Dialogue in  Ethiopia

Dialogue in Ethiopia

Envoy Discusses with the Regional President Employment Opportunities for

Sri Lankans in Tigray Region

The Asia Pacific Group of Ambassadors representing Indonesia, Pakistan, Bangladesh, Turkey, Azerbaijan, Kazakhstan and Sri Lanka had a 3-day visit to Mekelle, capital of the Tigray Regional State of Ethiopia on an invitation extended by the President of the Regional Government from 04 October 2019.

The programme included visits to industrial park in Mekelle, the historical Al-Nejashi mosque, and Mekelle University, and meetings with the Chair of the Regional Investment Commission, Chair of the Cultural and Tourism Bureau of Tigray and officials of the Tigray Regional Government.

Ambassador of Sri Lanka to Ethiopia and Permanent Representative to the African Union Commission Sumith Dassanayake had a meeting with the President of Tigray Regional State, Dr. Debretsion Gebremichael. The Ambassador sought more employment opportunities for Sri Lankan nationals at the industrial parks in the Tigray region. He also briefed the Regional President on the political and economic developments taking place in Sri Lanka.

Ambassador Sumith Dassanayake also requested the assistance of the regional Government to attract Ethiopian investors and tourists to Sri Lanka.
The President assured more opportunities for Sri Lankans and requested the Ambassador to arrange a high level business delegation from Sri Lanka to visit his region. He also informed that opportunities are available for investment in the fields of energy, mineral industries and agro business. Concluding the visit, the envoys attended a joint press briefing chaired by the Regional President.

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The  Asian Century

The Asian Century

Asia re-emerges as the dominant economic power in the world – opportunity beckons Sri Lanka

Dr Palitha Kohona

Former Ambassador and Permanent Representative of Sri Lanka to the United Nations; Former Secretary to the Ministry of Foreign Affairs of Sri Lanka

It has been said that in the 19th century, the world was Europeanised. In the 20th century, it was Americanised. Now, it is being Asianised. Sri Lanka has another opportunity, through the astute management of its policies, both internal and external, to be part of the blossoming Asian success story. It is reassuring that Sri Lanka’s opposition presidential candidate, Gotabaya Rajapaksa, has identified the seminal national need to participate in the Asian resurgence gathering steam now through a refined and responsive policy framework. Emerging Asia has many lessons to offer also.

Asia, after having been accorded the dubious distinction of being the poorest continent in the 1960s, has, within a very short space of time, transformed itself in to the economic powerhouse of the world, and is achieving prosperity at a dizzying pace. This rapid rise has caught the West off balance and many analysts find the transition difficult to accommodate in their existing frames of reference, not to mention the political class and the media. The much flaunted, and oft prescribed liberal democratic political structures and open economies and free trade have not been faithfully replicated by the majority of countries of resurgent Asia, as they strive to catch up to the West.

At most, only lip service is being paid by many to liberal democracy. Liberalised trade and open markets, an article of faith for so long in the West, has not been adopted in full and it is being gradually diluted even in the West, particularly in the face of Asian competition. The dominant economy of the West, the USA, is now being forced to backpedal on the trade liberalisation and globalisation crusade of yesteryear, and is busily putting up barriers. The noisy call to open doors to foreign investments is being replaced by strict monitoring of inward investments, ostensibly for security, environmental and sociological reasons. Some entertain genuine fears that one of the pillars of the Bretton Woods institutional architecture, the World Trade Organisation, might collapse due to US actions.

Economic and trade concepts advocated with messianic fervour are being modified rapidly, just as resurgent Asia was beginning to reap their benefits. Sri Lanka, as it adopts post-election trade and investment policies, must fully be cognisant of the sea changes affecting the attitudes of the West, and the responses of the rest of the world. Gotabaya Rajapaksa’s election manifesto appears to grasp these sweeping changes, and to position Sri Lanka strategically to reap advantage effectively, including through exploiting the opportunities offered by booming Asia.

Hoax

Did the West promote a hoax all these years, or were these concepts advocated for their immediate convenience, including through post World War II international institutions set up to advance their own vision for a better world? Is it now backtracking when confronted by a super-competitive Asia, which has become adept at exploiting the rules propagated by the West itself?

History has witnessed a prosperous Asia fall from grace. In the early 1820s, Asia accounted for two-thirds of the world’s population, and more than 50% of the wealth produced globally. The subsequent impoverishment of Asia could be attributed to a number of overlapping factors, including its forcible integration into a world economy on conditions determined by colonial and imperial priorities, development exhaustion, stifling and inward-looking conservatism, perhaps influenced by regressive religious constraints, dissipation of the dynamism and innovation of the past, paucity of advances in military technology, strategy and science, and internecine conflicts which were unscrupulously exploited by Western colonial invaders. The causes for the downfall hold lessons for Asia in the contemporary environment. The same weaknesses, where they manifest themselves, including overwhelming suspicions of other countries of the region, continue to be exploited by interested outsiders who still remain in control of global financial structures and the media.

By the late 1960s, Asia had slid to being the poorest continent in the world, but with more than half of the world’s population. Its social indicators were among the worst. The task of feeding this massive population was a practical and immediate challenge, highlighted in the Club of Rome’s Limits to Growth. But to the surprise of many, Asia, modifying feudal and semi-feudal socio-economic structures, and employing modern science and technology, pulled through and surprised the many pessimistic commentators. The food problem was solved despite the numerous publicly expressed reservations. Millions were extricated from absolute poverty within a single generation.

Global centre of gravity

As Sri Lanka readies itself for a new administration, and more responsive foreign and policy approaches are explored, it is pertinent to remember that Asia now accounts for 30% of world income, 40% of world manufacturing, and over one-third of world trade, while its income per capita converged towards the global average. Already Asia’s GDP exceeds that of the USA and EU. By 2040 it will account for about over 50% of World GDP, with India or China having the biggest individual GDP. China lodged 44% of patent applications in 2016. Hyderabad is catching up to Bangalore as an IT hub. Technology was spurring Asia, especially South East and East Asia ahead.

By 2040, Asia is likely to account for nearly 40% of global consumption. Asia now accounts for around one-third of global trade in goods, up from about a quarter 10 years ago. Its share of global airline travellers has risen from 33% to 40%, and its share of capital flows has increased from 13% to 23%. China alone generated over 137 million international travellers per year, spending over 130 billion Dollars, and the number is expected to grow. When I started travelling on government delegations in business class in the middle eighties, it was rare to see non-white faces in this class. Today, it is the other way around.

McKinsey Global Institute research demonstrates the impressive extent to which the global centre of gravity is shifting toward Asia with the region increasing its share of global trade, capital, people, knowledge, transport, culture and resources. Of eight types of global cross-border flows, only waste is flowing in the opposite direction, reflecting the decision by China and other Asian countries to reduce or eliminate imports of waste from developed countries. China stopped the import of waste in 2017. Some, including the Philippines, Thailand, Vietnam, Singapore and Malaysia have begun to return waste to European source countries, something unthinkable two generations ago.

Sri Lanka lags

According to the World Bank, with regard to ease of doing business around the world, India has risen to 63rd place, from 142nd when Modi took office in 2014. He is aiming for the top 50. China is already at 31. New Zealand and Singapore hold the top two positions. The Middle East demonstrated new strength with Saudi Arabia, Jordan, Bahrain and Kuwait among the top 10 gainers. That most-improved group also included India, Pakistan and Nigeria, three populous nations.
Sri Lanka lags at 99 in the world rankings and must improve fast if the people’s dreams of a better future and an expanding economy are to be realised. Sri Lanka, with many natural and sociological advantages, needs to examine what is holding it back and understand what makes the other Asian countries shine. Inefficient Tax and administrative structures, corruption, lack of transparency, dynamic and visionary managers, uncertain policies and lost opportunities, etc come to mind. Gotabaya Rajapaksa’s policy statement seeks to address these challenges methodically.

Now, 21 of the world’s 30 largest and four of the 10 most visited cities are in Asia. A dizzying range of business opportunities have opened up in Asia’s mega cities. Reflecting this trend, Yangon, Myanmar’s commercial capital, attracted greenfield foreign direct investment (FDI) in knowledge-intensive sectors totalling USD 2.6 billion in 2017, up from virtually zero in 2007. The factors that made investors attracted to Yangon are worth studying by Sri Lanka.
China, South Korea and Taiwan in East Asia; Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam in South-East Asia, Bangladesh, India, Pakistan, and Sri Lanka in South Asia, and Turkey in West Asia, account for more than four-fifths of the population and income of the continent. Japan, a high income country, was already industrialised 50 years ago.

ACEP and BRI

Today China’s GDP, although its growth has slowed, tops USD 14 trillion. India’s USD 2.6 trillion. China’s economy has been expanding at 6% per annum and contributed around 30% of global growth in the past eight years. India’s economy expanded at 5%. India is expected to overtake the Chinese economy around 2050. The regional grouping of ASEAN, with 600 million people and a combined GDP of USD 2.8 trillion, is surging ahead economically, including technologically, making it an attractive partner and a model to outsiders.

The Asian Comprehensive Economic Partnership (ACEP), currently being negotiated after the US withdrew from the Trans Pacific Partnership. offers further opportunities for collaboration. China has long pushed to conclude this pact, which also includes Japan, South Korea, Australia, New Zealand and 10 Southeast Asian nations. The technological advancements of the region are breath-taking.

Asia’s economic transformation in this short time-span is almost unprecedented in history. Rising per capita incomes have transformed social indicators of development. Literacy rates and life expectancy have risen dramatically.

President Xi Jinping’s flagship Belt and Road Initiative (BRI), covering more than 68 countries, including 65% of the world’s population and 40% of the global gross domestic product as of 2017, pledged USD 60 billion in financing for projects across the African continent. China’s trade with Africa has soared over the past 20 years from about USD 10 billion to close to USD 200 billion. In a reflection of shifting balances of power, nearly twice as many African leaders attended the Forum on China-Africa Co-operation in Beijing in September than the UN General Assembly in New York two weeks later. The BRI holds considerable promise for Sri Lanka.
Russia invited over 50 African leaders to its first Russia-Africa summit in Sochi in late October, the culmination of a strategic push that marks Moscow’s re-entry into the continent. With trade and investment replacing aid, and due to the inroads already made by China and Russia, US and European multilateral lenders are also directing more funds towards Africa. Africa offers exciting new trade and investment prospects for Sri Lankan businesses.

Diverse

But it is important to recognise that Asia is bewilderingly diverse. There are significant differences between countries in geographical size, embedded histories, colonial legacies, nationalist sentiment, natural resources, population size, income levels and political systems. The reliance on market forces and the degree of openness of economies has varied greatly across countries and over time.

Similarly, the politics and ideologies have also tended to differ widely from authoritarian regimes and oligarchies to substantial democracies. From communism, socialism with capitalist characteristics, to state capitalism and simple robber baron capitalism. Development outcomes differed and different paths to development were adopted, because they decided early that there was no universal one-size-fits-all solutions.

Rising investment and high savings rates combined with the spread of education, especially technical education, were significant underlying factors contributing to Asia’s performance. Rapid industrialisation fuelled growth, often led by exports. Co-ordinated and well considered economic policies, including international policies, contributed. The developmental states in South Korea, Taiwan China and Singapore co-ordinated policies across sectors over time in pursuit of national development objectives, using carrot-and-stick policies to implement their agenda, and were able to become industrialised nations in just 50 years. China emulated these developmental states with tremendous success, and Vietnam followed the same path two decades later. Both countries have strong one-party communist governments that could effectively co-ordinate and implement policies.

Government role

Successful Asian economies gradually embraced openness. Integration with the world economy was almost always strategic and cautious, rather than passive insertion. Trade policy was liberal for exports but in many instances, restrictive for imports. On many occasions, it was designed to encourage local manufacture. Government policies towards foreign investment have been shaped by national development priorities, rather than willy-nilly. While openness was necessary for successful industrialisation, it was not sufficient and facilitated industrialisation only when combined with industrial policy.

Governments performed a vital role in the transformation of Asia. It was catalyst and supporter. Success at development in Asia was about managing this evolving relationship between states and markets, by finding the right balance in their respective roles.

While Sri Lanka has posted some impressive socio-economic indicators, there are other areas where it could learn from the experiences of the region. As Sri Lanka readies itself for a new administration, it would be instructive to study the identifiable factors which propelled the Asian miracle.

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USD stands to lose its dominant position  as global reserve currency

USD stands to lose its dominant position as global reserve currency

On 16 October, in response to spiking interest rates, the US Federal Reserve system (nicknamed “The Fed”) started a programme to buy about USD 60 billion monthly in US Treasury bills. As of the beginning of November, its holdings stand at USD 4.02 trillion. The next day, separately, its New York arm injected USD 104.15 billion into financial markets, through repurchase (repo) operations; an action it repeated two weeks later, with repo operations totalling, USD 104.58 billion; the aim being to boost liquidity and control interest rates. Meanwhile, for the third time in four months, the Fed cut interest rates by 25 basis points (a quarter of 1%).

Troubling

These moves are troubling, especially in view of the ostensibly bright prospects for the US economy. The US Bureau of Economic Analysis said on 30 October that the economy grew by 2.9% in Q3 this year, marginally down from the 2.0% of Q2 (although considerably lower than Q1’s 3.1%). Market pundits expected rather lower rates of growth. US Secretary of Commerce Wilbur Ross commented:

“Today’s report shows that the U.S. economy continues its steady growth in defiance of media sceptics calling for a recession. Since President Trump took office, wages have surged, unemployment has hit record lows, and poverty has fallen for all Americans, including the country’s most vulnerable.”
Ross’ optimism might appear justified, since the data on growth, together with rising employment data, and low inflation figures, as well as higher manufacturing growth in China, caused buoyancy in markets, and overcame fears of an imminent slowdown. Market analysts began speaking confidently about needing to re-evaluate the prospects for 2020.

However, things do not look so good under the bonnet. Although, officially, unemployment in September hit a 50-year low of 3.5%, the real unemployment rate, taking into account those who have given up on looking for work and the marginally-employed, may be twice or thrice that figure.
On 1 October, the US Institute for Supply Management said that the country’s manufacturing sector had entered recession (meaning that it had contracted for two quarters in succession). Output fell to the lowest level since the aftermath of the Global Financial Crisis. Three days later, the US Labour Department stated that the manufacturing sector lost 2,000 jobs in September, part of an overall decline in employment in the sector.

Today, manufacturing accounts for just 10% of US economic activity, part of a long-term decline as companies shift their production to cheaper, foreign location. Despite its small size, however, the manufacturing sector’s slowdown has knock-on effects on the logistics business, and there are fears of what its effects might be on the much larger services sector. The possibility of an economy-wide recession appears less distant.

Debt crisis?

In mid-August, the US National Association for Business Economics published a report on its survey of economists’ opinions, in which 34% of them believed the country might be heading towards a recession in 2021, and 40% that the recession would take place before then.
Economists worry about the rising level of US debt. The national debt surpassed USD 22 trillion for the first time in February, and stands, as of 30 September, at USD 22.719 trillion, or 106% of the US gross domestic product (GDP). Even more worrying is corporate indebtedness. The non-financial debt of large US companies stands at about USD 10 trillion. Adding to that the debt of corporations not listed on the stock exchange, small and medium enterprises (SMEs), and family-owned businesses, increases the total corporate debt to a record USD 15.5 trillion, or 74% of the US GDP.

The corporate sector has been racking up this debt, using the cheap money available in the low-interest-rate financial regime, primarily for stock buy-backs, acquisitions and dividends – in order to hike up share prices – rather than to expand. Many businesses, particularly those which took greater risks in borrowing, become vulnerable if the interest rates begin to rise, being unable to pay back debts or refinance them.

These companies make up a large part of corporate USA. The International Monetary Fund (IMF) estimates that half the debt of large corporations is high-risk, having a greater probability of default. Half of the USD 660 billion worth of leveraged debt (that is, below investment quality loans to companies with high levels of debt) is held by a range of investors as collateralised loan obligations (CLOs) – structured financial products, created by pooling high-risk corporate loans. These have high potential returns but greater levels of risk, and uncertainty in the markets could cause a stampede of selling, which could spill over into more conventional areas, such as bond markets.

Synchronised slowdown

Worries about the US economy take place amidst against a world backdrop of uncertainty. In August The Economist reported that
“Financial markets are often accused of complacency. However, the mood just now is not complacency but anxiety. And it is deepening by the day. In Germany interest rates are negative all the way from overnight deposits to 30-year bonds. In Switzerland negative yields extend right up to 50-year bonds. In America, meanwhile, interest rates on ten-year bonds are lower than on three-month bills—a harbinger of recession. Angst is evident elsewhere, too. The safe-haven dollar is up against many other currencies. Gold is at a six-year high. Copper prices, a proxy for industrial health, are down sharply. Despite Iran’s seizure of oil tankers in the Gulf, oil prices have sunk to below $60 a barrel. Plenty of people fear that these strange signals portend a global recession. Yet a recession is so far a fear, not a reality. The true problem is that firms and markets are struggling to get to grips with uncertainty.”

Nevertheless, there are ominous signs of an impending world recession. Incoming IMF managing director Kristalina Georgieva said in early October that the world economy was experiencing “synchronised slowdown”, warning that the situation could deteriorate unless governments supported growth and resolved trade conflicts. The IMF lowered its prediction of global growth in 2019 to 3%; — remarking on a “serious climbdown” from 2017’s growth figure of 3.8 %.

The slowdown in most apparent in the European Union (EU). The UK economy contracted by 0.2% in Q2. Although its return to growth is expected in the third quarter, the IHS Markit Purchasing Managers’ Index (PMI) crept up to 50.0 (zero growth) from 49.5 (negative growth) in September. The PMI figures, some of the lowest since 2009 (when Britain had its last recession), are consistent with a 0.1% contraction in Q3 – which means a recession, and which was one of the lowest readings since Britain was last in recession in 2009.

Britain’s economy has been affected by both the Sino-US trade war and by uncertainties over Brexit (Britain’s anticipated exit from the EU). The Brexit deadline, delayed again to 31 January next year, remains in doubt with the announcement of a December general election. Meanwhile, economists warned that economic recovery from the uncertainty could take years, given that many companies have abandoned the UK and moved overseas.

German recession

The British economic downturn might be the result of Brexit, but the broader picture across the EU also reveals a generalised “synchronised slowdown”. The economy of Germany, the EU’s powerhouse, may be in recession. In August Germany’s central bank, the Deutsche Bundesbank, reported that the economy of might be shrinking:
“The German economy will probably remain lacklustre in the third quarter of 2019. Total output could shrink slightly again, mainly as a result of the continued downturn in industry. According to the data currently available, industrial output is expected to contract markedly in the ongoing quarter again.”
The key manufacturing sector, it reported, facing a lack of export demand, struggled, dragging down the rest of the economy. The downturn was exacerbated by Brexit: in anticipation of the earlier, March deadline, British consumers stocked up on German goods in the Winter; but in the Spring, with the postponement of Brexit, this led to a drastic drop in demand.

In Q2, German GDP shrank by 0.1%, and a second quarterly contraction would signify a recession. This possibility became more apparent in late October, when the Bundesbank said in its monthly report that “Germany’s economic output could have shrunk again slightly in the third quarter of 2019.”
The traditional engine of German economic growth, its manufacturing export sector, is failing to rebound. “The decisive factor here is the continued downturn in the export-oriented industry,” the Bundesbank reported. “Early indicators currently provide few signs of a sustainable recovery in exports and a stabilisation of the industry.”

Meanwhile, the German Council of Economic Advisers, in its growth forecast for 2020, has shaved 0.1% off the government-predicted rate, to 0.9%. The Council, known colloquially as the “Five Economic Sages”, which evaluates economic policies for the finance ministry, envisages 0.5% growth this year. They did not, however, expect a “broad and deep” recession.

USD losing status

On top of the economic uncertainty, the USA is worrying about the US Dollar losing its status as the world’s dominant currency, as the country’s relative supremacy declines. A recent analysis by New York based financial services giant JP Morgan says:

“… in the coming decades we think the world economy will transition from U.S. and USD dominance toward a system where Asia wields greater power. In currency space, this means the USD will likely lose value compared to a basket of other currencies, including precious commodities like gold…Recent data on currency reserve holdings among global central banks suggests this shift may already be under way. As a share of overall central bank reserves, the USD’s role has been declining ever since the Great Recession… we believe the U.S. dollar could become vulnerable to a loss of value relative to a more diversified basket of currencies, including gold.”
Whereas, according to the IMF, 73% of the world’s central bank reserves were held in US dollars in 2000, this dropped to about 62% last year, and may have shrunk again this year. China’s holdings of US government paper halved from 14% in 2011 to 7% today. Investors and experts alike are examining are the US Dollar’s hegemony, which is not surprising, given that U.S. policies look ambiguous or altogether absent, together with its aggressive sanctions policy.

China and Russia (and several other smaller players) increasingly look to means of settling international trade contracts in non-USD currencies, to achieve protection from the US-established and led global financial system. Businesses are alarmed at the prospect of losing billions of dollars in fines, if the US government finds the smallest evidence connecting them to Washington-sanctioned countries or companies. Europe is attempting to bypass US sanctions on Iran using the Instrument in Support of Trade Exchanges (INSTEX) special purpose vehicle.

According to some experts, the US Dollar, Euro and Yuan may already be struggling for dominance. The effects of a decline in the US Dollars dominance are debated hotly. Questioned on the subject, St Louis Fed senior vice president David Andolfatto, said “who cares?” He added that many countries are prosperous without their money being global reserve currencies. On the other hand, Dallas Fed president Rob Kaplan said that US government interest payments could leap by USD 200 billion, due to interest rates rising by 1%, as a result of the loss of reserve-currency status.

The US Doller appears to be in the same position as the British Pound Sterling, which declined in the lead-up to the Bretton Woods agreement. Bretton Woods led to the former replacing the latter as the world’s dominant currency. Whether the Euro or the Yuan, or perhaps a crypto currency, might replace the US Dollar remains, for the moment, moot.

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Trade War Cooling

Trade War Cooling

Both China and the USA want to bring the crisis to a conclusion

The unilateral decision by US President Donald Trump, to increase tariffs precipitated increased tension between the world’s two leading powers. In July 2018, the Trump administration imposed a 25% tariff on USD 38 billion worth of imports from China, which it extended in August to include a further USD 16 billion worth of imports. In September, it imposed a tariff of 10% on a yet another bundle of US$ 200 billion worth of imports – which it increased in May this year to 25%.

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SL-UK Relations after BREXIT

SL-UK Relations after BREXIT

Brexit should be seen as a great opportunity for renewal of the Commonwealth of Nations

The Parliament of the United Kingdom will be prorogued from September until the middle of October meaning that at long last the UK is almost certain to leave the European Union on 31 October 2019. The result of the largest democratic vote in British electoral history, that took place on 23 June 2016, will finally be honoured. The United Kingdom’s departure from the European Union, AKA Brexit, will bring tremendous challenges and also opportunities, not only for the British but also for the rest of the world, especially the Commonwealth of Nations.

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Global  Recession Imminent

Global Recession Imminent

Economist Dr Howard Nicholas foresees

Record-breaking audiences listened to Dr Howard Nicholas’ seminar on “The Current State and Future Directions of the Global and Sri Lankan Economies” at the Lakshman Kadirgamar Institute in Colombo on 11 July, as well as to a subsequent lecture at the University of Colombo. His two-part presentation dealt firstly with the trends in the global economy Dr Nicholas has had a long and distinguished teaching career, teaching business economics and financial markets in academic institutions in various countries – including most recently China and Vietnam. He is invited regularly to give lectures on the global economy. At a time when the world economy appeared to be riding high, Dr Howard Nicholas forecast a recession. Soon afterwards, the Global Financial Crisis (GFC) of 2007 occurred, as he had predicted. He is also known for his early warnings of the Asian Crisis of 1996-8, the global recession of 2001-3 and a little-known crisis in the Chinese economy in 2015. Now, once again, he envisages a global recession, driven by a world-wide debt crisis.

Power shift

Dr Nicholas points out that there has been a massive shift in global economic power, “as the place of the West is being taken over by the Rest.” Underlying this is a massive shift in global wealth over the past three decades. The advanced economies’ share of global gross domestic product (GDP), as measured by purchasing power parity (PPP) has declined from over 60% in the early 1990s to 40% today, while that of the developing countries (including emerging markets) has increased, reversing the previous relative position.

There has also been a regional shift in the distribution of GDP between the developing countries, with the shares of Africa and South Asia stagnating around the 10% mark, while that of Latin America has declined from 35% to converge on the South Asian level. Conversely, East Asia’s share has almost doubled from the below that of Latin America to almost 60%. Within East Asia itself, there has been a shift, with China’s share rising from 10% in 1992 to nearly 60% in 2017. Hence, it is clear that China has been driving the shift in global wealth.

It has also become the world’s largest manufacturer, pushing the USA, the Eurozone and Japan into second, third and fourth place. Manufacturing, Dr Nicholas explains, underlies “living standards, which are about the material basis of our existence – the material products (and services) we purchase to improve our well-being, and most material products are manufactures. Services, such as catering, tourism and the like are founded on the production of manufactures, while others such as finance support the reproduction of the material base of the economy.”

Countries that dominate the world economy are those that manufacture, and manufacturing has been driving global growth. By building on manufacturing, China has become the world’s largest retail market, displacing the USA. Thus, world economic power has shifted to East Asia, led by China.

Long Cycles

Dr Nicholas also referred to “long cycles”, a concept explored first by the Dutch economists Jacob van Gelderen and Salomon de Wolff, and expanded upon by Soviet Economist Nikolai Kondratiev, after whom the Austrian economist Joseph Schumpeter named them “Kondratiev Waves”. A typical business cycle, he explains, consists of a business cycle peak and a business cycle trough, on either side of the equilibrium level with expansion above and recession below. He itemises two types of cycle which he finds relevant: the Juglar cycle, which last 7-11 years and are driven by fixed capital investments; and the Kondratiev wave, which last 50-60 years and are driven by major innovations.

Dr Nicholas asserts that combining the shorter Juglar Cycle with Kondratiev cycle provides us with a long cycle of about three Juglar cycles. describes four such long cycles so far, starting with the Industrial Revolution, based on different technologies as prime movers.: First, 58 years from 1790, peaking in 1814, with a trough in 1848; Britain being the hegemonic power; and the primary technology being canals.

Second, 45 years from 1848, peak 1872, trough 1893; hegemonic power Britain; technology: railways, steam. Third, 47 years from 1893, peak 1917, trough 1940; hegemonic power: Britain; technology: steel, combustion engine, electricity, chemicals, telephone. Fourth, 80 years from 1940, peak 1975, trough 2019/20; hegemonic power USA; technology: electronics, plastics, aerospace, nuclear energy

This model can predict the direction in which the economy will move: the next long cycle should be less than 50 years starting in 2020, peaking about 2040 and with a trough about 2065, with either China, or an East Asia led by China as the hegemonic power. The technologies of this “Fifth Technological Revolution” he forecasts as the internet, biotechnology, and robotics. However, before the technological revolution marking the start of a new cycle, the previous long cycle ends in a trough, signifying a depression or recession. The US economy, Nicholas points out, has been in a de facto recession for the past decade.

“The problem is,” he says, “that at the bottom of all long cycles when you have a major technological change, you have a lot of unemployment. The skills we used to have which gave us jobs in the previous generation are no longer valid.” The true unemployment rates are being hidden by statistical manipulation. For example, the US government gives a figure of about 4% for the unemployment rate. However, the official statistics do not count the unemployed who, being discouraged at not finding jobs, stop looking actively for employment. Taking these numbers into account, the actual unemployment figure is closer to 21%.

Elephant in the room

The elephant in the room, Dr Nicholas states, is a great monetary and fiscal experiment in deficit spending, especially by China and the USA, which is propping up the global economy, but which has been making it increasingly unstable.
Central banks have been “printing money”: the assets of the “Big Four” (The US Federal Reserve, the European Central Bank, The People’s Bank of China, and the Bank of Japan) have risen from less than USD 5 trillion to USD 20 trillion, representing growth from less than 15% of GDP to over 40%.

The Central Banks do not control the quantity of cash in the system, but only the rate. Putting money into the system cause interest rates to fall. With global GDP growth at 2% over 9 years, printing money grew at 300%. So global debt is at historic highs, but interest rates are at historic lows because of printing money. The quality of debt has fallen, as has corporate yield. For the first time in history, people are paying governments and banks to hold their money. Economic growth is predicated on fixed capital growth, not working capital, overdrafts or loans. What is happening at present is that borrowing is taking place for speculation, when there should be lending to businesses for productive investment. A huge “asset bubble” has been created, making the rich richer, but hurting the poor and creating global financial instability. Pension funds are being, most dangerously, invested in speculation on the stock market. All the world’s wealth funds (including oil-rich Norway and the Middle East countries) are investing in only a few US firms, such as Google, Apple, Microsoft, and Amazon.As a corollary. Governments and central banks are increasingly controlled by finance sectors. All the US presidents who are elected are those receiving the highest amount of funds for campaigns. Hence, there is no incentive to reduce the bubble by increasing fixed capital investment.

Therefore, in the next couple of years, he predicts a massive recession, massive budget deficits, more quantitative easing and a rise in protectionism. The USA and China may try to delay the deluge with a trade deal, and there might be an agreement on more budget deficits. However, the writing is on the wall.

Christine Arumugam-Pillai

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Trade Delegation visits Poland

Trade Delegation visits Poland

Led by S.T. Kodikara and Chairperson of EDB Mrs. Indira Malwatte

It has been recognised that Central Europe is an economically important region for Sri Lanka. The potential of Central Europe remains largely untapped. This region is much open for business and in particular attractive for long-term growth prospects. Although Sri Lanka has a strong image in the region, our commercial engagement has been relatively limited. Sri Lanka’s total bilateral trade with Central European countries is USD810 million in 2018 with its total exports to Central Europe being USD 388 m and imports 422 m. But these figures do not tell the entire story, as it contains Sri Lanka’s healthy trade relations with only few of the countries like Poland and Hungary.

Sri Lanka looks at the Central Europe primarily as a market for our own strategic industries. Sri Lanka exports tea, apparel, manufactured tobacco, rubber finished products, electrical and electronic products, coconut fiber, coconut kernel products, edible fish products, transport equipment and parts, coconut shell products, parts of footwear, spices, essential oils and oleoresins and processed foods to Central European Region.

Recently the EU has announced its Europe- Asia connectivity strategy. It is important that Sri Lanka should now look beyond the largest EU states of Western Europe and utilise the potential of cooperation with the Central European countries which
comply with the uniform market rules which apply throughout the EU.

Sri Lanka and Central European countries have much to offer each other. There are many complementarities of interests and mutual benefits and dependencies. Central European countries have stable macro- economic environment, highly educated yet affordable workforce, favurable business environment and strategic location.

In the above context, Sri Lanka Export Development Board in cooperation with the Embassy in Poland organised an out-ward trade mission to Central Europe covering Hungary and Poland. This delegation was organised parallel to the First Session of the Sri Lanka Hungary joint Commission held in Budapest.

Business Forum and B2B Meetings in Warsaw, Poland

Immediately after the Hungary programme the delegation proceeded to Poland. Poland is the largest economy in Central and Eastern Europe. Poland’s population exceed 38 million.

The Sri Lanka Embassy in Poland and the Polish Chamber of Commerce organised the Business Forums and B2B Meeting Programme on 25 and 26 April in Warsaw, Poland. More than 40 Polish companies attended the Business Forum and more than 40 B2B meetings were conducted on 25 and 26 April 2019.

During this mission the Sri Lankan participants discussed with their counterparts on different options of partnerships. It was identified that the Central European market is a more affordable and reachable market for Sri Lanka, and the delegation was afforded with the opportunity to develop business sales leads, joint ventures, and distributorships in both countries.

Siddhalepa Exports Ltd, Director Vidyani Hettigoda stated that they received positive interests towards Ayurvedic products, hotels and franchise sectors from the counterparts they met in Poland and could establish a number of business contacts in Poland. Though Sri Lanka tourism industry braces for tough time, Polish companies specifically inquired for facilitation services for one to two weeks I Ayurvedic Health Resorts in Sri Lanka.

Further, Hettigoda mentioned “I saw a lot of possibilities in Poland to promote Ayurvedic products and would like to explore those . I developed many contacts, and is now exchanging emails, so the relationship have begun.” It is reported that in the next few months, EDB anticipates that many of these leads will develop into formal agreements, and the EDB will continue discussions with the private sector mission participants to track their individual results.

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Terrorism,  Afghanistan and  connectivity

Terrorism, Afghanistan and connectivity

India at Bishkek SCO foreign ministers’ meeting

Our heart goes out to our brothers and sisters of Sri Lanka, said who have recently witnessed the ghastly act of terrorism. Our wounds of Pulwama attack were still raw and the news from the neighbourhood has made us more determined to resolutely fight against this menace.”

So saying, Sushma Swaraj concentrated on the issues of terrorism during her address to the Shanghai Co-operation Organisation (SCO) foreign ministers’ meeting at Bishkek, Kyrgyzstan on 21 April.

Swaraj was attending her final high-level foreign engagement as Indian External Affairs Minister, since she decided not to recontest her Vidisha electorate at India’s recently-concluded general election,
citing ill health. Her successor, Subrahmanyam Jaishankar, a former Secretary to the External Affairs Ministry, may be expected to continue her
trajectory.

India got full membership of the SCO, along with rival Pakistan, at its summit in Astana in 2017. This the second SCO foreign ministers’ meeting in which India has participated, as a full member of the organisation, the first being held in April last year in Beijing. The foreign ministers’ meeting comes weeks before the SCO leaders’ summit is due in Kyrgystan, in which the Indian Prime Minister Narendra Modi and his Pakistani counterpart Imran Khan, as well as Chinese President Xi Jinping, will participate.

Security

Swaraj said India is determined consistently to strengthen co-operation within the SCO framework for comprehensive, co-operative and sustainable security. Terrorism has been a particular bugbear of the Indian government, especially since the UN-listed Jaish-e-Mohammed terrorist group launched their attack in Pulwama on 14 February.

However, security against terrorism is not merely an Indian concern. The SCO’s Tashkent-headquartered Regional Anti-Terrorist Structure (RATS) has emerged as an important forum for co-operation in countering terrorism, separatism and extremism. A meeting held in March of the RATS council, attended by teams from India, China, Kazakhstan, the Kyrgyz Republic, Pakistan, Russia, Tajikistan and Uzbekistan declared plans to hold a joint anti-terrorism exercise, “Sary-Arka-Antiterror 2019”, and the first stage of the joint border operation “Solidarity 2019-2021,” the 7th meeting of the heads of the border services; as well as training workshops on identifying and preventing the use of the Internet for terrorist, separatist and extremist purposes.

The Syrian and Iraqi crises focussed the attention of SCO members on the threat from extremist Wahhabi terrorism. The successes of the Al Qaeda and Daesh (Islamic State) proved alluring to Islamists in the north Caucasus autonomous republics of the Russian Federation (Chechnya, Ingushtia) to join with extremists among the Central Asian Uzbeks, Turkmens, Tajiks, Kazakhs, Kyrkyz and Uighurs to form a Central Asian “Emirate”, separating Xinjiang from China.

As early as 2014, Uzbekistan’s President Islam Karimov warned that “Central Asia, a resource-rich and mainly Muslim region nestled between Russia, China and Afghanistan, could face a fate similar to that of Iraq, swathes of which have been taken over by Islamic State insurgents.”

Iran

Since then, the concerns of not just Central Asian leaders, but those of Russia and China, have awoken to the danger. Russia has emerged as the strongest bulwark against Islamist terrorism, and Central Asian leaders have sought its protection.

Another emerging force is Iran, which enjoys SCO observer status, as well as warm bilateral relations with China, Russia, India and Pakistan. Russia and the Central Asian countries and Russia have recognised Iran as a buttress against the rise of international Wahhabi terrorism. Russia and Iran are, increasingly, co-operating in the military sphere, especially in Syria, where they are protecting the government from Al Qaeda and Daesh.  This is appreciated by the leaders of the Central Asian republics, from which many of the Islamist militants originate. They are also collaborating in helping defend the Central Asian republics, for example in ending the brutal civil war in Tajikistan in 1997.

Relations between Russia and Iran are getting warmer, with the former supplying the state-of-the-art S-300 air defence to the latter, and keeping the option open to supply the even more sophisticated S-400 system.

Afghanistan

Russia and Iran have co-operated in Afghanistan since the rise of Taliban in the 1990s. They also collaborated with the USA during its invasion of Afghanistan in 2001. As the USA and its allies wind down operations, Russia and Iran are working together closely to curb the expansion of Wahhabi outgrowths in the country, including Al Qaeda, Daesh and the Islamic Movement of Uzbekistan.

Swaraj said that “India stands committed to any process” which can help “Afghanistan emerge as a united, peaceful, secure, stable, inclusive and economically vibrant nation, with guaranteed gender and human rights.”

Her comments came against a background of increased Indian engagement with China, Iran and Russia on the Afghan peace process. India is seeking to expand its presence in Afghanistan, especially in the economic sphere, investing several billions of dollars in iron ore mines, steel mills, electrical power projects and transmission lines. Two keynote Indian projects in the country were the new Kabul Parliament complex and the Selma Dam in Herat province.

Connectivity

Iran is the key to increased economic and transit co-operation as India also seeks to improve its trade with Afghanistan, with which it has established two air corridors. India and Iran are collaborating on transporting goods to and from the land-locked country. India is investing over USD 100 million in expanding the southeast Iranian port of Chabahar, the sea-land transport hub for its Afghanistan trade.

Chabahar is also a node in another important connectivity initiative, the International North-South Transport Corridor that will connect Mumbai with Moscow. New Delhi also considers three other connectivity initiatives of importance: the Ashgabat Agreement for central Asia connectivity, the India Afghanistan air corridor and the India-Myanmar-Thailand Trilateral Highway.

The connectivity projects need to be, “inclusive, sustainable, transparent and respect the principles of sovereignty and territorial integrity”.

The full members of the SCO are: China, India, Kazakhstan, the Kyrgyz Republic, Pakistan, Russia, Tajikistan and Uzbekistan; with Afghanistan, Belarus, Iran and Mongolia as observers; and  Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka and Turkey as dialogue partners.

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Silk Road & Young Dreams Sri Lankan youth win at  music competition

Silk Road & Young Dreams Sri Lankan youth win at music competition

Young musicians Nipuna Siripathi and Tharushi Athukorala, who represented Sri Lanka at the recently held “Silk Road & Young Dreams” competition, were placed 3rd for their outstanding performance under the ‘Silk Road Young Voice Musician’ category.

The international competition held in Beijing, China for the second consecutive year, had 300 participants from 70 countries. “Belt Road and Young Dreams” is a youth-oriented cultural exchange program, along the Silk Road, conceived and initiated in August 2018, by the Silk Road Cities Alliance, Beijing Belt and Road Co-operative Community and the Chongyang Institute for Financial Studies of Renmin University of China.

The objective of the competition is to provide youth from different backgrounds, hailing from countries and regions along the Silk Road, the opportunity to showcase their talents and engage with one another on an equal platform. The programme, designed to help youth understand different cultures, serves as a bridge to link societies.

A number of different categories were added to the programme in 2019, and the China Friendship Foundation for Peace and Development also joined as a co-host. CHEC Port City Colombo, the company behind Sri Lanka’s most futuristic project to date, was the sponsor for Nipuna Siripathi, who works as a composer at popular radio station Sitha FM, and his duet partner Tharushi Athukorala, is an announcer for CRI Sri Lanka FM radio.

The winning duo expressed their appreciation for the support provided by Port City, adding that they were overwhelmed by their win, especially since they were pitted against some extremely talented youth from around the world. They expressed their gratitude for the opportunity
to bring glory to mother
Lanka.

Creating opportunities for Sri Lanka’s future generation is a significant part of the project company’s CSR strategy, and encouraging local talent to shine at an international competition fit into that plan. Apart from the two winners who were sponsored by Port City, eight other Sri Lankans had participated in the competition under categories such as dancing, painting, photography and oration. Sri Lanka’s Deputy Ambassador to China Shani Calyaneratne Karunaratne was amongst the guests attending the event.

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Developing Countries and Public Interest Capitalism

Developing Countries and Public Interest Capitalism

Looking beyond Return on Equity for Successful and Sustainable Businesses

The twenty-first century is being hailed as Asia’s Century, with the balance of World GDP significantly shifting towards the continent. While in 1950 it was less than 5% of World GDP, the Asian share now accounts for about a third of it, and is forecast to be over half of it by 2050. With increasing economic output comes geo-political weight and a greater responsibility for the governments to secure the betterment of their citizens.

Capitalism, it is argued, is a social system in which the government is exclusively devoted to the protection of individual rights, including property rights – one in which there exists absolutely no government intervention in the economy.

However, causing a widening wealth disparity, the American and British style of Capitalism that has long been considered as the global standard, may be reaching a dead end. Therefore, to overcome the challenge the writers of the article advocate Public Interest Capitalism (PIC). While George Hara conceptualised the notion of PIC, Manish Uprety is interested in exploring the relevance and application of PIC in the context of developing economies.

Public Interest Capitalism is a corporate philosophy whereby, in the long run, a company sustains fair distribution to all the members who contribute to the company, including its employees, suppliers, customers, community, and shareholders. The fair distribution based on public interest capitalism reduces the increasing disparity and enables a more robust middle class.

Shareholder Capitalism and limitations of ROE and IRR

The concept of Capitalism increasingly prevalent in the globalised world today is based on the idea that the company is owned by stockholders. The style of management prevalent in the US with excess focus on shareholder interests and return on equity (ROE) may one day lead many socially beneficial companies to failure. In a company governed solely by stockholders’ interests, stockholders want the highest possible return in the short term. If this kind of Capitalism prevails, the results will be catastrophic.

Internal rate of return (IRR) is a popular measurement used by investors. Because IRR is designed for higher returns when a particular amount of cash is returned to the investor in a shorter term, the measurement tends to cater towards speculators rather than investors. If this measurement is applied to gauge the performance of whole industries that make up the real economy, lengthy research and development that lower the IRR have no place. In other words, IRR cannot be used to measure the profitability of industries such as manufacturing.

The drawback of this mind-set is that it leads the investors towards speculation rather than investment. To the speculative investors, industries such as manufacturing and retail distribution are not efficient since they require substantial R&D or the holding of inventory: their IRRs are too low. Stockholders also tend not to agree with long-term projects, which naturally makes the management more short-term oriented.

If speculators become a major stockholder, they try to make the company’s business that supports the real economy turn into a fund-like, finance-based business. These problematic speculators expect the management not to focus on R&D but on M&A. They demand that retained earnings be distributed as dividends or through stock buybacks – all to maximize short-term returns for shareholders.

Speculation is a zero-sum game that creates winners and losers – where wealth becomes concentrated into a small group of individuals and the remaining majority loses everything. Imagine that a hundred people bet USD 100 each in a game of rock-paper-scissors. One person wins the USD 10,000 pot, and the other ninety-nine people lose. The sum of the money involved is always USD 10,000, and no new value is created during the speculative game.

Shareholder capitalism, along with market fundamentalism, eventually leads to speculative financial capitalism. Speculation always creates a bubble economy, which of course is a major cause of instability in the financial markets throughout the world.

Public Interest Capitalism is a corporate philosophy whereby, in the long run, a company sustains fair distribution to all the members who contribute to the company, including its employees, suppliers, customers, community, and shareholders. The fair distribution based on public interest capitalism reduces the increasing disparity and enables a more robust middle class.

Public Interest Capitalism- A Sustainable Option

Hence a company should be considered as a public institution and should not be construed solely belonging to its stockholders. The profit must be distributed to all of the company’s stakeholders (called Shachu in Japanese) including its employees, customers, suppliers, local communities, and even the planet. While a stockholder who supports the company’s growth by holding one’s shares for the long-term could be considered as one of the true owners of the company, the goal of many investment funds is simply to artificially boost the stock price for immediate gains. These funds should not be considered foremost when deciding how to run a company.

Though there is always a demand for lowering corporate taxes, there is not much evidence to show that it leads to higher wages or more business investments. Instead, most of the profit is allocated to stockholders as dividends or through stock buyback programmes, with the intention of increasing share price.

When a company uses its funds to maximise shareholder returns rather than to invest for growth, long-term prospects of the company decline, and therefore long-term stockholders may suffer a loss. The employees are also discouraged from spending money since their raises always seem very limited compared to shareholder return. As a result, employment stalls, and the income gap widens. The disparities become a cause of conflict that makes economies implode and the world more unstable.

Under the Public Interest Capitalism, a company is considered as a public institution, and therefore its purpose is to contribute towards the society through its business. In order to achieve this, the company must:

  1. Allocate its profit to all of its stakeholders or Shachu that support the company, not just to its stockholders;
  2. Strive for sustainable growth; and
  3. Continually adapt and challenge itself to improve existing products and services offerings and venture into new growth businesses.

Because the shareholder-centric model of Capitalism (“Shareholder-centric Capitalism”) demands that management teams maximise share prices in the short run, long-term R&D projects become less prioritised and pushed aside. In particular, ambitious R&D projects that have the potential to create new core businesses, and even an entirely new industry, are no exception.

This necessitates medium- and long-term risk taking and investment in order to create and maintain stable economic growth in the developed countries of the 21st century, the development of new businesses and future key industries based on Public Interest Capitalism is crucial.

The idea of Public Interest Capitalism plays an important role not only in advanced countries but also in underdeveloped countries, because it encourages economic independence. In 2030, the population of advanced nations will only account for 12% of the whole world’s population, but the remaining 88% will live in the developing world, primarily in Asia, Africa and Latin America. Companies in advanced countries need to establish strong ties with underdeveloped countries in order to survive. However, shareholder-centric management and capitalism will only cause tension in the process making Public Interest Capitalism a viable and sustainable option.

ROC (Return on Company) Index- A Holistic Index

Instead of having a propensity to value a company through its ROE (Return of Equity), the Public Interest Capitalism’s research division at the Alliance Forum Foundation has come up with “ROC” (Return On Company), a new index that measures the value of the company from a holistic perspective of its stakeholders. The ROC (Return on Company) evaluates the sum of all the returns to the entire Shachu.

The company that distributes its profit to the entire Shachu will eventually bring a higher return to stockholders. A higher ROC tends to correlate with a higher future ROE, which implies that ROC is a long-term version of ROE.

ROC is an area of growing interest for the industry and academics. There is an inherent need to develop a new investment theory by linking ROC with stock prices. The positive correlation between the two would even motivate the speculators to invest in companies with sustainability and a fair profit distribution to Shachu, which would then spur the stock prices even further. The mainstreaming and establishing of ROC as a benchmark would lead to investors buying stocks or bonds of companies that act as “public institutions.”

PIC’s relevance for the Developing Economies

“Public Interest” refers to economic and general well- being of ourselves, our children and the future generation. A “company” should be a public institution that contributes to the society through its business. There are three pieces of management philosophy according to public interest capitalism: (1) fair distribution of the company’s profit, (2) long-term sustainability of the company and (3) entrepreneurship to create and improve the business.

The characterising features of developing countries are low per capita real income, high population growth rate/size, high rates of unemployment, dependence on primary sector and export of primary commodities. As countries move on their development trajectory, their economies gradually become isomorphic in terms of its constituents. For example, Japan, India and Sri Lanka, though on various levels of development, have the service sector contributing over 60 % in their respective economies. In the due course, growing economies face similar kind of challenges and need to set their priorities and focus areas. Cross-sector integration of technologies in IoT (Internet of Things), telecommunications, artificial intelligence, food, materials, and chemicals with healthcare is an important evolving area. A process including the careful collection and selection of information about new technologies both domestically and internationally, along with goal setting and speedy decision as well as creativity is crucial to bridge various divides. It demands an innovative regulatory policy.

Under the Public Interest Capitalism paradigm, governments have to play a major role in solving these challenges by building a robust ecosystem to realise technology and policy innovation in the priority areas. While projects should be led by the private sector, vision and goal setting by national leaders is essential.

Soon it shall be two decades when the philosophy of Public Interest Paradigm was first pitched, to shift the focus away from the excessive shareholder capitalism. Since then public interest capitalism has not only been adopted by leading management teams but has become the basis of policy changes to defy short-termism. With the West also beginning to notice the damaging effects shareholder capitalism has on the health of many companies that are engines of the economy and industry, the tide is finally turning in favour of public interest capitalism. It is quite prudent for the developing economies to take a page out of the book of public interest capitalism and use the very learning to build responsible companies contributing toward a healthy society and sustainable economy

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