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June 10, 2004
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G-8. Russia or China?

by Michael S. Bernstam and Alvin Rabushka

With the official addition of Russia in 1998, the G-7 group of nationsthe United States, United Kingdom, Japan, Germany, France, Italy, and Canadaformally became the G-8. The G-7 developed as an annual meeting of the political leaders of seven major industrial democracies to discuss and try to resolve global economic and political problems. The G-7 nations added Russia in order to bolster President Boris Yeltsin's position in recognition of his having transformed Russia's autocracy into a democracy.

The most recent G-8 meeting was held at Sea Island, Georgia, on June 810, 2004. A question that can be raised is if Russia should be the eighth member of the group. It surely does not belong on the basis of its status as a market economy, which we have explained in Chapter 2 of From Predation to Prosperity and in "Fixing China's Banks, Not Russia's." On that criterion, such other countries as Belgium, Holland, Spain, Portugal, and Ireland are far more worthy. One can argue that Russia should belong on the basis of its democratic qualification. Since President Vladimir Putin's reelection, however, numerous international observers express concern that Russia is lapsing into a cult of leadership dominated by his political party.

The obvious omission from the group is China. We have demonstrated in the above chapter and article that China has progressed far along the road to becoming a market economy. Indeed, a case can be made that China more closely meets the standards of a market economy than do the big-government, redistribution countries of Western Europe. As we indicated in "Market, Shmarket, WTO," in contrast to Russia, real market participants around the world accept China as a market economy. Admittedly China is not a democracy, but civil liberties have greatly increased since the onset in 1978 of the late Chairman Deng Xiaoping's reforms.

The choice of China as number eight is synonymous with Chinese culture. The word for eight in the Mandarin, the national language, is ba (as in bond). Ba rhymes with fa (as in father). Fa means prosperity. Chinese take the rhyming feature of ba with fa to equate the number eight with prosperity. Licenses plates with the number eight in China, Hong Kong, Taiwan, Singapore, and other Chinese communities are highly valued. Many Chinese products use the number eight as a marketing tool. Buildings are constructed eighty-eight stories high. And so on. The same relationship holds even more strongly in the Cantonese dialect.

This digression into the Chinese language becomes coincidentally significant in that China would constitute a more appropriate eighth member of the group. China's nine-ten percent annual average growth for more than two decades reflects its transformation as a new-entrant market economy. In contrast, Russia's post-1998 growth reflects high oil prices and export revenues coupled with a requirement of the Central Bank that a portion of foreign exchange earnings be repatriated. The results helped to lubricate the payment jam and roll back the economy-wide subsidy embodied in payment arrears. We discussed this mechanism in "The Roller-Coaster of the Russian Economy" (Addendum to Chapter 1) which showed that Russia's growth in 1999-2003 was a temporary recovery of past losses as the crippling subsidy was reduced. It seems to us that China, not Russia, should be at the table with the G-7 leaders as they discuss solutions to world problems.