Has market liberalism failed Latin America? "Yes", is often the reply these days. The logic here runs as follows: Venezuela, Argentina, Brazil et al. tried to get out of their old traps through democracy and/or free market innovation. But the effort didn't "work". Argentina is in economic depression and Brazil is haemorrhaging hard-currency so fast it will be out of reserves by summer's end. Even Mexico isn't the bright star one would have predicted ten years ago. These failures in turn are said to demonstrate that raw US-style capitalism isn't "right" for developing nations. And the "not ripe for capitalism" thesis seems to be confirmed by the disillusionment of voters in the region, who are increasingly turning away from neoliberal candidates.

Now though a new book turns the "not ripe" argument on its head. In The Force of Finance, one of the world's leading economists, Reuven Brenner of McGill University, argues that the problem has been not "too much" of markets but rather too little of them.* In the Brennerian view, markets have not had a full chance to show what they can achieve in and for these countries.

There is a second problem. It is that we assume these countries are all right because they are democracies, or something close to them. But this is wrong, says Mr Brenner. Democracy cannot always guarantee stability. Sure, you can give citizens the vote. But the prospect of wealth is what is dispositive when it comes to assuring a nation's future prosperity and stability. The key to assuring those things is not merely the rule of law, or private property, although these are important too. It is generating liquid capital markets that are truly open to everyman. Without those markets, and genuine capitalism, democratic governments are mere Weimar Republics. Like the German democracy toppled by Hitler, they are free, but fatally vulnerable to economic challenges and dictatorship.

Consider, as Mr Brenner does, Venezuela and Mexico. Both countries, in recent decades, made strides. Venezuela had free elections; Mexico finally managed to remove its ruling party, the PRI, after seven decades in power.

Yet in both these countries, large obstacles have still blocked the average individual's chance at achieving prosperity. In Venezuela, two parties have controlled the nation for 40 years; they have shut the middle class out. Revenue from the national oil industry fuels a domineering state.

In Mexico, likewise, Pemex, the national oil company, still gives an overweening government outsized power. In an e-mail to me, Mr Brenner outlined two additional Mexican problems: high tax rates and notoriously poor enforcement of the law (a landlord may own a house, but he will have little support for authorities when it comes to collecting the rent). The result of the combination has been that, notwithstanding freer markets, the average Mexican is still shut out. Power in both countries has remained, Soviet-style, close to the "centre"; there has been no diffusion.

Small wonder, therefore, that voters in such countries seem less enthusiastic about big money capitalism than they might; and small wonder that, in Venezuala, Hugo Chavez's anti-American populism has earned him so many votes. Generally citizens deprived of an opportunity to accumulate wealth of their own tend to turn to extremism.

In other words, such countries are deep into the Weimar stage. For stability, democracy must go "hand in hand with the liberalisation of financial markets, giving citizens a stake in the system." And - another Brennerian insight - liberalisation is especially challenging in countries with rich national resources. When such assets exist, governments are understandably unwilling to surrender control of them. And the power they derive from revenues generated from the national oil company or diamond mine smothers entrepreneurship in the rest of the economy.

Mr Brenner's thoughts about natural resources, democracy and capital markets have important applications for policy in Latin America. In the case of Mexico, they tell us that privatisation of Pemex ought to be a condition for helping come the next bailout. In the case of Brazil, they say that the International Monetary Fund ought to concentrate more on entrepreneurship and less on budget balances when it chooses to help.

But The Force of Finance also has global implications, especially for the Middle East. Its findings suggest that it is important to recognise that one of the main problems of the Middle East is the region's oil, and that denationalisation of oil companies in the Gulf countries is an indispensable (if radical) step. But they also tell us that the Bush administration is wrong to assume that the Loya Jirga (Grand Council) process in Afghanistan will stabilise the country. Afghanistan needs not only voting but markets - and ones that trade in things other than poppies and heroine - to succeed. Even Turkey, the West's key ally in the war on terror, is less stable than Washington would like to assume - its elites are too powerful, its markets too weak.

At a time when the US, for better or worse, finds itself back in the nation-building business, it is this last point that is the most important. Democratic, or "democratic on paper", is simply not enough.

* The Force of Finance, Reuven Brenner, Texere, 2002.

© Copyright 2002 Financial Times