There’s a new acronym for favored emerging markets – CIVETS. Coined again by Goldman Sachs’ Chief Economist Jim O’Neill (who invented the BRIC acronym for Brazil, Russia, India and China in 2001) it stands for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. However the new acronym’s enthusiasts may have missed out on one thing: the face of emergence is changing. A different set of skills and factor endowments is needed today to achieve the takeoff into rapid growth than was needed a decade ago.

The traditional emerging market used its ample reserves of hard-working and increasingly skilled labor to rise up the income scale. By saving huge portions of their income, its inhabitants both educated their children and provided for their own retirement, while making available to the economy the seed capital for innumerable future businesses, with their attendant economic growth. That formula worked for Japan in the 1950s and 1960s, for Singapore in the 1960s and 1970s, for Taiwan and Korea in the 1980s, and above all for China in the 1990s and 2000s.

Alternative economic models, driven by socialism or dependent on natural resources, failed miserably. In the Middle East, a few countries were so rich in oil income that they were able to enrich their people without effort, but none of those countries have built a genuinely viable economy for their inhabitants to enjoy when the oil runs out. In Latin America, repeated attempts to build viable economies on the basis of government funded infrastructure and high tariffs failed, even when as in Brazil the local economies had large endowments of natural resources. In Africa, in spite of the resources, the surplus of labor and in some places a decent education system, nothing worked – largely because that continent’s rulers were not only kleptocrats but LSE-educated socialist kleptocrats.

Since 2000, there have been signs that the emerging market formula may be changing. Vietnam is a traditional east Asian emerging market – oodles of cheap labor, hard-working people, a high savings rate and a manufacturing orientation with lower labor costs than neighboring China. However other non-traditional emerging markets look a little different. Brazil seems finally to have broken out of its decades-long stagnation. Colombia and Chile both benefit from resources rather than cheap labor, yet have managed to preserve a free-market orientation and a commitment to improving their inhabitants’ quality of life. Even in Africa, there have been some modest success stories, and the overall record of the continent has been better than at any time since the 1950s. As the recovery from the 2007-09 recession begins, signs are that the move away from the traditional pattern of emerging markets may be intensifying.

There would appear to be two reasons for this, both connected to the Internet-fueled economic emergence of China and India, which between them represent around a third of the world’s population.

The first reason for the changing pattern is the obvious one, discussed here before: the effect of 2.5 billion consumers, newly lifted above subsistence level, on natural resources markets. Until 2000, resources markets were both highly cyclical and downwardly biased in price, as improved extraction techniques and new sources of supply allowed commodity users to benefit at the expense of producers. Thus even low-cost commodity producers, such as Brazil, found their income sources continually eroded and their huge investments in production capacity continually less profitable.

From 2000, this has changed. The emergence of major markets in China and India has potentially quadrupled the demand for basic commodity-heavy, energy-intensive consumer goods such as automobiles, washing machines, refrigerators, central heating and air conditioning. While wealthy consumers, whose economies are expanding less rapidly, diversify their demand towards high-tech gadgetry, and many poorer consumers also demand low-feature cellphones and PCs, the markets for most commodities and energy is driven by the emerging newly middle class consumers’ thirst for products that wealthy country consumers acquired in the 1950s through the 1980s. Consequently the long-term bias in commodity and energy prices is now upward rather than downward, at least for the foreseeable future.

The emergence of China and India has however had a second effect, which is to block off at least partially the previous golden road to riches through manufacturing labor. Manufacturers such as Foxconn, with huge facilities in China (Foxconn’s employing 300,000 people) have until recently been able to ramp up production without raising wages simply by importing workers from China’s vast domestic hinterland. That has suppressed inflation in the west, in the same way as did the opening up of the railroads and refrigeration in the 1880s. Less noticed, it has also suppressed growth in other countries that had previously been able to rely on competing through manufacturing cost advantages. Thailand and Malaysia, for example, both of which had risen into middle income status by the middle 1990s and appeared likely to become wealthy in another decade or two, have found their progress halted by China and India’s emergence. In Thailand’s case this has destroyed the country’s hard-won political stability.

The pool of low-cost labor in China and India is nowhere near exhausted; the hinterlands of those countries will be opened up by infrastructure and educational development, making low-cost labor in glut economically for the world economy as a whole. That means that other countries that had hoped to emulate the typical east Asian route to wealth will find it much more difficult to do so. Their wage costs will be capped by the wage costs available in the less costly parts of China and India, countries in which most major foreign investors are already used to operating. Growth for low wage manufacturing countries will remain possible, but will be limited by the overhang from the enormous Chinese and Indian competition.

Conversely, while the manufacturing labor route to wealth is becoming blocked, the resources route to wealth is being opened up, in a way it had not been since the late nineteenth century. Before 1900, countries such as Australia, Canada, Argentina and Mexico were able to increase rapidly in wealth, approaching and in some case surpassing the European manufacturing economies, on their basis of their commodity resources, of which they encouraged the exploitation. Other countries, notably Britain, France, the Netherlands and Belgium, increased domestic living standards further by colonial exploitation of other countries’ resources. With resources prices trending upwards long-term, this route to wealth will reopen as the manufacturing route closes.

The closing of the manufacturing route to wealth has severe implications for middle income emerging markets. The richest manufacturing-oriented countries, such as Korea, Taiwan and Germany, will continue to thrive (as will Japan and France if they sort out their public sectors) as they have already developed world-beating technological and research capabilities that China and India cannot easily match. However the poorest countries that had hoped to develop through manufacturing prowess, such as Pakistan and Bangladesh, will find they no longer have cost advantages sufficient to tempt investors to desert China and India for their more difficult environments. Middle-income countries such as Thailand, Malaysia and the Philippines that depend substantially on manufacturing for their emergence will find themselves particularly badly affected (though Malaysia and the Philippines have substantial commodities exports that offset this.)

More adverse still will be the effect on those middle income countries that have heavy government burdens, poor governance or excessively activist labor unions which prevent efficiencies from being achieved. Mexico is the archetypal case of these. Not particularly well endowed with commodities (or rather, with a commodities endowment that has been reduced in value by inefficient exploitation and economically diluted by excessive population growth) Mexico was expected to benefit hugely after the 1994 signing of the NAFTA agreement from manufacturing relocated from its wealthy northern neighbor. This expectation has not been fulfilled. Manufacturing has been outsourced to China and India rather than Mexico, as costs there are lower and operating difficulties no more extreme. Even Monterrey, Mexico’s wealthiest city, expected to be a pole of economic development, has now become infested with drug violence, as poor employment growth produced an underclass of potential criminals.

In today’s world Mexico will not be able to compete with China and India unless it drastically reforms its governance. The same is true with two of O’Neill’s other CIVETS, Egypt and South Africa, in both of which corruption is extremely high, and workforce discipline poor, although in South Africa’s case mineral resources may alleviate the problem if the government allows them to be developed on a modern free-market basis. Vietnam, a third CIVETS, we have discussed; it is probably OK, though it will find the road to wealth much more difficult than for its 1950s-1980s Asian predecessors. Turkey could go either way. It is not very well endowed with natural resources, but its labor markets are relatively efficient and free-market-oriented. If it plays its cards right, it will get a favorable association agreement with the EU (though not membership) that will allow foreign investors to use it as a cheap labor source inside the EU tariff and non-tariff barrier regime. Turning too enthusiastically towards its Middle Eastern basket case neighbors, conversely, would be economically suicidal.

The remaining two CIVETS, Colombia and Indonesia have much better prospects, because they benefit from the other side of the commodities/labor see-saw, being relatively well provided with commodities and energy resources. Colombia now has a free-market oriented government and a huge endowment of commodities and energy for its relatively modest population. Consequently it could experience development in which manufacturing for the US market (if the Colombia /US free trade agreement is ratified) and providing domestic services relating to the extractive industries could supplement resource extraction to provide a rapidly increasing standard of living. Indonesia is a more difficult case, because of its much larger population, but its favorable location close to the major Asian economies, with which it should tighten its free trade agreements, should allow it to develop in a similar manner to Colombia.

Outside the CIVETS, Africa will for the first time have a clear road towards greater wealth by playing off Western, Indian and Chinese resource seekers against each other, provided it improves its governance. In Latin America, Chile is the example to follow and Venezuela and Argentina the examples to avoid; the latter two could be enjoying rapid increases in living standards today were they not so abominably run. Finally in Eurasia, badly run manufacturing countries like Romania, Bulgaria and Ukraine will find their positions slipping, while the resource rich Kazakhstan, no better run, moves forward. (Russia will find its fate depends crucially on its choice of regime, but its resources endowment will provide it with major advantages that it did not in the 1990s.)

As for the wealthy West, it will find itself under pressure. Its commodities and energy purchases will continually increase in price, while all but the most talented in its workforce will find their living standards threatened as outsourcing advances up the value chain.

In 1900, you would have done better economically as a worker in Melbourne, Vancouver or Buenos Aires than in Paris, Berlin or Manchester. In 2000, the wealthy and sophisticated West and Japan were the places to be. By 2050, we may have reverted largely to the 1900 pattern.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)