overshooting. Spending and credit booms lead to financial, external, and fiscal vulnerabilities and eventual serious problems.
Banks become overextended and take on excessive risk.
External debt increases at a rate that is impossible to sustain, while the real exchange rate appreciates and exports lose competitiveness. Governments tend to increase spending, because they can count on abundant external financing or growing tax resources. Caution should also be applied to the process of decentralization, to avoid its becoming a factor in the destabilization of public finance. In many countries systems of fiscal transfers to the regions tend to reinforce procyclical public spending and facilitate excessive indebtedness of subnational governments. Only this way can it sustain an acceptable growth rate, greater than 6 percent, which will reduce poverty and inequity.