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Fall of the Washington Consensus

Following Argentina's default the Washington Consensus seems completely devalued as there seems to be precious little correlation between the degree to which a country embraces reform and the likelihood of its economic success.

Argentina's crisis has been severe: the economy, the currency, the banking system and, most important, the rule of law have all collapsed simultaneously. So what went wrong, and what lessons can be learnt for the rest of the region?

One fresh and well-received analysis comes from Guillermo Calvo, the Inter-American Development Bank's chief economist. He traces Argentina's crisis back to the Russia crisis of 1998, when there was a huge spike in emerging-market bond spreads across the board, and a concomitant drying-up or "sudden stop" of capital flows to the region.

All Latin countries experienced this sudden stop, and the different natures of their economies largely dictated their reactions. Sudden stops are dangerous because they force countries with large current-account deficits to eradicate them rapidly. The capital-account surplus plunges to zero (or even goes negative) in no time at all; as soon as that happens, any remaining current-account deficit has to come out of a country's reserves.