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Old Tuesday, February 24, 2009
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Exclamation Shahid Javed Burki article

DAWN.... shahid javed burki

THERE is a tendency on the part of many in Pakistan to gloat over India’s misfortunes. The same is true in India where Pakistan’s problems are noted with some satisfaction by many segments of the population including certain influential people amongst the intelligentsia.

This is unfortunate since both countries would benefit by positive developments on the side across the border from them.

I have suggested in these columns on several occasions that Pakistan, being the smaller economy, would gain from the strength of the Indian economy if the two countries could shed their mutual suspicions and open up trade to commerce and their borders to the flow of people. It is in this context that I will look at the latest economic news from India suggesting that that country has also been severely hit by the ongoing global financial crisis.

A few months ago, there was confidence in India shared by officials responsible for the making of public policy as well as by managers in the private sector that India was on its way to climbing up the growth trajectory in the same manner as China. The latter had gone from backwardness to becoming a global economic powerhouse. As one commentator wrote, it seemed that “the Indian century had arrived; growth rates stubbornly stuck at 3.5 per cent for decades were forgotten”. That seems a distant dream now. The government has revised the growth rate for 2009 to 7.1 per cent, the slowest in six years. Other analysts are even less confident. Citigroup expects the rate of growth in 2010 to be only 5.5 per cent, increasing to 6.2 per cent in 2011.

This may appear to be satisfactory given growth rates in the half century after independence when India was stuck at what some Indian economists called the “Hindu rate of growth”. But there was an expectation of a fundamental change in the structure of the economy which would allow the latter to grow at rates achieved by China over a period of 25 years. In the three years before the current downturn, the Indian economy had grown at an annual average of close to nine per cent. This meant an increase in average per capita income of almost eight per cent a year. The large Indian middle class had begun to show signs of prosperity. This class will be seriously affected by the way the downturn is being felt in the economy.

Modern industry has suffered the most followed by the sector of information technologies. These two sectors of the Indian economy along with modern health services were expected to take India towards sustained growth and modernisation. They were expected to help the Indians carve out a large slice for themselves in the global economy. Those ambitions have been checked.

Indian industrial production fell by two per cent in December, the second monthly decline in the last quarter of 2008. Textiles and automobiles are the two most affected sub-sectors within the industry. Both had done well in recent years because of exports. India had been successful in carving out niches for itself in these two relatively crowded parts of the global economy. The IT sector has also been seriously affected.

What is particularly worrying for India is the loss of jobs in the modern sector. More than half a million people were laid off in the final quarter of last year. The rate of job loss is expected to increase in the coming months. This is unfortunate for the long-term prospects of the economy. There was the expectation shared by policymakers as well as the academia that job creation in the economy’s modern sectors would relieve pressure on the countryside where, despite a relatively high rate of urbanisation, most Indians continue to live.

This is the first time that India is experiencing a major downturn in the modern part of its economy accompanied by a loss of jobs. Unlike the situation in China where the people laid off by modern sectors are returning to the countryside, such back-migration is not likely to occur in India. Consequently, there will be greater pressure on the urban areas, in particular on the country’s major cities. This will further deteriorate the social situation in India’s large cities that was so vividly portrayed by the Oscar-winning movie Slumdog Millionaire.

How is the government reacting to the worsening economic situation? Not unlike the circumstances that have dictated public policy response in Pakistan, the Indians also don’t have the fiscal elbow room that would justify the kind of stimulatory route taken by China. Beijing is relying on an economic stimulation programme valued at close to $600bn to revive the economy. New Delhi has taken some steps to pump public money into the economy but its efforts are seriously constrained by the large fiscal deficit that already cramps government activity.

The government’s fiscal target for 2009 was an ambitious one. It had hoped to bring it down to 2.5 per cent of GDP. It is now expected to be 7.5 per cent; possibly higher. It could reach 9.5 per cent. Such an increase will have inflationary consequences. Inflation had climbed to 12 per cent in 2008 but was halved in recent months largely on account of the sharp decline in oil and other commodity prices. But a large fiscal deficit, if financed by borrowing from the central bank, would introduce another type of pressure on prices.

One factor helps India make adjustments. This is also the case in Pakistan. Both countries resisted the pressure from the world at large to completely open up their economies. This advice was taken to some extent but the economies were not as exposed to the outside as is the case in East Asia. One result of this is that the full pressure of the negative side of globalisation has not been felt by these countries. The shocks delivered by the economic downturn in the United States, Europe and Japan have been felt but not to the extent of their impact on the more open economies of East Asia.

Does this mean that once the current crisis has passed both India and Pakistan should selectively open their economies to outside influences? The answer to this question will come but later when the world gets fully engaged with analysing the causes and consequences of the crisis. This exercise is likely to begin with the meeting of the G20 group of countries scheduled to be held in London in early April.

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Post How to fix the economy

How to fix the economy



By Shahid Javed Burki
17/02/2009



THAT the country is faced with a serious economic crisis is recognised by the current group of policymakers. It is not certain whether they realise how serious the situation is and what could be its consequences.

Pakistan’s 165 million people of which one-half are under the age of 17 and about 40 per cent live in urban areas are becoming restive because of the deprivation caused by the severe economic downturn.

Security will not return to Pakistan unless the economy is put on a sustainable growth path. That will need considerable work on the part of the government and also help from the community of donors willing to come to Pakistan’s aid. At this time Pakistan’s economy is faced with numerous problems, most of which are a consequence of poor public policy decisions in the past.

The gross domestic product in 2009 is not likely to increase by more than two to 2.5 per cent. With the population growing at 1.5 per cent a year this rate of growth will certainly mean increase in the incidence of poverty to about 40 per cent of the population. This means that 65 million people will be living in absolute poverty by the end of this year, an increase of 15 million. Many of these will be in the urban areas and many in the parts of the country where Islamic extremists are trying to establish their control.

Urban unemployment will also increase sharply especially in large metropolitan areas such as Karachi, Lahore, Rawalpindi-Islamabad and Peshawar. These cities have absorbed a lot of surplus labour from the countryside in the past couple of decades. They have also been the favoured destination of refugees from Afghanistan. Unless jobs are provided to the urban unemployed and incomes are transferred to the urban poor, these developments will lead to restiveness among the urban youth and attract them to extremist causes. What are the options available to the state in these circumstances?

There are several. Of these I will briefly mention four, one immediate and the remaining having an impact over the medium and long term. The government needs to provide cash transfers, targeted subsidies and temporary employment to the unemployed in both urban and rural areas. For all of these there are examples available from several countries around the globe that have successfully implemented such programmes during periods of economic stress.

Several Latin American countries have created temporary employment opportunities when economic crises increased unemployment levels. The countries in the Middle East have achieved impressive levels of social development by spending three to four per cent of GDP on social safety nets during periods of economic stagnation. Pakistan needs to make a comparable level of commitment to these kinds of activities.

Second, government expenditure needs to be significantly restructured in favour of larger amounts of spending on education and primary healthcare. This redirection of public expenditure would require additional government revenues as well as changes in the direction of government spending. The size of the federal government needs to be reduced, non-development public expenditure will need to be drastically curtailed, duplication will have to be eliminated between federal and provincial spending, defence expenditure will need to be reduced.

Third, Pakistan needs to get off the roller-coaster it has been on ever since its birth, with the economy growing at a respectable rate whenever there were large flows of American assistance to the country (in the 1960s, the 1980s, and the early 2000s) and slowing down when the flow of funds from Washington declined.

This reliance on external finance was the consequence of the inability of the country to raise the needed resources from the domestic economy. This has to change. A shift would entail a significant restructuring of the tax system by the expansion of its base and by bringing in all sectors of the economy, including agriculture, into the tax net. The aim should be to double the tax-to-GDP ratio from the current pitifully low 10 per cent.

Fourth, the government needs to focus on developing the sectors and lines of products that could help increase export earnings. Pakistan has not benefited from the process of globalisation that led to a much higher increase in international trade compared to growth in the size of the combined international product. Export-led strategies have helped many Asian countries see sustained economic expansion for decades.

Pakistan will also need to trade more with its neighbours, in particular India and China. It is one of three countries (the other two are the relatively small nations of Bhutan and Nepal) that border on these billion-plus-people countries with dynamic economies. Rather than have the United States as the main trading partner, that position, as suggested by the gravity model of trade, should be occupied by India and China. Restoring trading relations with India should also help to reduce regional tensions.

These structural changes would need not only the full attention of Islamabad. They would also require a considerable amount of additional external resources at least for the next half a decade. This is where the United States enters the picture. It could provide leadership to a group of donors to fund a large programme of structural change (say $50bn to $60bn over the next five years) with one half to be provided by the donors and the remaining by Pakistan. The donor contribution should be front-loaded with Pakistan picking up the bulk of the expenditure at the programme’s tail-end.

How Pakistan will provide funding should be made clear at the very start of the planning process. This will require a major overhaul of the tax structure. The donors should also carefully monitor the implementation of the programme by creating a consortium chaired either by the World Bank or USAID.

Ten to 12 donors interested in associating themselves in this exercise may contribute to the establishment of a group tasked with helping Pakistan develop a plan for the use of the funds made available by the donors as well as overseeing the implementation of the programme. Funding should start only after Islamabad has prepared a medium-term programme of structural reform and sustained development including some of the elements suggested above in this brief article.
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Post The Holbrooke mission

The Holbrooke mission


By Shahid Javed Burki
10/02/2009


PRESIDENT Barack Obama has departed in a number of significant ways from his predecessor George W. Bush’s style and substance in managing external affairs. Even in the case of intractable problems the US faced in the global arena, the former president famously relied on his gut feeling rather than deep thought and analysis.

When policymaking is done through gut and feel, there is little need for expert advice. Whereas a number of previous occupants of the White House had appointed “special envoys” to help in the making of policy in difficult areas, President Bush let the established bureaucracy take the lead with some broad guidance provided by him. President Clinton, like some of his predecessors, relied on special envoys. Two of these were remarkably successful in carrying out their assigned missions.

The first of these was former Senate majority leader George Mitchell who worked on the Irish problem that had festered for decades. By being patient and showing willingness to understand the points of view of both sides, Mitchell was able to bring together the rivals. The ground was laid on which it was possible to build a political structure that has since become durable. The other envoy was Richard Holbrooke who worked on the Balkans and was able to have the many contestants agree to what has come to be called the Dayton Accord. That agreement has also served to bring peace to a very difficult area.

Both Mitchell and Holbrooke have been summoned back to duty by President Obama. Mitchell will be the “special envoy” working on the Middle East while Holbrooke has been assigned the task of dealing with the problem created by the resurgence of Al Qaeda and the Taliban in Afghanistan and in the border areas of Pakistan.

Richard Holbrooke begins his mission to Afghanistan and Pakistan at a particularly difficult time for the two countries. Much has been said and written about Afghanistan; relatively less on Pakistan. I will attempt to fill the gap for the latter. At this time Pakistan is faced with a perfect storm: its political system and the structure of its economy are in tatters. Both need to be fixed. Doing one without the other won’t work. I will begin with politics.

The free and fair elections held in February 2008 and the successful outcome of the prolonged struggle to send President Pervez Musharraf into retirement created the hope that the country would be able to put in place a political system that would have people’s elected representatives in charge. The transition from military to civilian rule was completed in September with Asif Ali Zardari becoming president.

While the Pakistan People’s Party and the Pakistan Muslim League, the two main political groupings in the country, had cooperated to force Musharraf out of office, they began to drift apart once Zardari announced his intention to seek the presidency. Zardari won easily. There is considerable political uncertainty at this time with Zardari attempting to consolidate the power of the presidency while the Sharif brothers, Mian Nawaz and Mian Shahbaz, are pushing for a system in which executive authority would be with the prime minister answerable to parliament.

Embedded in this conflict are issues that Pakistan has not been able to resolve for more than 60 years. There are basically four questions to which answers have to be found. The first one relates to the choice of the place from which executive authority should be exercised. There was enormous concentration of power for 44 out of the 61 years that the country has been independent. This was the case when the military was directly or indirectly in power — the years of Presidents Iskander Mirza (1955-58), Ayub Khan and Yahya Khan (1958-71), Ziaul Haq (1977-88) and Pervez Musharraf (1999-08). Even some of the elected prime ministers — for instance, Zulfikar Ali Bhutto — freed themselves from the control of parliament.

There are two ways of resolving this tension. One is to fully restore the constitution adopted in 1973 to its original form. This would mean doing away with the 17th Amendment introduced by Musharraf that concentrated political power in the hands of the president. The 17th Amendment was based on the Eighth Amendment introduced by Ziaul Haq before he allowed civilian leadership to share power with him. The Eighth Amendment was repealed by the National Assembly when Nawaz Sharif returned to power as prime minister in 1997. This is what the Sharif brothers want to do with the 17th Amendment. The other option is to go back to the drawing board and remove the ambiguity that exists by adopting a presidential form of government.

The second question concerns the distribution of power between the central government and the provinces. When strong men governed the country there was an understandable trend towards centralisation. This was the case in particular when the military ruled. It is a strong believer in centralised command and control. However, a country the size and complexity of Pakistan cannot be efficiently and effectively governed from one central point. No matter which system of government eventually evolves, there has to be greater autonomy granted to the provinces and to the institutions of local government. The fact that Pakistan has tried five different systems of local government is one more indication of the state of flux in politics.

The third unresolved issue relates to civil-military relations. What kind of role, if any, should be allowed to the military, particularly in foreign affairs? The military has used its self-perception as a guarantor of national security to repeatedly insert itself in politics. It is unlikely that the armed forces will completely walk away from politics unless the two other issues discussed above get resolved.

The fourth question concerns the role of the judiciary in governance. There is a tradition in the country going back to the mid-1950s when the executive called upon the judiciary to provide ex-post legal cover to its clear defiance of constitutional provisions. It started in 1954 when then Governor General Ghulam Muhammad sacked the National Assembly and had his action endorsed by the Supreme Court under the “doctrine of necessity”. It includes the two attempts made by Musharraf to use unconstitutional means to assert his authority by first firing the chief justice in March 2008 and then imposing a state of emergency in November. The role of the judiciary is now being used by the PML-N to challenge Zardari.

How could Holbrooke help the country make progress in developing a system of governance that is durable and meets the wishes of the people? He could possibly play the role of an intermediary for different political groups. However, as I will suggest in this space next week, it is in economics that the United States could be really helpful.
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Post

The sordid side of India


By Shahid Javed Burki
Tuesday, 03 Mar, 2009


THE British-Indian film Slumdog Millionaire has become a phenomenon in the United States, Britain and other western countries. It was nominated for 10 Academy Awards and won eight of them, including the highly coveted title of the best motion picture of the year.

Not only was the movie a sensation, its three child actors, all plucked from a Mumbai slum inhabited mostly by Muslims were also applauded.

The three kids were flown from Mumbai to Hollywood and attended the award ceremony. The film’s director, an Englishman, said the movie is really a love story — the story of two children who, after going their separate and at times ugly ways, find each other and presumably live happily ever after. The movie ends with a dance and song number — the song also won an Oscar — celebrating the triumph of love over evil.

The Indian reaction to the movie’s triumph was at best mixed. While Manmohan Singh, the Indian prime minister, said that it was a matter of pride for his country that its art and artists had received global recognition, many Indian commentators were less enthralled. Priyadarshan Nair, an Indian filmmaker, wrote in an article published in India Today, that the movie was a poor copy of those made in Bollywood. Besides, it mocked India. He wrote. “India is not Somalia. We are one of the foremost nuclear powers in the world; our satellites are roaming the world. Our police commissioners’ offices don’t look like shacks and there are no blind children begging in the streets of Mumbai.”

There are, of course, blind and crippled children begging not only in the streets of Mumbai but in all major cities of South Asia. To deny their existence is to deny help from reaching them. The political slogan, ‘Shining India’, did not help the Bharatiya Janata Party in the 2004 elections. ‘Incredible India’, the slogan with which India began to draw the attention of the world to its economic and political triumphs, must not be allowed to brush under the carpet the lives lived by hundreds of millions of people who have not been touched by the country’s impressive economic performance of the last couple of decades.

There is a tendency among many Indians to become highly nationalistic when what they perceive as the ugly side of their country becomes news. That is unfortunate since there are many areas where India is not doing well and one of them is the quality of services it delivers to the urban poor. That, in part, was the story of Slumdog. The poor in India feel differently about the film. “A lotus from the swamps” is how a proud father of a child actor in the film describes his son’s achievement.

But there was more to the movie and the story it told. It is not really a love story involving two kids from one of the more notorious slums of Mumbai, who ultimately escape poverty and much else to become rich and famous. What appealed to western audiences was the display of audacity on the part of some kids from the slums, with which they are able to mould their future. The three children in the story don’t opt for fame and wealth based on virtue; one of them becomes a leader of a gang that makes its money by exploiting kids from the slums.

This is not only the story of urban India

but of the entire developing world where the heartless exploitation of the poor by the rich is common and beyond the reach of the state. Not only is the state often a bystander in this form of economic exploitation, it is often complicit in what goes in. The police in particular provide little protection to the vulnerable. It often comes out in support of those who exploit. This happens in the slums of Mumbai, Karachi, Dhaka, Sao Paulo and Lagos — in fact, in all the megacities of the developing world.

It is interesting that those who financed the film, produced and distributed it and who consequently made a good profit for themselves are anxious not to be seen as having exploited the slums, those who live in them and the slum children who are desperate to find some way of escape. They have declared that a part of their profit will be used to help the children who acted in the film. Their school will be improved and once they have graduated from it they will be provided financial assistance to attend institutions of higher learning.

The story of filth and squalor — at one point Jamal, the film’s young protagonist wades through raw sewage to get the autograph of a movie star who has arrived in his helicopter — is the story of millions of children who suffer from the extraordinary environment in which they live. Almost 90 per cent of the two billion projected increase in world population will take place in the developing world by 2050. Of this one-half will live in towns and cities.

About 50 large cities of the developing world will gain an additional 250 million people, 90 per cent of them will find accommodation in the slums of the cities and jobs in the already crowded informal sectors. The probability that one of them will become a millionaire is minuscule. Even the chance of surviving to adulthood and old age is small.

Slumdog is also a vivid portrayal of the environmental degradation that surrounds the people who live in these settlements. Economists have now begun to argue that providing clean drinking water and basic sanitation is an important way for bringing some development to these areas. This is the reason why the Millennium Development Goals adopted by the heads of state in 2000 emphasised not only education but also the supply of quality drinking water and the provision of sanitation to the poor. By focusing on this aspect of life for millions of slum dwellers in India — and by extension in all developing countries — the filmmakers have done a great service.

One likely consequence of public awareness that will definitely result from the success of the film is to attract the West’s civil society to pay some attention to the conditions in the slums of the developing world. Experience has shown that when governments fail non-government organisations step in. This happens in both developed and developing countries. The failure of western governments to increase assistance to poor nations — something they have promised over and over again — has prompted organisations such as the well-endowed Bill and Melinda Gates Foundation to step in with assistance.

Likewise NGOs such as Pakistan’s Edhi Foundation come to the assistance of people in distress when the state fails to reach them. By increasing the world’s awareness of the conditions in which millions of people live, Slumdog did not mock India. It has served the world’s poor well.

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Post

A possible Kashmir solution


Open trade and free movement of the people of Kashmir could be the basis of an agreement since both sides have paid a heavy economic cost keeping the issue alive for so long.


By Shahid Javed Burki
Tuesday Mar 10, 2009


I HAVE seen some reports in the American press detailing how India and Pakistan, working through back channels, were close to an agreement on solving the long-enduring Kashmir problem.
It appears that the two countries were about to reach an understanding on creating a new legal and political entity covering the entire state of Kashmir, the parts being currently administered by both Pakistan and India. The state would have been given a fair degree of autonomy and would have been governed by a body with membership drawn from both India and Pakistan. A sort of Kashmir Commission would have been created to manage the state.

The Line of Control, the current border between the Indian-occupied Kashmir and the Pakistani-held Kashmir, would have been turned into a soft border, open to unconstrained trade. The movement of people across this quasi-border would have been free. People’s movement beyond the estab lished borders of the two countries would have been regulated according to the laws of the two states. Although the press reports did not indicate what kind of passports and citizenship the Kashmiri people would have carried, I presume that a separate national identity would have been created.

This near-agreement collapsed after President Pervez Musharraf was forced to leave office. The terrorist attacks on Mumbai last November dealt another blow to the developing understanding. It is presumably lying on a shelf in diplomatic cold storage in New Delhi. Will it ever see the light of day?

The current political turmoil in Pakistan has contributed if not to the demise of the agreement then at least to a considerable delay in its possible adoption. Pakistan today is politically and economically a much weaker state than it was in the early 2000s. It was then that much of the backchannel negotiations were conducted. Especially when longenduring disputes are being looked at for finding possible solutions, progress can not take place when one side has been considerably weakened compared to the other. This has happened to Pakistan.

A government that does not have a sense of a security cannot negotiate when the workable agreement involves moving back from the positions that have been taken for a long time. The solution of the Kashmir problem of the type revealed by the American press would have resulted in Pakistan giving up its long-standing claim to the entire state of Kashmir. Not only that, it would have also agreed to Azad Kashmir to be governed by a joint commission. Only a strong and secure administration could sell this change in posture to the population which continues to be emotionally involved in the Kashmir issue.

India, too, has been weakened by the Mumbai attacks. The government headed by Prime Minister Manmohan Singh has come under heavy criticism for not being able to defend its borders. That a small group of men could penetrate the defence perimeters of such a well-protected city as Mumbai was seen a sign of weakness, particularly on the part of a country that claims superpower status.

That it took so long for the members of the special forces to reach the scene of carnage did not provide comfort to a population that was being fed the slogan of ‘incredible India’. Weak governments don’t settle old and difficult disputes. This does not augur well for the settlement of the Kashmir problem anytime soon. That said, it gives some hope that at least at the official level the contours of a possible settlement have begun to take shape.

A couple of years ago I was commissioned to do a study on Kashmir by the Washingtonbased United States Institute of Peace. The study was published by the USIP and became the subject of a conference hosted by Pugwash in Colombo in 2007. The conference was well attended by non-government representatives from both India and Pakistan as well as by some functionaries from the US think-tank industry.

The conclusions I had reached in the study were similar to those that formed the basis of the informal dialogue between the governments of India and Pakistan. I had suggested that open trade and free movement of the people of Kashmir could be the basis of an agreement since both sides had paid a heavy economic cost keeping the issue on the front burner for so long. This was the case especially for Pakistan.

Using a simple economic model I estimated the economic costs for Pakistan of the continuing dispute, arguing that the country’s economy would have been a couple of times larger had so much not been invested in the Kashmir dispute. It was an economist’s way of arguing that letting Kashmir go unresolved was a tenable proposition for the people of Pakistan.

The costs incurred came not only in the form of large military expenditures that a country at Pakistan’s stage of development could not afford. They also resulted from smaller flow of foreign capital, the closure of large Indian markets for Pakistan’s exports, and periodic troop mobilisations that were costly. Pakistan also allowed Kashmir to become a cause célèbre for Islamic extremism.

Once equilibrium has been restored to Pakistani politics and once general elections in India have produced a new government in New Delhi, the two countries may be able to revisit the problem of Kashmir, continuing the dialogue where they left it when Pervez Musharraf departed from the political scene. A nudge may be needed by both capitals to get back to the ta ble, formally or informally, and begin to lay the ground for moving forward.

The nudge may come from Richard Holbrooke, President Barack Obama’s special representative to the region. Although India was able to exclude Kashmir from the Holbrooke mission at New Delhi’s insistence, this may not prevent the emissary from informally pressing the two governments to move ahead towards resolving the dispute. If further evidence is needed about the way various conflicts around Pakistan are destabilising the country, it was provided by the terrorist attacks on Lahore on March 3.

The Americans must be concerned that unless progress is made in removing the causes that motivate the jihadi groups, this part of Asia will not be stabilised. Wise leadership on both sides of the border should recognise that persistence on Kashmir and the reluctance to move away from established positions comes with very high costs. ¦
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Through the economic prism


Wednesday, 18 Mar, 2009
By Shahid Javed Burki


IT pays politicians to look at politics from the prism of economics. This is precisely what Barack Obama did while he was campaigning as a candidate for the US presidency.

In September 2008, when the first of several meltdowns that have affected the US economy occurred, he concluded that what the people wanted was a calm handling of the rapidly worsening situation. He kept his cool and gave his responses in highly measured terms.

On the contrary, his opponent John McCain responded hysterically. He suspended his campaign for a few days, flew to Washington to assume the leadership of the Republicans in the US Congress, and tried to persuade the lame-duck administration of George W. Bush to take action. These two different approaches were seared in the minds of the US electorate and helped Obama score a landslide victory.

What was true for the US last year is true for Pakistan now. There is much hysteria in Pakistani politics today. This, too, must be affecting the way people look at the politicians in general and at different politicians in particular. The uncertainty created by a charged political atmosphere has an economic cost. I do not believe this has been fully comprehended by the politicians active in the field today. Ultimately, the side that keeps it cool and exacts a smaller economic price from the way the crisis is handled will benefit at the polling booth whenever the people are invited to elect their representatives again.

It does not need all that much elaboration to underscore an important point about the current economic situation. The country is in deep crisis, perhaps the worst it has experienced in the 60-plus years since its birth. A significant part of the cost is being borne by the poor and their situation will get worse if the country’s economic situation continues to deteriorate. But that will not happen for as long as the political situation remains highly uncertain.

It is sometimes useful to calculate the economic cost of political agitation to convince politicians that hysteria may force their followers to look in a different direction. If that were to happen in Pakistan, and if the mainstream political parties choose to fight it out in the streets, those who are economically stressed as a result of political machinations may opt for something different. They may choose extremism.

The other day a politician active in one of the two major parties told me with great pride that he and his followers were able to put 100,000 people in the streets of Punjab’s major cities. That assertion led me to do some simple calculations.

Encouraging a person to take to the street costs that person at least Rs300 if he is fully employed. Getting 100,000 people to agitate means a loss of income of Rs30m. The cost to the economy is perhaps three times as large since the income forgone has what the economists call a multiplier effect. In Pakistan’s case the gain or loss of one rupee of income means at least the gain or loss of three rupees to the economy. We are, therefore, looking at a cost of more than $1m to the economy. Who bears this cost?

Perhaps a good part is met by the political organisation that has ordered its followers to come out on the street. The money that the party spends may come from the savings of

its well-to-do leaders. This amount could be deployed in more productive enterprises than political agitation. Or if it comes from corruption, it produces serious distortions in the economy.

It is well recognised that in most developing countries political expenses are paid from the funds not legitimately collected from donors but from the money solicited from beneficiaries of services provided by those who are in power. This increases the cost of the service provided to the beneficiaries. Those who pay political bribes will pass on the cost to the consumers of the service or the product that is being procured from those who, because of the power they wield, are able to provide either or both of them.

There is another cost associated with the politics of agitation that produces an even greater economic burden for societies where this kind of political behaviour is prevalent. Agitation rather than the use of legitimate means for settling disputes according to the law of the land becomes the norm in those places where the institutional structure is weak. This is certainly the case in Pakistan.

Over time, institutions in Pakistan have weakened to the point at which people have lost confidence in the political system to deliver in legitimate ways. National and provincial assemblies don’t settle political disputes. Courts do not dispense justice. Bureaucrats do not implement decisions taken by policymakers or laws passed by parliaments. Scores are settled by resort to the politics of the street. This results in a vicious cycle. But this is not the only vicious cycle that is taking Pakistan down to unknown depths.

It all began in Pakistan in 1954 when an authoritarian and unelected head of the state dismissed the Constituent Assembly because the latter had begun to assert what was its legitimate right. The governor-general’s action was legitimised by the judiciary. Even after half a century that vicious cycle has continued to define politics. There is an urgent need to break into it.

The economist Douglass North won the Nobel Prize in his discipline by suggesting that economies will not modernise and grow unless they also develop the institutional base that provides the foundations on which the country and society must rest. North’s definition of institutions went beyond organisations that underpin economies. He included in institutions the ways, both formal and informal, in which all human beings interact with one another. These interactions should support the modernisation of economies and societies. Over time, the forms of interactions should move forward from the formal to the informal.

The politics of agitation is by its very nature an informal way of achieving ends that should be pursued through formal means. Doing political business through informal means is disruptive and costly. It may produce immediate results for those who choose to go along this path but it does incalculable harm to society and the economy over the long run. It is imperative that the leaders of Pakistan abandon this path in favour of doing business within an established institutional framework. By bypassing institutions they will bring not only economic ruin to the country. They will also pose an existential threat to the state of Pakistan.
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Faced with five crises


On the economic side, we face the possibility of a prolonged slowdown in activity that will probably yield a GDP growth rate of no more than two per cent a year.


By Shahid Javed Burki
Tuesday, March 24, 2009



THE fact that Pakistan is currently faced with a crisis that in terms of its scope, reach and likely consequences has no precedence even in our exceptionally turbulent history cannot be disputed.
There are many dimensions to the problem. On the economic side, we face the possibility of a prolonged slowdown in activity that will probably yield a GDP growth rate of no more than two per cent a year. This will mean practically no increase in income per head of the population. That, in turn, will mean a decline in the real incomes of the bottom 60 to 75 per cent of the population. The only segment of the population that may still see some improvement in their economic situation are the rich and the relatively well-to-do.

This will further exacerbate the poor distribution of income. By the end of the year the country may add 10 million new poor to the 50 million who already live in abject poverty. A sizable proportion of these will be in the urban areas, in particular the large cities. This will increase the social restiveness in cities adding to the problem posed by the rise of extremism. This the country cannot afford.

A growing number of people in the country believe that the present structure of society is not serving their interests and presents to them a future they are not prepared to accept. They are willing to resort to almost any means, even to limitless violence and extreme cruelty to disturb the existing social order and usher in a new one. This is the meaning of the rise of extremism which is the second of Pakistan’s many problems. The failure of the economy to provide adequately to the people at the bottom end of the income distribution scale or living in the more backward regions of the country accelerates the rise of extremism.

The rise of extremism in a country of Pakistan’s size and in which the citizens subscribe to a faith which, according to many in the world’s more advanced countries, is seen as a threat poses another challenge, the third in my list. The people of Pakistan may consider possible foreign involvement to be interference in their domestic affairs, but the world, concerned about the impact on them if the Pakistani state fails, will not allow the country to go down. The political and economic order they could impose on the country may not be to the liking of most of the people.

The fourth crisis Pakistan faces is the result of several developments in its external environment over which it has no control. In most of 2008, the country’s economy was under considerable stress because of an unprecedented increase in commodity prices, not only of oil. A number of other commodities that figure prominently in Pakistan’s imports saw substantial increases in their prices. This strained Pakistan’s external payments situation.

In the fourth quarter of 2008, oil and commodity prices fell as sharply as they had risen, thus providing some relief to policymakers in Islamabad. But other strains appeared. There was a spectacular downturn in global economic activity, resulting in the contraction of export markets for emerging countries, including Pakistan. At the same time, severe stresses in international finance resulted in the flight of capital from Pakistan and other developing countries.

The fifth challenge is posed by the inability of the political culture to develop a system allowing a voice to the people, making it possible for them to resolve their differences without resorting to street politics, and creating a structure that could sustain the inevitable shocks in a politically backward society. Pakistan’s plunge into political chaos and possible disaster was narrowly averted on March 16 by an eleventh-hour agreement between two contending forces. One of these used the streets to put pressure on the government, the other used the state’s coercive power to force its will on those who oppose it. Both failed to use the institutions available for democracies to reach accommodative positions.

There is, in other words, a perfect storm which has hit Pakistan. Five different crises have arrived more or less simultaneously. Will the country and its political leadership be able to deal with them? Or will the country succumb and thus create a situation which would lead the people to question the very idea of Pakistan.

That idea, articulated with considerable clarity and passion by Mohammad Ali Jinnah, was based on the assumption that the Muslims of British India constituted a separate nation from the majority Hindu population. Jinnah successfully argued that the people of his faith needed a political space of their own in order to live according to their own traditions, culture and social norms. The space was provided but the people have failed to define a political system in which they could live peacefully, working to better their lives. Of and on, Pakistan has been successful economically. But time and again it has failed politically. It is also failing to be a responsible member of the community of nations.

We know how to deal with each of these five storms separately. The economy’s revival requires a combination of stabilisation policies and the revival of pro-poor growth. Stabilisation on both fiscal and external accounts should be undertaken without disturbing the medium-term growth prospects.

In order to deal with extremism, Pakistan will need a combination of targeted development of the areas that have become vulnerable to it. It will also require ensuring that people, no matter how disaffected they are, do not question the authority of a legally constituted state. It is only with the adoption of a comprehensive approach that the country can deal with this problem.

It will involve economic and social development on the one side and clear demonstration that the state’s authority must be respected on the other. Only then will the country be able to convince the world that it is serious about dealing with the problem of extremism. The stresses on the economy because of the global economic meltdown will require making the country more reliant on domestic resources for development. It will also need the accumulation of foreign reserves to absorb shocks delivered from abroad. Finally, the propensity to use the street and the coercive power of state to settle disputes can only be dealt with by strengthening institutions of governance. These include parliament, the provincial assemblies and the legal and judicial systems.

It is when these crises started to interact one another that we begin to face the possibility of chaos. This was averted on March 16 but much remains to be done. ¦
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Cost of political insecurity


By Shahid Javed Burki
Tuesday, 31 Mar, 2009


SEVERAL political commentators have used hyperbolic terms to describe the political developments on and after March 16. It has been said that the concession by the government on the matter of the judges and the decision by the opposition to call off the long march in response has ushered in a new era of Pakistani politics.

It has been described as a revolution, the beginning of a major structural change in the country’s political system. One writer declared that there is no other example in the political history of the developing world where people working together have brought about a political development of this dimension.

This is, of course, an exaggeration. People in several other countries — most notably in several states of the former Soviet Union, were able to force the authorities to take the democratic route. Nonetheless, the significance of the contribution made by those who led the long march and participated in it should not be minimised. It does appear that the Pakistani political system is likely to see a greater balance among the several pillars that support it and the judiciary may be able to exercise an influence that was denied to it for so long. Given all this, do I need to revise arguments I made in this space a couple of weeks ago?

It was then argued that the politicians in deciding to call their followers out on the streets and agitate against the established order would do well to look at their decision from the prism of economics. Working up the street to agitate is economically costly — and not only for those who may lose their daily wage or a part of their income for participating in this kind of political play. It is also costly for the economy to settle political differences on the street.

I then went on to suggest that this approach to politics inflicts damage on the building of durable political institutions which serve the purpose of resolving differences among political players. Even though the long march appears to have produced some positive developments, the main substance in the case I put forward still holds.

There is a close relationship between economic and political developments that economists recognise but politicians and political scientists often ignore. A well functioning political system serves several economic functions. It allows a voice to the people. Those in policymaking positions get to know the aspirations as well as the grievances of the citizenry or a section of the population.

As Amartya Sen, the Nobel Prize-winning economist, suggested in the work that brought him fame and fortune, famines don’t usually occur in democratic societies. Famines, he observed, happen when governments fail to create the economic environment that would provide incomes to the poor to buy the food they need.

When an economy reaches that point, a democratic political system forces the government to act. There are no such compulsions in non-democratic systems. Even a country like China, known for its concern about the welfare of the common citizen, saw millions of people die of hunger when political whims led to the disruption of the economy. The human catastrophes that followed the launch of the Great Leap Forward in the late 1950s and the Cultural Revolution in the late 1960s would not have happened in a functioning democratic system such as the one in India, Sen maintained.

What this suggests is that for Pakistan to gain a political system that works for the masses, its institutions must begin to deliver policies and programmes that work for the citizens. The country must move away from the politics of confrontation and agitation and towards the resolution of conflicts by institutional means.

Bringing about change through agitation has a very high transaction cost. One estimate of the cost to the economy of the use of shipping containers to block the long marchers is Rs1bn. The transaction of the cost of politics is considerably lowered when the political system has strong institutional underpinning. There are several aspects of institutional development that could reduce the cost of transaction in society. One of these is particularly important for a country in Pakistan’s situation. It is also pertinent for the goal the long marchers had before them.

The goal is improving the effectiveness and efficiency of the legal and judicial systems. A country’s legal system is made up of laws that are on the books. The most important of these is the constitution, the basic law of the land. But there are hundreds if not thousands of other laws and regulations. Laws need to be enforced and disputes amongst individuals, economic establishments and between these two and the state resolved. This is the function of the judicial system. Pakistan is weak in both areas.

First take the constitution. Originally promulgated in 1973 as a result of consensus among a number of different groups, it has been repeatedly tinkered with, especially by military rulers. The several published constitutions of Pakistan don’t make an easy read since they are cluttered with footnotes, explanations and amendments that have been incorporated in it over time. Cleaning up the text should receive high priority perhaps through an amendment. A constitution should be an easy document to read and understand; it is meant not only for the legal community but for the people at large. Uncluttering needs to be done for other parts of the legal system as well. Some laws have been there for decades and have lost their initial purpose. Take for instance the various provincial agricultural marketing acts which are derived from the original law promulgated in the late 1930s. Its objective was to protect the Muslim peasantry from the Hindus who dominated agricultural marketing. The acts have been kept alive and now serve to hinder the development of agricultural trade and agro-processing rather than protect the peasantry. In the meantime, new vested interests have developed that draw ‘rents’ from the restrictions the provincial acts place on the modernisation of this important part of the economy. The best way to deal with this situation is to repeal the acts rather than continuously amend them.

I believe the Egyptian government has launched a programme to review all economic legislation placed on that country’s books over many decades, if not over centuries, and modernise the legal system. Perhaps Pakistan could do something similar. The promise of change that has come with the success of the long march should result in improving the structure of governance and reducing the cost of doing political business in the country. I hope this opportunity will not be lost.
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Post

An approach towards urban policy


By Shahid Javed Burki
March 30, Monday 2009



PAKISTAN needs to develop an approach towards addressing the numerous problems faced by its urban population. Not unlike other developing countries, Pakistan tends to underestimate the size of its urban population, the size of its large and medium cities and the proportion of the population that should normally be classified as urban.

Other than the usual reasons for the underestimation, there are also political reasons for giving a smaller weight to the urban population. Pakistan was a rural place and a largely rural economy at the time of its birth. Since then, starting with the movement of the population that accompanied the partition of British India into independent states of Pakistan and India, the size of the urban population has increased at rates between two and half times to three times the rate of increase in population.

The country has had one of the highest rates of the urbanisation in the developing world. This should have resulted in the flow of greater political power from the countryside to towns and cities. That did not happen as the powerful landed interests succeeded in preventing the urban areas from gaining a larger space in the political system. This is one reason why population censuses have not been held on a regular basis as provided by the Constitution of 1973. There are at this time no firm estimates of the size of the population overall and its geographic age and gender distribution.

By underestimating the size of the urban population and the size of the major urban areas, the country has not properly provided the needed urban services. There is an urgent need for an urban economic and social development strategy that can provide employment and economic security to its young and growing population. Without it, the urban population will become increasingly restive. This is particularly the case with the urban youth. My guess is that Karachi and Lahore alone have 20 million people who are below the age of 20. For designing an urban strategy it may be appropriate to reflect on the economic and social dynamism that shapes urban areas. Policy makers may distinguish among four different types of urban communities: the large cities; the peripheries of large cities; the medium-sized cities and small towns. Each of these urban centers has its own dynamic.

There are also differences among the large cities.The strategy that might well serve the city of Karachi, Pakistan’s largest, may not exactly be the same as the one that would be relevant for Lahore, the country’s second largest city. Nonetheless, both cities need better supply of water and sanitation, better transport, better education and health care, more focused attention to providing employment to the people who are constantly moving into the cities from the areas outside, more technological advance to increase the incomes of the employed and better integration with the global economy.

While the city centres of Karachi and Lahore and other large cities may need the same kind of public sector attention, their peripheries are very different from one another. Karachi has expanded into its hinter land by extending itself into the essentially empty and desert areas to its south and east.

Those who have arrived in the city in search of jobs, have found or developed slum-like housing in the numerous “katchi abadis” that are located in the city’s periphery. Hundreds of thousands of Pathans are living in these cities making Karachi the world’s largest Pathan city, larger than Peshawar and Kabul.

There are “katchi abadis” in Lahore as well but its expansion has occurred largely by the assimilation of long-settled towns that were all around its ever-expanding periphery. Public policy designed to address the problems faced by the peripheral areas of the two cities, therefore, will have considerable differences in their content and objectives.

The medium-sized cities are the product of economic and social dynamics that are altogether different from those that are operating in large cities. Most medium-sized cities have grown in size for three different reasons. They were either important links in the system of transport and communication; or they were centered on some indus try that used locally available skills; or again, they were supplying important services to the sector of agriculture as it developed in the surrounding countryside.

Two medium size cities, both in the Punjab, illustrate very well how different approaches towards industrialisation can influence the shape and growth of urban areas. Rahim Yar Khan in the province’s south drew a number of large transnational corporations that, taking advantage of the import substitution bias in the first 40 years after independence when they established their operations in and around the city.

The city’s choice as a location was influenced by the impressive agricultural potential in the surrounding countryside. Lever Brothers, a prominent multinational that specialised in the manufacture of basic consumer goods, chose to locate its plant in the city. Engro corporation established a fertiliser plant. But the city failed to develop as an industrial hub especially after the economy was opened to trade and import-substitution lost some of its lustre.

On the other hand, Sialkot in the province’s centre was able to become a vibrant urban centre by opting for what economists now call “cluster development”. By this is meant the location of relatively small enterprises in one area producing same types of goods and services.

Being clustered together makes it possible for them to obtain the inputs, services, physical infrastructure and have access to the markets that, working individually would be expensive and, therefore, uneconomical.

Sialkot is an example of the success of this type of cluster development. The medium-sized cities located in the city built a strong export business based on traditional skills that were abundantly available in the area. The city’s entrepreneurs also decided not to rely on the government for serving their area with the needed infrastructure. Instead they taxed themselves and raised sufficient resources to improve roads and even build an airport. A single urban development approach, therefore, would not work for all medium-sized cities.

Finally, small towns have their own social and economic characteristics. They are much more integrated with the economic and social situations of the surrounding countryside than the other types of urban communities. They will be affected much more by the policies aimed at the development of agriculture and by promoting trade in agricultural commodities.

Urban centres grow and flourish – or decay and perish – by developments that are not strictly part of a state’s urban policy. This should be clear especially to the people of Pakistan. After all, the country was once the site of the oldest urban centers in human history. Mohenjodaro and Harappa disappeared into history not because the rulers of the day did not have appropriate urban policies. They were the victims of circumstances and events over which the ancient state had no control.

That notwithstanding, Pakistan’s urban future will depend to some considerable extent on how the country builds its economy and how it makes it more productive and competitive. For instance, by encouraging the development of retail trade and by facilitating the entry and expansion of multilateral retail chains, the country may be able to develop a number of centres of agricultural processing. This will create new urban poles of economic activity which, in turn, will reduce the pressure on the large cities by holding back some of the surplus workers from the countryside that would have inevitably migrated to the large cities, further crowding them and further putting pressure on weak urban services.
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Post Trade with India — a small step

Trade with India — a small step


By Shahid Javed Burki
Monday, April 06, 2009


THE Economic Coordination Committee of the Cabinet in its meeting held on March 19, 2009 took a small step to regularise trade with India.
It authorised the ministry of commerce to start building the WagahAttari crossing near Lahore as an important point of entry and exit for facilitating trade between the two countries.

It also permitted the ministry to increase the number of items that could be exchanged to more than 1938, the currently permitted limit. The ECC announcement promised further liberalisation contingent upon the development of infrastructure on both sides of the border . While this is a positive development, it is still a baby step in an area that could do with some bold initiatives from the leadership in both the countries.

The decision by the cabinet committee was presumably taken under the provisions of the South Asia Free Trade Area agreement (Safta). The agreement was signed in Islamabad by all countries of the South Asian Arrangement for Regional Cooperation in January 2004. Creating a free trade area in South Asia was an important objective of the Saarc initiative when it was launched in Dhaka by the then Bangladesh president General Zia ur Rahman.

No progress was made for almost two decades largely on account of the continuing hostility between India and Pakistan, the region’s two largest economies. The near-war between two countries in 2001-02 when hundreds of thousands of troops were massed on both sides of the Indo-Pakistan border almost killed the entire enterprise. It was saved when the two leaderships recognised that persistent hostility was economically very costly for both the countries.

The Saarc’s leader wished to create a customs union in the region of the type that had propelled the countries of the European Union towards economic prosperity and political tranquility. Given the decades long hostility among the countries of the region, in particular between India and Pakistan, the South Asian leadership wished to be cautious in its approach. The Safta was designed to move slowly towards the creation of real free trade area, allowing time for the participating countries to absorb the gradual opening up that was envisaged.

It was right for the leaders to proceed very deliberately, but not right to be so slow in their movement that the advance they were making did not become apparent to the markets. Markets don’t respond well when signals are weak and subtle. They look to clear public policy guidance.

The Safta, at least in theory has been operational for a couple of years but it has yet to produce tangible economic effects. In a series of articles I contributed to Dawn while the Safta was being prepared for ratification by the governments of the region, I argued that Pakistan, being the smaller economy compared to India, would benefit more from the opening of the Indian border to its producers. That was the experience of all small countries that entered regional of arrangements with their larger neighbors in other parts of the world. Thus Mexico has gained more than the United States from NAFTA, Argentina more than Brazil from Mercosur, the smaller countries of Europe more than the larger ones from the expansions of the European Union. There is no reason why Pakistan’s experience from Safta should be any different.

The decision by the ECC to expand the size of the negative list was indeed a small step; no only that, it is in the wrong direction. By continuing with the “positive list” approach as the way of controlling trade with India, Pakistan is persisting with a practice that trade economists have long argued is inefficient and permits rent-seeking behaviour on the part of those who are authorised to regulate the movement of goods at the border.

The more efficient and active approach would be to go for a negative list by identifying a small number of items. It is not in Pakistan’s strategic interests or in conformity with its cultural norms to import from India. For instance, the import of liquor from India could be banned as it is from other countries of the world. All other items should be allowed, subject to the conditions that govern all international trade. Long negative lists give a great deal of authority to the customs regulators which invariably gets misused and, more often than not, turns into corruption.It is also not advisable to concentrate on the development of one point of entry such as the WagahAttari border.

There should be several crossings that should be encouraged to be developed. That will allow competition among the provinces which would produce with greater efficiency. It may also be economically more efficient to develop a port of entry closer to Karachi, still by far the most significant location for large scale industries. It would be cheaper for some of these enterprises to import machinery and intermediate inputs from India by road.

If the response to this initiative is quick and does not get bogged down in the bureaucracies on both sides or one side, it could begin to have a significant positive impact on the Pakistani side. I have argued on many occasions in this space that it is in Pakistan’s economic interests to build a strong trading relationship with India. No matter how sluggish is the Indian response to the initiatives Pakistan may take, Islamabad should keep on pressing for more openness from the Indian side.

The Indians remain more protective of their markets compared to their neighbours. They are also much more bureaucratic in the way they handle foreign trade. Even when they begin to bring down the tariff rates, they use all kinds of legal constraints to restrict trade. The Safta presents a mechanism where these problems can be tackled.

Trade experts argue that trade facilitation has become a much more potent tool for promoting international trade than the lowering of tariffs. Even in more protective markets such as those in South Asia, the walls of tariffs have come down significantly. Much more is to be gained by improving and simplifying non-tariff procedures for the movement of goods across frontiers.

In this context it is correct for the ECC to ask for the improvement of the facilities on both sides of the Wagah-Attari border. Complaints by countries against their trading partners should be preferably handled by the Safta secretariat rather than the trade authorities of individual countries. India has resisted the attempts to strengthen the SAFTA secretariat. It should be persuaded to change its position.

In conclusion, following points about the use of public policy by Pakistan in promoting trade with India needs to be underscored. It should use the framework made available by the Safta to deal with its much larger neighbour. That way it will be able to deflect the pressures that may come from India if the opening was to be done bilaterally. Within the Safta, Pakistan should be the leader rather than a follower.

It should, for instance, take the lead in forcing India not to use the anti-dumping clause as vigorously as it has done in the recent past. Since it is expensive for the exporting country to challenge the use of this clause, it is almost equivalent to an increase in the rate of tariff. Pakistan should also press other members of the Safta to abandon the positive lists in favour of the negative lists thus limiting the role of custom officials as regulators of the flow of trade. Increasing trade with India within the Safta framework should be an important part of Pakistan’s international trade policy.
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