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  • Interest Rate Liberalization Key to China Becoming a High-Income Country

    For China to become a high-income country, policy makers have to make some significant changes. Pingfan Hong , Chief of the Global Economic Monitoring Unit of the United Nations Department of Economic and Social Affairs, says those changes must begin with financial reform. And top on his list is liberalizing interest rates. From Project Syndicate : In many ways, China is breaking the mold. Despite severe financial repression, it has experienced extremely high savings and investment, owing mainly to Chinese households’ strong propensity to save and massive government-driven investment, particularly by local governments. The adverse effects of financial repression in China are reflected primarily in its economic imbalances. Low interest rates on deposits encourage savers, especially households, to invest in fixed assets, rather than keep their money in banks. This leads to overcapacity in some sectors – reflected in China’s growing real-estate bubble, for example – and underinvestment in others. More important, financial repression is contributing to a widening disparity between state-owned enterprises (SOEs) and small and medium-size enterprises (SMEs), with the former enjoying artificially low interest rates from commercial banks and the latter forced to pay extremely high interest rates in the shadow-banking system (or unable to access external financing at all). Interest-rate liberalization – together with other financial reforms – would help to improve the efficiency of capital allocation and to optimize the economic structure. It might also be a prerequisite for China to deepen its financial markets, particularly the bond market, laying a solid foundation for floating the renminbi’s exchange rate and opening China’s capital and financial accounts further – a precondition for the renminbi’s eventual adoption as an international reserve currency. Read China's Interest Rate Challenge here .
  • IMF Projecting Strong Growth in Sub-Saharan Africa

    Developing Asia continues to lead the way in growth rate. But you might be surprised at what region is second: sub-Saharan Africa. From the IMF : The IMF’s Regional Economic Outlook for sub-Saharan Africa projects regional economic growth of 5 ½ percent in 2013–2014, compared with 5 percent in 2012. Investment is expected to remain a key driver of growth, while measured activity in 2013 will also be boosted by one-off factors in some countries, including rebound effects from floods in Nigeria and recovery of agriculture in regions previously affected by drought. Upper middle–income countries are expected to continue grappling with sluggish growth, while activity should gradually normalize in some fragile economies that were negatively affected by political instability. The region’s downtrend in inflation is set to extend into 2013–14. This forecast is premised on moderating nonoil commodity prices, productive local crops, and inflation-focused monetary policy. Gains made in combating inflation in eastern Africa are expected to be consolidated, while the pace of price rises is projected to slow in countries that experienced inflation flare-ups. Read Sub-Saharan Africa Builds Momentum in Multi-speed World here .
  • A Tricky Task for China's Policy-making Economists

    China now has an economist as prime minister, and now Li Kiqiang and the other economists in the Politburo are tasked with explaining why first quarter growth fell short of expectations. From The Economist : The slower figures may be easier to excuse than to explain. China’s new government is intent on “improving the quality and efficiency of growth”, according to the NBS. If that is true, it might justify some reduction in the quantity of growth. More efficient growth would require a lower input of capital (as well as energy and labour) per yuan of extra output. It was, therefore, notable that investment (the addition of capital) contributed only 30% of China’s growth in the first quarter. That was an unusually small contribution for an economy often accused of building bridges to nowhere. In 2012, by comparison, investment contributed about half of China’s growth; in 2009, more than 87%. The first quarter’s growth was instead led by consumer spending, which contributed over 55% of it, despite Mr Xi’s frugality drive. Consumption is often strong in the first quarter, notes Mark Williams of Capital Economics, a research company. But its prominence was no seasonal fluke. In both 2011 and 2012, consumption exceeded investment’s contribution to growth—a welcome sign that rebalancing of the economy is finally under way. These shifts in China’s spending mix are mirrored by changes in its mix of production. Services contributed more to GDP than industry for the third quarter in a row. The sector (which includes transport, wholesaling, retailing, finance and property) remains unusually underdeveloped for a country with China’s level of prosperity. But this year services may nonetheless become the biggest part of the economy. Read Climbing, stretching and stumbling here .
  • IMF's World Economic Outlook: Three Speed Global Recovery

    What was once a "two speed recovery" is now looking like a "three speed recovery" to IMF researchers. It had been the case that advanced economies were recovering at a slower rate than emerging and developing economies. Now, there is a split among advanced economies. Overall, the IMF is projecting 3.25% growth in global gdp for 2013 and 4% growth in 2014. That is up from 2.75% growth over the second half of last year. Here are some regional specific projections from the World Economic Outlook : In advanced economies, the recovery will continue to proceed at different speeds. The main revision relates to the U.S. budget sequester, which lowers the U.S. growth forecast for 2013. Following a disappointing end to 2012, easier financial conditions, accommodative monetary policies, recovering confidence, and special factors will support a reacceleration of activity, notwithstanding still-tight fiscal policy in the United States and the euro area. The reacceleration, which assumes that policymakers avoid new setbacks and deliver on their commitments, will become apparent in the second half of 2013, when real GDP growth is forecast to again surpass 2 percent. • Thanks to increasingly robust private demand, real GDP growth in the United States is forecast to reach about 2 percent in 2013, despite a major fiscal tightening, and accelerate to 3 percent in 2014. Weak growth in the United States in the fourth quarter of 2012 reflected the unwinding of a spurt of inventory investment and defense spending during the third quarter (Figure 1.8, panel 1). Preliminary indicators suggest that private demand remained resilient this year, but across-the-board public spending cuts are expected to take a toll on the recovery going forward. • Activity in the euro area will pick up very gradually, helped by appreciably less fiscal drag and some easing of lending conditions. However, output will remain subdued––contracting by about ¼ percent in 2013––because of continued fiscal adjustment, financial fragmentation, and ongoing balance sheet adjustments in the periphery economies (Figure 1.8, panel 2). The projection assumes that policy uncertainty does not escalate and further progress is made toward advancing national adjustment and building a strong economic and monetary union. • Activity in Japan is expected to accelerate sharply during the first quarter of 2013, as the economy receives a lift from the recent fiscal stimulus, a weaker yen, and stronger external demand. Growth will reach 1½ percent in 2013, according to WEO projections, and will soften only slightly in 2014 as private demand continues to garner speed, helped by aggressive new monetary easing offset by the winding down of the stimulus and the consumption tax increase. In emerging market and developing economies, the expansion of output is expected to become broad based and to accelerate steadily, from 5 percent in the first half of 2012 to close to 6 percent by 2014. The drivers are easy macroeconomic conditions and recovering demand from the advanced economies. Download the full report here .
  • EU Leaders Looking East for Trade Pacts

    Patrick Messerlin , professor of economics at the Institut d' Etudes Politiques de Paris, thinks European leaders are right to look to Asia to build new trade agreements. Trade liberalization, Messerlin says, are the right prescription for Europe's stunted economic growth. But new trade agreements must be with the right partners. And you might be surprised as to which Asian economies Messerlin argues make the right partners for the EU. From Vox : The first question focuses on the ‘growth’ dimension of trade policy. Preferential trade agreements will only be able to boost domestic growth if the economies of the EU’s preferential trade agreements partners fulfil three main conditions. They should be big enough to generate economies of scale and scope capable of having a substantial impact on the EU’s relative prices – changes in relative prices are the source of welfare gains. They should also be well regulated because modern economies are intensive in norms and dominated by services, the efficiency of which depend largely on the quality of the regulatory schemes in place. Finally, they should have a wide network of good-quality preferential trade agreements, capable of offering EU firms opportunities to access the economies already covered by those preferential trade agreements (the ‘hub’ quality) without waiting for longish negotiations with the EU. As Table 1 shows, Japan and Taiwan – apart from the US – are the only economies in the world that meet these three conditions since the EU already has a free trade agreement with South Korea. China (possibly India in the long run, but not Brazil or Russia) may offer better growth opportunities when it comes to size. But, it still scores poorly on regulatory quality, while Japan and Taiwan score better than many EU member states. When it comes to the ‘hub’ criterion, Japan has a wide network of preferential trade agreements in east Asia (a region that EU negotiators are very slow to negotiate with) while Taiwan has massive operations in China which have been recently strengthened by a key preferential trade agreement, making Taiwan a privileged hub with respect to China. The capacity of Japan and Taiwan to meet all three conditions indicates the need for a resolute EU pivot to east Asia – an outcome echoed by general equilibrium calculations (Kawasaki 2011). Read The much-needed EU pivot to east Asia here .
  • Skepticism About China's Official Statistics on Consumer Spending

    Global economic growth is going to depend more and more on Chinese consumers and their growing buying power. So it would be nice if we felt like could rely on official figures about consumption in China. An article in the latest edition of The Economist raises some doubts: In 2012, according to estimates by Jonathan Garner and Helen Qiao of Morgan Stanley, a bank, the Chinese spent over 2.3 trillion yuan ($370 billion) on domestic tourism alone. And yet China’s GDP statistics captured only a tiny part of that spending, they argue, as well as missing spending on financial services, health care and housing. As a result, official figures show private consumption languishing at around 35% of GDP. Morgan Stanley’s “bottom-up” calculations, by contrast, imply that it has grown since 2008 to almost 46% of GDP (see chart). Mr Garner and Ms Qiao draw on company reports and industry studies to fill gaps in the official data, which, they say, undercounted consumption by $1.6 trillion in 2012, more than Australia’s entire GDP. Their calculations echo earlier studies, which also found that official statistics undercount consumption, albeit by a smaller margin. As well as stuff bought offshore, spending online is also undercounted, the two economists argue. On a single weekend in November, Chinese consumers spent more than $3 billion on two websites, Taobao and Tmall (both part of Alibaba, an online giant), in celebration of “singles’ day”, the bachelor’s equivalent of Valentine’s day. But official statistics have failed to keep pace with changing consumer habits, Ms Qiao argues, neglecting entire categories of e-spending. Online gaming, for example, is largely missing. Yet it amounted to 53 billion yuan ($8.5 billion) last year, according to Morgan Stanley’s tally of revenues earned by online gaming firms. China’s statistics have long been viewed with scepticism or worse. Some economists worry that they fail to reflect reality, others that they slavishly reflect political imperatives. In 2002 Thomas Rawski of the University of Pittsburgh complained about a “tornado of deception”. Five years later Carsten Holz, then of Princeton University, said that official statistics should be taken with a “rock of salt”. When Li Keqiang, now China’s prime minister, was party chief of Liaoning province in 2007, he called the province’s output figures “man-made” and “for reference only”. Read Bottums up here .
  • Post's Irwin: "Maybe this economy is stronger than we thought"

    The Commerce Department released some positive retail spending figures this morning. Sales for retail and food services went up 1.3% in February. Sales are up 4.7% an annual basis. Here's the breakdown: The Washington Post 's Neil Irwin says the release, along with some of the other recent key economic news, is a sign that consumers are feeling much more confident in the state of the economy moving forward: Well, it turns out (as Wal-Mart made clear in its earnings call shortly thereafter), they were just waiting a bit until they received their delayed tax refund checks. The underlying state of consumer spending seems to be strong. But beyond what that tells us about the consumer, think about that in the context of other recent evidence. Friday’s jobs report was quite good, and it followed a series of solid jobs numbers. Employers didn’t sweat the fiscal cliff in December. They didn’t sweat the sequester in February. Housing market indicators—construction, prices, sales—are all pointing up. Put it all together and it’s hard to escape the conclusion that the U.S. economy is finally starting to gain some traction. This fits with the story that what the economy really needed the last few years was to get through some of the headwinds holding it back, namely housing and debt-pinched consumers. Some credit also may be due to the Federal Reserve; its new quantitative easing policies announced in September may be starting to have an impact. Now that housing is supporting growth and debt levels have been pared down, there seems to be some underlying resilience in the economy that even a dysfunctional political system can’t stop. Read Boom! Retail sales are way up. Maybe this economy is stronger than we thought here .
  • Economic Confidence Declines With Failure to Reach Budget Deal

    Americans' confidence in the economy took a hit at the end of last week when our elected officials failed to come up with a deal to avoid the so-called sequestration. Here is a look at the weekly averages of Gallup 's Economic Confidence Index : But before we get too caught up in the drop, here's a look at the monthly averages: As Gallup's Alyssa Brown notes, economic confidence had been at a five-year high. The question is whether action in Washington (or inaction) will offset the larger trend. A majority of Americans, 56%, say the nation's economy will suffer this year if the federal budget sequestration goes into effect and 44% say sequestration will harm their own finances. This sentiment, combined with a sharp decline in Americans' economic confidence in the week ending March 3, suggests that Americans' monthly economic confidence may slip further in March. But, Americans' confidence in the economy did rebound quickly after the fiscal cliff debate came to an end, so confidence may similarly bounce back if leaders in Washington reach a deal. Read the full release here .
  • Noah Smith: "If growth does end, does our economic system go with it?"

    Even the good news about GDP for most advanced economies these days is tempered. Any rate of growth seems welcome in Europe or Japan, for example. The slow growth/no growth news of late has sparked some discussion of whether we need to adjust our expectations for the long term--or even whether capitalism in danger. But Noah Smith wants us to be careful not to equate growth and capitalism. We may have come to think that capitalism is fueled by growth, but Smith argues that not-so-distant history shows otherwise. From The Atlantic : Ask any economist of the free-market persuasion to justify capitalism, and the word "growth" probably won't even be part of his spiel. The simple Econ 101 theories that are used to justify free markets don't even have growth in them! In Econ 101, capitalism works because people gain from trade, not because they have more and more to trade over time. Efficiency, not growth, is the gold ring. In those simple toy economies, people just keep on cheerfully making their bargains of cattle and grain until the Sun explodes. In fact, some of the earliest challenges to the free-market orthodoxy came from adding growth to the models. Back in the 1950s, Paul Samuelson showed that growth provides a rationale for Social Security. Later, "endogenous growth" theories called for a government role in supporting research and development. But who cares about economic theories, right? What does history tell us? Using the past as a guide to the future has always been the most daunting of challenges. But that said, modern history doesn't seem to favor the "end of growth = end of capitalism" thesis. After all, middle-class incomes have been stagnating in rich countries on and off since the early 1970s. Energy and water - certainly the most important natural resources - have become scarcer and more expensive. In other words, we really have started hitting our resource limits. And yet in many ways, rich countries like the U.S., Europe, and Japan have become more capitalist since the 70s, with lower taxes, deregulation, widespread privatization, and a bigger role for financial markets (not that this has always worked out well, obviously!). Despite the increasing prices of oil and gasoline and water, people in the developed world have not clamored for capitalism's downfall. Read The End of Growth Wouldn't Be the End of Capitalism here .
  • Atlanta Fed President on Growth and Jobs, and 'Misrepresentations' of the Impact of Small Firms

    We find that a lot of the talk about small businesses as job creators in the U.S.--especially during political campaigns--isn't quite backed up by the data. The same may be true elsewhere. Atlanta Fed President Dennis Lockhart was in Spain to speak with students at the Instituto de Empresas . The focus of his speech was on growth and jobs, and he spent some time tamping down heightened expectations for smaller faster younger firms--or "gazellas"--to drive growth in the U.S. or Europe: We found that the role of young firms in job creation is easily overstated. For instance, the claim is often made that new firms alone account for all net job creation. This is true in what you might call an accounting sense. That is, the number of jobs created by new firms about matches or exceeds the net number of jobs created by all firms. But this fact ignores the reality that established firms that are growing create many more jobs each year than do new firms. It's just that established firms that are downsizing are responsible for destroying a lot of jobs as well. New firms haven't been around long enough to downsize. In fact, as a group, young firms between one and five years old destroy more jobs than they create because of the high failure rate. Moreover, we found that many small firms are not established with an objective to grow and add employees. The landscape of small, young businesses is heavily populated with "mom-and-pop" businesses. They play an important social role, but are not a major source of jobs beyond the initial number of employees at establishment. In our investigation we then looked at the argument that it is the relatively small subset of small, young, fast-growing firms—the gazelles—that drive job creation. It's clear that gazelles do contribute significantly, but it's the growth dimension, not the age or size dimension, that matters most. That is to say, fast-growing mature firms also account for a lot of job creation. And heavy emphasis on technology and bioscience industries—so popular among economic development professionals—may also be misplaced. High-growth firms emerge in a number of industries, some decidedly low tech. All in all, it's not so obvious that the likely source of high-growth firms can be identified. The recent recession significantly constrained the growth opportunities of companies. By one definition of fast growth, there are about a third fewer fast-growing firms in the U.S. economy now compared to the mid-2000s, and they are adding about half as many jobs compared to the earlier rate. It may seem like an obvious point, but one still worth emphasizing. Innovation and entrepreneurial activity are most likely to achieve maximum impact in terms of job creation in a context of general economic growth. Read the full speech here .
  • North Dakota Top Scorer in Gallup's Job Creation Index for Fourth Year in a Row

    The Midwest was the highest scoring region for Gallup 's Job Creation Index for 2012, but the index showed improvement across the nation. Only four states--Arizona, Delaware, Mississippi, and West Virginia--had lower survey scores than 2011. Gallup's Job Creation Index is based on employee reports of their own company's hiring activity, so we don't want to go overboard on what the data tells us her, but the trending is positive. Here is a look at Gallup's interactive map: On average in Gallup Daily tracking from January through December 2012, 43% of North Dakota workers said their company was hiring workers and expanding the size of its workforce, while 9% said their employer was letting workers go and reducing the size of its workforce, for a +34 Job Creation Index score. This is easily the best among the 50 states and the District of Columbia, and is 16 percentage points above the national average of +18. North Dakota has ranked first four years in a row. Full results by state for 2012 can be found on page 2. South Dakota, Nebraska, Iowa, Indiana, Oklahoma, Utah, and the District of Columbia have also all ranked among the top states in hiring in 2011 and 2012. Maine is new to the bottom 10 states in 2012, compared with 2011, largely because its +10 Job Creation Index score was unchanged while most states showed improvement. Connecticut, Idaho, New Jersey, Oregon, New Mexico, New York, and California are the seven states that made a repeat appearance among the bottom 10 in 2012. Read the full report here .
  • McKinsey Global Institute: 'How to save $1 trillion a year

    How would you like to save a trillion dollars a year? One thing, you have to spend a bunch of money on a bunch of projects you have been putting off. That's the opportunity and challenge global policy leaders are facing when it comes to infrastructure, according to a report from the McKinsey Global Institute . In order to just keep up with global economic growth, government spending has to reach new highs at a time when politics is pushing many key economies toward cuts. From the report: The McKinsey Global Institute (MGI) estimates $57 trillion in infrastructure investment will be required between now and 2030—simply to keep up with projected global GDP growth. This figure includes the infrastructure investment required for transport (road, rail, ports, and airports), power, water, and telecommunications. It is, admittedly, a rough estimate, but its scale is significant—nearly 60 percent more than the $36 trillion spent globally on infrastructure over the past 18 years. The $57 trillion required investment is more than the estimated value of today’s worldwide infrastructure.1 Even then, this amount would not be sufficient to address major backlogs and deficiencies in infrastructure maintenance and renewal or meet the broader development goals of emerging economies. Moreover, the task of funding the world’s infrastructure needs is more difficult because of constraints on public-sector budgets and commercial debt in the wake of the financial crisis, higher and more volatile resource costs, and the additional costs of making infrastructure resilient to climate change and less harmful to the environment. The size of the infrastructure “gap” and the undoubted challenges there are in finding the financing necessary to close it dominate political and public discussion on this topic. Yet this focus diverts attention from what we believe is just as compelling and urgent an issue—how the world can get more, better-quality infrastructure for less. This report focuses on rethinking how governments, together with the private sector, select, design, deliver, and manage infrastructure projects, and make more out of the infrastructure already in place. We argue that there is an emerging opportunity to raise the productivity of infrastructure investment by a substantial margin. Based on McKinsey & Company’s work with governments and private-sector infrastructure players around the world, an extensive literature review, and drawing on insights from more than 400 case examples, we project that if infrastructure owners around the world were to adopt proven best practice, theycould increase the productivity of infrastructure investment to achieve savings of 40 percent. Put another way, scaling up best practice could save an average of $1 trillion a year in infrastructure costs over the next 18 years. While a 40 percent saving is an extrapolation that uses several simplifying assumptions, we believe a productivity boost of this magnitude is achievable in many countries if they are willing to invest in a systematic approach to infrastructure that drives improvement across agencies and private-sector owners and contractors. The measures that we discuss are not about inventing a completely new approach to infrastructure— what we propose is simply rolling out proven best practice on a global scale. Here is a breakdown of the key sectors where the report argues infrastructure is needed: Read the full report here .
  • Wharton's Guillen: Pressure is Still on Emerging Markets to Carry Global Growth

    Key emerging economies like China, India, and Brazil are still growing at rates developed economies would love to see on their own shores, but they aren't growing at the rate they were a couple of years back. And that is the key problem for global growth, says Mauro Guillen , professor of International Management at Wharton. Even if Europe halts its economic slide, the pressure is still on emerging economies to fire the global economy. Guillen gives his outlook for global markets over the coming year in this Knowledge@Wharton interview:
  • Mark Thoma On Infrastructure Investment as Economic Fix-it

    Mark Thoma has a good conversation starter at the Fiscal Times . Thoma puts forward the case that now is the right time for infrastructure investment--precisely because the federal government needs to work down its debt long term. And instead of looking at it through the lens of Washington, he wants us to consider this sort of investment from the point of view of a business or home owner. We are in a situation where the costs of infrastructure construction are very, very low. Interest rates are near zero, a sign that the financial community has no worries about loaning us the money, so borrowing long-term has very little interest expense associated with it. In addition, high unemployment has reduced wage costs, and low demand for raw materials due to economic troubles in developed economies has reduced the price of the other inputs that are needed for infrastructure construction. We are also in a situation where the benefits from new infrastructure are very large. The construction of new infrastructure has not kept up with our needs – roads, bridges, water systems, electrical systems, ports, and so on are all in need of attention – and we have not taken full advantage of the latest technological advances that will ensure we are competitive in a global economy. High benefit projects are not hard to find. And there are additional long-run benefits from infrastructure spending as well. Long-term unemployment, which is abnormally high right now, imposes long-term costs on the economy in the form of higher social costs and lower economic growth. Infrastructure spending moves people off of couches and into productive employment so that we avoid these costs – growth is higher and social costs are lower – and that makes us all better off. The low costs and high benefits of infrastructure spending in the present economic environment give us an abundance of projects that would easily pass a cost-benefit test. Our failure to take advantage of these opportunities is, in essence, leaving money on the table. That wouldn’t happen in the private sector, and there’s no reason for government to do this either. Read One Investment that Can Reduce Our Long-Term Debt here .
  • Roubini's Outlook for 2013: "Downside risks to the global economy are gathering force"

    As President Obama launches into his second term, getting the economy moving remains among his top priorities. It is not the challenge he faced four years ago, when we were just months removed from the near global economic meltdown of September 2008. Rather, it may look very similar to last year: slow growth around the globe. But, according to Nouriel Roubini , there will be some "important differences , " that might lead us to prefer slow growth to the alternative. In a piece for Project Syndicate , Roubini raises concern that, "given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries." With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government. Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters. Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will re-emerge with full force in the second half of the year. After all, stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm. As a result, large – and potentially unsustainable – stocks of private and public debt remain. Moreover, given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits. Read The Economic Fundamentals of 2013 here .
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