Archive for May, 2013

Politics 2.0: The Multifaceted Effect of Broadband Internet on Political Participation

May 15, 2013

Filipe R. CampanteRuben DuranteFrancesco Sobbrio write this paper which must be read by Aam Aadmi Party (and other new parties if any) people in India. It is actually a must read for all interested in how and whether internet can influence political participation.I have just written an article on the hopeless state of affairs in India’s political system. Based on this paper, internet can help give people some better political choices in years to come..

The authors base their study in Italy. They show internet first leads to lower political participation in Italy and then over the years leads to rise in participation.  It is like this U-curve you see with most things in economics. It declines first and then rises:

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From writing Shiva trilogy to advocating decentralisation in India…

May 15, 2013

I got curious on seeing this piece from Amish Tripathi while flipping HT yesterday. I was interested in knowing how the Shiva trilogy guy (haven’t read any so far :-() writes on this very complex issue of decentralisation in India. I must say the article was really good. Tripathi sticks to the subject he knows best – history.

He says India has been a decentralised regime for most part of its history:

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The Resurrection of Indian Congress !!??

May 15, 2013

I am really miffed to read such articles. That too by likes of Dr Shashi Tharoor. One would imagine that people like him would bring a breath of fresh air to Indian politics but it is all so stale really.Though, I have not been impressed with his recent articles as well and this one is just an addition to the growing disappointment.

Indian politics clearly converts the best of the lot as I even pointed to Dr Raghu Rajan’s case as well.

He like India’s PM says the recent Congress victory in Karnataka shows resurrection of the party:

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The 1991 Reforms, Indian Economic Growth, and Social Progress

May 14, 2013

A nice review paper on Indian economy by Manmohan Agarwal and John Whalley.

They say growth picked up in 1970s and not 1990s:

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How Fiscal Policy helps in liquidity traps: Lessons from the UK’s 1930s escape..

May 14, 2013

Nicholas Crafts adds fuel to the fire on debate over fiscal policy working during Liquidity Trap or not. He says UK solved its liq trap situation in 1930s using aggressive fiscal policy. What Shintzo Abe is trying with Japan today was done by Neville Chamberlain (UK’s PM) in 1930s.

Chamberlain followed a three pronged approach: getting off gold standard, announcing a price level target and devaluation of GBP:

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What are FIIs investing in India thinking?

May 13, 2013

Given the state of corruption and mis-governance in India, one would think Foreign investors would be really wary. I would surely think there is some criteria  called ethics and governance/ corruption before investing in any country. However, looking at the FII flows in India, one is not sure:

I was looking at the flows in India in recent years and here is how it goes:

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How University of California squanders millions on mindless diversity programs…

May 13, 2013

A very interesting longish article on state of affairs at Univ of California. It is written by Heather Mac Donald, a contributing editor of City Journal and the John M. Olin Fellow at the Manhattan Institute. Sad to say but Univ of California finances resembles that of it State as well.

The core of the article says that UC system keeps looking at increasing diversity where there is no real evidence that system is already fairly diverse:

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A day in the life of a behavioural economist..

May 13, 2013

A superb post by  of Worth a lot Canadian Blog.

She points how one struggles to stay focused despite being a behavioral econ. Quoting the whole post as it is:

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Meaning of work in life: A Comprehensive Perspective from Ancient Indian Spiritual Tradition

May 10, 2013

A very nice paper by Prof. Nisigandha Bhuyan of IIMC. It is really nice to read such papers from Management Institutes in India where we usually look at western approach towards solving our problems.

She looks at meaning of work from Indian spiritual perspective:

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Central Banks worldwide have eased policy rates 511 times since crisis

May 10, 2013

A nice fact-giving article by Bloomberg journos – Simon Kennedy & Jennifer Ryan.

South Korea’s rate cut yesterday was the 511th reduction worldwide since June 2007, according to Bank of America Corp.’s tally. While the tide of liquidity has sent stock markets surging, it has yet to prove as effective in generating economic growth.

511 times!

Crises Before and After the Creation of the Fed

May 10, 2013

Early Elias and Òscar Jordà of FRBSF write this nice short paper on the topic. A more detailed paper on similar lines was given by Micahel Bordo.

Mostly we compare the current recession to the Great Depression. This paper compares it to the Panic of 1907:

This year marks the 100th anniversary of the Federal Reserve System. Two of the Fed’s main duties are acting as lender of last resort in times of crisis, and promoting stable prices and full employment through monetary policy. Few would challenge the Fed’s recent record at controlling inflation. But many question the effectiveness of the Fed’s emergency response to the 2007–08 financial crisis and the recession associated with it. The Federal Reserve was itself born out of the Panic of 1907, a financial crisis that bears a striking resemblance to the one that occurred almost exactly 100 years later. This Economic Letter examines the Fed’s crisis management response in this historical context.

How history repeats/rhymes:

Can you identify when the following events took place? Early in the year, the stock of a nonbank financial institution widely used as collateral in certain transactions drops by more than half. At first, financial markets shrug it off. But, during the summer, with market distress apparently in check, two new financial challenges arise. Shortly after that, a nonbank financial institution fails and panic strikes financial markets. Meanwhile, a giant financial company is also in trouble, but considered salvageable. A deal is struck. Market participants bet that the rescue will keep other financial dominoes from falling. Disaster is avoided, but not without major damage to the real economy in the form of a protracted recession.

If you thought this scenario describes the 2008 financial crisis, you would be right. You would have identified Bear Stearns as the company whose stock took a hit early in the year, Fannie Mae and Freddie Mac as the two challenges that surfaced in the summer, Lehman Brothers as the nonbank financial institution that collapsed shortly after that, and AIG as the financial giant that was rescued. However, the scenario also describes events that took place a century earlier. Replace Bear Stearns with Union Pacific, Fannie Mae and Freddie Mac’s failures with the crash of copper prices and New York City bonds, Lehman Brothers with the Knickerbocker Trust Company, and AIG with the Trust Company of America, and you would precisely identify the panic of 1907.

The events surrounding both crises were remarkably similar. But the institutional responses to these events were vastly different. The lack of a central bank in 1907 meant there was no public lender of last resort. Instead, J. Pierpont Morgan, a private investor and founder of J.P. Morgan & Co., orchestrated the rescue effort in 1907. In 2008, it was federal government agencies, especially the Federal Reserve and the Treasury Department, that responded to the crisis.

Interesting…

There is a nice chart which shows number of countries in crisis in the decades since 1870s:

Recessions originating from a financial event were common in the late 19th and early 20th centuries. Many stemmed from banking panics. Figure 1 provides a global historical perspective. We calculate by decade the number of countries that experienced financial crises among a sample of 17 industrialized economies representing more than half of global GDP during the past 140 years (for details, see Jordà, Schularick, and Taylor 2012).

Figure 1 shows a notable downward global trend in the incidence of these highly disruptive events, with the conspicuous exceptions of the Great Depression and the Great Recession of 2007–09. In the United States, the rate of banking crises declined markedly after the 1913 creation of the Federal Reserve System. Other than the Great Depression and Great Recession, the only significant banking crisis of the past century was the savings and loan crisis. By contrast, ten significant banking crises occurred in the 19th century.

Overall having a Fed would have helped in 1907..Though many would diasgree

Dollarize Argentina Now!

May 9, 2013

A nice post by Steve Hanke of Cato Insti.

Argentina is once again wrestling with its long-time enemy – inflation. Now, it appears history may soon repeat itself, as Argentina teeters on the verge of another currency crisis. As of Tuesday morning, the black-market ARD/USD exchange rate hit 9.87,  meaning the peso’s value now sits 47.3% below the official exchange rate.

This yields an implied annual inflation rate of 98.3%. For now, the effects of this elevated inflation rate are being subdued somewhat by Argentina’s massive price control regime. But, these price controls are not sustainable in the long term. Indeed, the short-term “lying prices” they create only distort the economic reality, ultimately leading to scarcity.

There is, however, a simple solution to Argentina’s monetary problems –dollarization. I have advocated dollarization in Argentina for over two decades – well before the blow up of their so-called “currency board”. To put the record straight, Argentina did not have a true currency board from 1991-2002.  Rather, as I anticipated in 1991, the “convertibility system” acted more like a central bank than a currency board. This pegged exchange rate system was bound to fail… and fail, it did.

 His solution is to dollarize Argentina:

If you note, he is also proposing a free banking system in Argentina with no central bank! Most Cato Insti guys are against central banks and propose free banking where banks figure things by themselves..

Nice bit..

Econs fighting over Keynes..Please behave Sirs..

May 9, 2013

I was off from blogging and reading for a couple of days last week and just missed this new war on Keynes. It is not new actually as Keynes homosexuality keeps cropping up in jokes etc.

It all started with Niall Ferguson who remarked on Keynes one of the famous quotes – In long run we are all dead:

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Does Money Still Matter for Monetary Policy?

May 9, 2013

A nice crisp review by Renee Haltom of Richmond Fed on monetarism.

Economists agree that infl ation is a monetary phenomenon, but since 1982,  monetary policymakers have demoted measures of the money supply from  prime targets to key indicators to incidental byproducts. With excess bank  reserves at all-time highs, however, measures of money may have a renewed  purpose as red flags for inflation.

She starts nicely saying what c-banks really do:

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Design of an optimal monetary-policy committee..

May 9, 2013

I pointed to a column earlier which criticized FSLRC’s proposal to set up an MPC in RBI. The criticism was based on the fact that MPC would become a politicised body and lead to excessive govt interference.

Keeping this criticism aside for a moment, say govt goes ahead with MPC for RBI. What should the design be? More of RBI people? More of Academicians? More of Industry People?

This column by Sylvester Eijffinger, Ronald Mahieu and Louis Raes looks at design of MPC:

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Why India Slowed?

May 8, 2013

An interesting piece by Raghuram Rajan. Actually disappointing.

A clear article which shows why top econs should refrain from serving the govt. Instead of the econs influencing the govt., it is the govt. which influences the econs.

Ok so what are the reasons as per Dr Rajan:

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T-shirt’s journey to Market..

May 8, 2013

A nice write-up as part of Dallas Fed’s Globalization Institute Annual Report -2012.

It starts like those articles on i-pod/i-phone  where things are piled on from different places to make the final product, showing the power of globalization:

The life of a T-shirt—from its origins in a Lubbock, Texas, cotton field to its final days in a used-clothing store in Tanzania—aptly tells the story of globalization, comparative advantage, trade regimes, proximity to market and modern retailing. In the book The Travels of a T-Shirt in the Global Economy, Georgetown University economist Pietra Rivoli documents the roles of three countries on three continents (Chart 1): the United States, where the raw materials are produced; China, where cheap labor and flexible manufacturing practices are tailored to U.S. speedto-market demands; and Tanzania, an east African country, whose used-clothing industry imports extensively from the U.S. Along the way, cotton for the T-shirt is spun, woven, cut and stitched to U.S. specifications in China. Before the garment can travel from the factory, it is subject to trade policies (most formulated in Washington), which determine sourcing and the quantity allowed into the country. Once the T-shirt arrives in North America, a U.S. shopper becomes its first owner.

Years later, after a household spring cleaning, the now-faded garment is donated to charity, perhaps to the Salvation Army or Goodwill. It then starts another journey, this time across the Atlantic to used-clothing stores in parts of Africa and other developing nations. Here, a second consumer buys the T-shirt. The single garment provides a source of income to many during its lifespan (Rivoli 2009). The tale of this everyday item sheds light on the complexities of globalization, mapping the role of apparel and textiles in emergent economic development, global shifts in sourcing and the impact of trade policies.

However, the  paper shifts focus to textiles market from a historical perspective. It shows how most countries growth story begins from cotton/textiles:

Textiles and apparel were the starting point of world industrialization. Both industries are viewed as starter endeavors for development efforts. Because apparel and textiles are laborintensive, their manufacture has migrated from high-income countries to developing economies with relatively lower pay.

Nice bit..

Housing Markets in India.. Lessons and Comparisons with US and Spain

May 6, 2013

Nice paper by Prof Charan Singh of IIM Bangalore. In a very detailed and descriptive manner he shows the developments in housing markets in India Interestingly he compares the Indian market with that of US and Spain.

India suffers from a chronic shortage of housing, estimated at 18.8 million units in 2012, mainly in urban areas as per the Government of India. The shortage was mainly on account of congestion (15 million) followed by obsolescence (2 million) and homelessness (1 million). This paper documents the characteristic and business practices prevailing in the Indian housing sector in comparison with US and Spanish housing sectors. The paper discusses the determinants of house prices, role of lending institutions and their policies, drivers of credit flow, credit sources, interest rate regimes, regulators and housing indices of Indian housing market with brief outline about the same for US and Spanish housing market. It also includes a comparative study of housing market parameters across these three countries. 

The findings suggest India has experienced rise in demand for housing since 2001, owing to increase in levels of income, younger earning age group, rapid urbanisation and nuclearisation of families. It also points towards existing incomplete information in Indian housing market in terms of lack of data base about mortgages, transparency in transactions, proper laws and robust indices. The government, and major regulatory institutions, NHB and RBI, are taking care to address these issues but substantial gaps continue to prevail in the housing sector. 

The study concludes that there is need to undertake extensive research, mainly at the state level, revisit the methodology of calculating shortage, build database on housing sector, examine the utilization of land in urban areas, and consider importing of housing material to meet housing shortage, preferably from countries like Spain and the US where housing markets are sluggish. 

The importing building materials from Spain and US is interesting.

The paper has a lot of data and tables which can be used by scholars. It is rare to find data on India’s housing and this paper surely helps fill the gap.

Housing is another sector which shows how  unprepared we are for India’s urbanisation. Apart from the house ownership issues there are serious flaws in rental markets as well.

The owners of properties esp. in metro cities are having a ball as people from rural areas storm into cities. The tenants are fleeced with crazy demand for advance deposit (usually 10 months of rent) and inflated rentals. There is no forum where these issues are addressed and people simply give into demands of owners/brokers. The owner can ask tenants to leave anytime and people are thrown all the time. Then there are several ownership biases – family/bachelor, veg/non-veg, religion etc etc. One just does not know where to really go and is very demanding. The rents take away nearly 50% of the salaries and one does not have any really saving. Worst is you realise most political class is involved in housing which makes everything even more bitter.

It is high time something is done about living in India. The political class should focus on reforms which improve the welfare of the people. The focus always is on bigbang reforms to please the business and foreign investors. Hardly anytime is spent on making things easier for the people of the country. It is much easier to talk about India story from  ivy tower. Only people at the ground know what it means to survive in this country…

Allocating Spectrum: Ostrom vs Coase

May 6, 2013

A brilliant paper by Guru Acharya (don’t know the affiliation).

He shows how Lin Ostrom’s insights can be used to allocate spectrum.. It is a better strategy than auctioning to private players. The central idea is that spectrum should be seen as a common whose governance should be done accordingly:

This paper adopts Ostrom’s (1990) framework of governing common pool resources and applies it to electromagnetic spectrum in order to examine conventional policy prescriptions of privatisation and command-and-control, which are dominantly used in most jurisdictions for governance of spectrum. Additionally, Ostrom’s design principles for long-enduring, self-organised and self-governed common pool resources are used to propose a new institutional arrangement for governing spectrum.

The paper is structured in the following manner. First, Ostrom’s framework is introduced along with her critique of conventional policy prescriptions. Next, existing literature related to spectrum governance is reviewed. Finally, Ostrom’s framework is applied to electromagnetic spectrum as a common pool resource in order to examine existing prescriptions for governing spectrum and further to understand her prescriptions for governing spectrum.

Spectrum is a kind of common good – Rival (my consumption lowers your consumption)  but non-excludable (difficult to price):

Traditionally, spectrum is considered as a classic example of a common pool resource characterised by high subtractability (rivalry) and high difficulty of exclusion (Savas, 1977). Subtractability of spectrum is a result of interference between electromagnetic waves, which are transmitted during wireless communications. Technically, interference is caused by superimposition of one electromagnetic wave onto another electromagnetic wave to form a resultant wave of greater or lower amplitude. Any undesirable electromagnetic wave which superimposes onto the intended wave is referred to as noise. Accordingly, since all wireless communications require transmission of electromagnetic waves, communication by one is noise for another. As a result, appropriation of spectrum by one person reduces its value for simultaneous appropriation by another person, thus making the resource rivalrous or subtractable.

The tragedy of commons is best described in this context by the phrases ‘chaos in the ether’ (The Milwaukee Sentinel, 1926) and ‘with everybody on the air, nobody could be heard’ (Nat. Broadcasting Co. v. US, 1943). However, the rivalrous nature of spectrum is a function of the technology deployed for transmission (Berge & Kranakis, 2011). In the recent past, many new technologies (like ultra-wide band) have emerged which have thepotential to push rivalry to almost negligible (Milgrom, Levin, & Eilat, 2011) but have not witnessed widespread deployment till date due to regulatory restrictions.

Both government interference and privatisaiton of spectrum are used to governs this commons:

For preventing the tragedy of commons in spectrum as a result of the metaphorical use of the three models discussed by Ostrom, the policy prescriptions dominantly used in most jurisdictions are the same as the conventional policy prescriptions critiqued by Ostrom (i.e. state intervention andprivate property). Of these two policy prescriptions for preventing the tragedy in spectrum, the most dominant prescription is that of state intervention in the form of command-and-control. The private property regime for spectrum governance is a recent phenomenon and finds its genesis in an article by Coase (1959).

In most jurisdictions, in order to coordinate wireless communications, the regulator divides spectrum into multiple frequency bands; assigns uses and technologies to different bands; and allocates bands to different (private) parties. Traditionally, the allocation to private parties has been in the form of lotteries, beauty contests or first-come-first-serve. Since the bands, uses, technologies and authorised users are administratively determined, this regulatory framework is referred to as command-and-control. By dividing spectrum into bands, each having specific uses, which are then allocated to certain entities, the state centralises control and administratively legitimises certain uses and users of the spectrum, thereby excluding the masses from using the spectrum.

In the recent two decades there has been a shift from the command-and-control paradigm towards the private property paradigm in which property rights are assigned to different spectrum bands (as a combination of time, space and  frequency), which are auctioned in the market. Coase (1959), in his critique of the command-and-control mechanism, advocated that spectrum is a resource which can most efficiently be allocated using the market by assigning private property rights. The auction mechanism ensures that the private parties do not have any windfall gains, and the secondary market allows the spectrum to be reorganised efficiently according to size of band and the use for such band.

Applying Ostrom’s ideas to Spectrum:

Ostrom’s critique of external intervention is primarily on the issues that (i) external agencies do not have ufficient/accurate local information and that intervention based on inaccurate information can lead to lower payoffs; (ii) other costs like monitoring and enforcement costs can be relatively high for an external agency; and (iii) the focus of the external agency is only on a single arena.

If one were to use Ostrom’s critique of leviathan (external state intervention) and apply it to the  command and control regime, various interesting points emerge. For example, use for spectrum bands is administratively defined by the center in the case of command-and-control management of spectrum. In this case, the central government may not have accurate information about localised demands (of use). Say, in a certain geographic area, more amount of spectrum is required for television broadcasting of local language channels than for mobile communication. Allocation that neglects such local requirements can lead to lower payoffs. Other similar examples also emerge. For example, the central government may not be aware that a particular area demands more spectrum for 4G services whereas the center may have created artificial shortage by allocating excessspectrum for 3G services.

Similarly, in an urban setting with high number of obstructions, low frequency does not have as good propagation characteristics as it otherwise does in rural areas creating further need for localised allocations. Similarly, interference, which is the primary reason for rivalry, is dependent on local topography, due to multipath interference, of which the central government does not have accurate knowledge. 

The private property regime overcomes many of the shortcomings of the command-andcontrol regime. For example, by making the spectrum technology and service neutral at the time of privatisation, it allows the property owner to respond to market requirements. Therefore, the spectrum allocated can be used for providing any service using any technology as may be locally required. However, it still suffers from inherent limitations outlined in Ostrom’s critique. By dividing the spectrum into bands and privatising such bands, it suffers from similar defects as the field divided into small privately owned heterogeneous strips. Due to such privatisation, one operator may have spectrum in a low frequency band while another may have spectrum in a high frequency band. Or the same operator may have a high frequency band in one geographic area and a low frequency band in another geographic area. Worse, an operator may have spectrum in one geographical area but may not have any spectrum in another geographical area. This may lead to a number of  problems/complications ..

So what to do?

Ostrom’s framework identifies two types of problems. The first is the appropriation problem and the second is the provision problem. Since spectrum is a perfectly renewable resource that is instantaneously replenished, the objective of the institutional arrangement reduces to solving the problem of appropriation only.

 In the proposed institutional arrangement, a combination of spectrum in the high and low frequency bands is collectively allocated as a common property to a combination of multiple network service providers. The boundary of the resource system is the boundary of the allocated spectrum bands; and the boundary for the users is the collective of network service providers to whom the combined spectrum is allocated. All other users will be excluded from appropriating the resource. The proposed institutional arrangement requires these network service providers to then decide between themselves the appropriation rules. In contrast to the dedicated spectrum bands that are traditionally allocated under command-and-control and privatisation, in this case, the operators are required to collectively determine the rules for using/sharing the spectrum. It is expected that allocation rules will take into account the possibility of using technologies that reduce rivalry and will not merely involve dividing spectrum between member operators.

The same could be applied to India as well..

Keeping this brief background in context, if, for example, the government were to collectively allocate spectrum in the 900 MHz, 1800 MHz and 2100 MHz bands to a combination of 6 service providers at a pan India level and let the service providers mutually decide how to allocate spectrum between themselves, it would conform to the institutional arrangement proposed in this paper. In such an arrangement, all persons except for these 6 service providers would be excluded from using the allocated spectrum. These service providers could adopt flexible variations in the allocation rules to maximise their benefits. For instance, the service providers could collectively use the low frequency spectrum through active infrastructure sharing in rural areas to maximise coverage and minimise costs. Further, capacity constraints due to heavy usage in dense urban areas can be overcome by the shared spectrum which would have the combined capacity to serve all providers and would not lead to underutilisation in the hands of any one service provider.

Additionally, all service providers could have contiguous spectrum in all geographic areas permitting national roaming and nation wide competition. The service providers could mutually decide a harmonisation policy (across providers and across bands) to ensure that a healthy ecosystem of devices develops and economies of scale are best utilised. Lastly, service providers could also respond faster to market changes in a localised manner by providing/allocating more spectrum for voice based services in rural areas and more spectrum for data services in dense urban areas, which would otherwise be centrally decided by the Government.

Hmm.. How to identify the six? Via bidding again?

A very interesting idea and application though. The paper points it has been done in the past as well:

Wormbs (2011) discusses the design principles with reference to a historical institutional arrangement. Specifically, the paper discusses the case of frequency allocation in Europe in the 1920s in which the institutional arrangement conformed to the eight design principles enunciated by Ostrom. In this, European broadcasting companies self-organised under the aegis of the International Broadcasting Union and developed an institutional arrangement to prevent interference. This arrangement conformed to all of Ostrom’s design principles including boundary rules, allocation rules, monitoring and sanction.

So it has been done in the past as Most of Ostrom’s works are based on how the world really works and not how she wishes it would work. So if it was done in the past, there is some evidence. Need to read whether it was successful or not..

Very good paper indeed..

Gender Mainstreaming in Finance Ministries and a bit of history of FInMins

May 3, 2013

This is a paper India’s FM (and politicos) should read. It is by Prof Gita Sen of IIM Bangalore and is quite a read. In this whole debate over misgovernance and insensitivity towards women related issues in India, this paper offers good insights. It was written more than 13-14 year back but is so relevant especially in today’s India..

She says FinMin should play a large role in gender sensitivity:

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