Widespread
poverty and excessive inequality remain the principal
challenges to the legitimacy of the process of globalization
that has been underway during the last two decades.
Even as economies and governments adjust to afford
a larger role for markets and a smaller role for the
state in development, the importance of public action
to deal with poverty and vulnerability has increased.
It was for this reason that the 1995 World Summit
for Social Development called upon countries not just
to set "time-bound goals and targets" to
substantially reduce overall poverty and eradicate
extreme poverty, but to implement national anti-poverty
plans to achieve these targets.
Not surprisingly, as anecdotal evidence of the inequalizing
effects of globalization accumulates, a charged academic
debate has arisen on the issue of globalization and
its impact on world incomes. Neoliberal economists
are prone to argue that with the lifting of trade
barriers between countries and freer movement of capital
across borders due to globalization, there is a tendency
towards the narrowing down of cross-country income
differentials. Inasmuch as this narrowing or homogeneity
is the result of a faster increase in per capita incomes
in the poorer countries, and so long as the income
inequality in these countries is not worsening, the
global decline in income differentials should be accompanied
by a decline in the incidence of poverty, as measured
by the head-count ratio.
Such narrowing is a must in the present context, although
differences in ability, in resources and in many other
factors—less justifiable or obvious—are
likely to remain. Income, which is the most basic
indicator of economic well-being, must clearly reflect
the apparent advantages of globalization. Open market
policies, that are advocated by the Washington Consensus
as the route to economic prosperity that delivers
benefits to all and specially the poorer nations,
must ensure that income disparities across the world,
as also within countries, do not increase, and that
all human beings are included in the distribution
of the gains that arise out of this new system. This
is especially necessary since liberalization is being
thrust on many who are as yet unwilling to have it.
The opposite cannot be justified on moral grounds,
and even the most cynical must admit that it poses
many practical problems, which include according to
some, the creation of conditions that engender terrorism.
But whether or not these contentions forwarded by
neoliberal economists capture actually the reality
of the world today remains to be tested. The question
is in the first instance empirical. A number of studies
in recent years have examined the trends in inter-country
and intra-country inequalities during the years of
globalization. As is to be expected, the debate has
increasingly given rise to disagreements with regard
to the measurement of inequality and poverty, and
about cross-country and inter-temporal data comparability
and methodology of analysis relating to these. Clarification
at this level is a minimal prerequisite to establish
causal links between and test statistically the relation
between income inequality and globalization.
What kind of income inequalities are we talking about
and what impact does globalization have on these?
Inequality is multidimensional and we must study and
treat each aspect in detail.
Intra-Country Inequality
The first and most basic concept of inequality that
we are familiar with is within-country or intra-country
inequality. It indicates the disparity between the
incomes of individuals within a particular country.
This kind of inequality has existed for a long time
though the degree has varied across countries.
In clear evidence against the reduction-in–inequality
hypothesis, Cornia and Kiiski (2001) found that over
the last two decades, inequality has risen in 48 out
of the 73 countries that they found high-quality data
for. These countries accounted for 73 per cent of
the total GDP and 59 per cent of the total population
of the 73 countries put together. Of the rest, 16
countries experienced constant and 9, decreasing inequality.
At a regional level, the African economies faced rising
inequalities, Latin America saw declining inequalities
of the 1970s reverse into a rise, while Russia and
the Eastern European transition economies experienced
a collapse of the middle class that made inequality
soar. China experienced rising inequality, especially
between its urban coastal areas and the rural interiors.
Even the developed countries experienced rising inequality
as a result of 'greater disparities in market income',
the effect of which has been compounded recently by
changes in the tax system, public services and income
transfers.
A noteworthy feature of this study is that it records
adverse trends in income distribution not just for
poorly performing economies, as in Latin America during
the "lost decade" of the 1980s, but also
for economies that experienced remarkable growth after
liberalization, as was true of China. Thus, even when
liberalisation was followed by growth, the benefits
of that growth did not seem to accrue in full measure
to the poorer sections of the population. In fact,
in a World Bank paper, Lundberg
and Squire (1999) found a negative correlation
between greater openness to trade and income growth
among the poorest 40 per cent of the population, but
a strong and positive correlation with income growth
among the remaining groups. This was for a sample
of 38 countries between 1965 and 1992. Hence it seems
that the adjustment costs of greater openness are
borne exclusively by the poor, regardless of how long
the adjustment takes.
However, in a paper entitled, 'Growth is Good for
the Poor', World Bank economists David
Dollar and Art Kraay (2000a) found a positive
relation between the incomes of the bottom fifth of
the population and per capita GDP that holds in a
sample of 80 countries covering four decades. On the
other hand, they did not find any significant impact
of openness to trade, measured as exports plus imports
as a share of GDP, on poverty. They argued that this
shows that globalization or openness had no adverse
impact on incomes of the poor. However, globalization,
given its promises, must do better than that.
This result stands directly opposed to the Lundberg
and Squire result. The question, therefore, remained
unanswered, forcing attention on the nature of the
sample used by the two sets of authors and on issues
such as the correctness of the "trade openness"
measure used by Dollar and Kraay. Apart from this,
a major problem with the Dollar and Kraay study is
that, given the collapse of the large middle class
in Russia and the East European countries which has
increased the extent of income inequality, taking
into account only the income of the bottom 20 per
cent of the population leaves out a significant section
from the income inequality scenario.
Many studies have found results showing increased
intra-country inequalities during the era of globalization,
and interestingly, some such results have come precisely
from studies that otherwise show, or attempt to show
that overall global inequalities have actually declined
over this period.
In one such attempt, Xavier
Sala-i-Martin, in a recent discussion paper (2002)
of Columbia University, measured inequalities both
within and across countries. He found that within-country
inequalities have increased over the last two decades,
and that this is more so when differences in incomes
within quintiles of population are included in the
analysis. This has mainly been driven by income inequalities
in China. The thrust of his argument is that the larger
part of global income inequalities is explained by
inter-country inequalities and these have actually
come down over this period. But his paper does show
that as far as within-country inequalities are concerned,
the results run contrary to the propositions forwarded
by the neoliberal school. Similar results are also
found in Quah (2001).
In a paper by Weller
and Hersh (2002), the authors analyse the short-term
and long-run effects of global liberalisation on the
poor in developing economies. The results indicate
that more current and capital account liberalization
hurt the poor. "This is not because trade is
directly harmful for the poor, but because of the
institutional design under which trade is conducted.
In particular, trade in a more deregulated environment
lowers the income share of the poor, whereas trade
in a more regulated environment raises the share of
the poor." As far as income growth is concerned,
the results indicate that global deregulation has
no measurable, robust impact on growth rates. Therefore,
the short-term effects on the income share of the
poor are not offset by significant faster income growth
in the long-run.
In addition their results also indicate that trade
and possibly capital flows may have a beneficial effect
on growth in the long-run, and no systematic adverse
effect on the income share of the poor in a regulated
environment. To quote, "hence, greater trade
and capital mobility in a regulated environment, as
was the case for the majority of countries for most
of the sample period, appears to be a preferable development
choice". However, the authors point towards the
need for detailed research to find out the exact nature
of regulations that can help reap maximum benefits
from trade and capital flows and simultaneously let
the poor share in these gains.
Inter-Country Inequality
Inter-country inequalities accounting for a large
part of world inequality is a result derived also
by Milanovic
(2001). He shows that rising income inequality in
the world is mainly due to between-country or inter-country
(or cross-country) inequality (75 to 88 per cent)
and not within-country inequality. Let us move onto
a more detailed discussion of such inequality.
Inter-country inequality refers to the disparities
in average or per capita incomes between countries.
Analytical treatment of this kind of inequality involves
an inherent assumption that all individuals within
a particular country earn close to that average income
i.e. within-country inequalities are not taken into
account. With the dilution of economic borders between
countries, the question of inter-country disparities
has been in the forefront of discussions recently.
Inequalities between nations, although present for
a long time, show up as being lower the further we
go back in time.
Economic historian Angus
Maddison (2001), on the basis of GDP per capita,
has estimated that the richest countries were about
three times richer than the poorest countries in 1820.
This difference has grown over time. However, in today's
age of increasing integration of the world economy
with the intention that countries should jointly share
benefits, further increases in inequalities between
nations can have no possible justification.
But sadly, as Marc
Lee (2002) points out, "the UN's Human Development
Report (1999) adds that in 1960, the top 20 per cent
of the world's people in the richest countries had
30 times the income (in terms of total GDP) of the
poorest 20 per cent. This grew to 32 times in 1970,
to 45 times in 1980, and to 59 times in 1989. By 1997,
the top 20 per cent received 74 times the income of
the bottom 20 per cent." This would seem to imply
that the globalized world we are living in today has
seen a dramatic rise in inequality.
The attempt to show that policies of globalization
have been accompanied by decreasing poverty and income
inequalities is contained in a report by Dollar
and Kraay (2000b). They identify the globalized
nations on the basis of two variables, namely, increased
trade to GDP ratio and reduced tariff barriers. Their
finding is that the globalizers have overtaken the
non-globalizers in terms of their joint GDP growth
rates. Apart from serious problems of bias in the
selection of sample countries in each variable category
and the measures of openness used, e.g. measure of
trade volume rather than trade policy, as pointed
out by Dani
Rodrik (2000), the study has certain other major
drawbacks.
First, the inclusion of India and China as globalizers
does pose a major problem since both countries are
known for their reluctance and sluggishness in adopting
the new policies prescribed by the IMF, the World
Bank and the WTO. This is true also of many other
economies included in the 'globalizer' category, for
example, Malaysia, Thailand and Brazil, many of which
have followed limited forms of globalization. On the
other hand, many of their 'non-globalizers' in Latin
America and Africa display remarkably open trade and
structural adjustment policies as prescribed by the
IMF and the World Bank.
Second, since India and China have huge populations
that jointly account for a third of the world total,
the weighting of country GDP estimates by population
results in an upward bias of growth rates of the so-called
globalized nations, as India and China have both had
high GDP growth rates in the recent decades.
Another argument on lines similar to that of Dollar
and Kraay has been advanced by Martin
Wolf, in an article in the Financial Times (2000).
He argues that China's growth, which has been a major
factor responsible for the reduction of cross-country
inequalities, has been driven by the increased opening
up of its economy. He also argues that many of the
backward countries have remained backward because
they have not opened up enough. Again, the same criticism
holds.
In another set of results favouring the advocates
of globalization, Sala-i-Martin
(2002), using a number of measures including the
Gini coefficient and the Theil Index, has found that
cross-country inequalities have came down during the
period 1978-98. His argument is that the growth of
incomes in China, and to a lesser extent in India,
contributed largely to the reduction in inequality.
On the other hand, the African economies have shown
a huge disparity in incomes as compared to the developed
nations, and if their incomes remain stagnant then
world inequality will rise again in the future. We
discuss his finding in more detail in later.
Branko Milanovic, in
a 1999 World Bank research paper that starkly
contradicts the above results, found that the Gini
coefficient measuring across-country inequalities
based on per capita GDP actually rose from 55 to 58
between 1988 and 1993. His use of population weighted
per capita GDP figures as opposed to the per capita
country GDP figures used previously, yielded results
that showed a decline in income inequality. This latter
result can easily be explained by high GDP growth
rates in the hugely populated countries of China and
India. Dropping China from the sample threw up a constant
inequality, and dropping India in addition, again
showed an increasing Gini for between-country inequality.
World Inequality
Combining the concepts of intra-country and inter-country
inequalities give us a definition of global or world
inequality, which calculates income disparities between
individuals as if they belonged to the same nation.
This is calculated as a distribution of total world
incomes among the total population of the world. Study
of such inequalities has emerged recently, and has
concentrated on developing different measures of calculation.
Sala-i-Martin's
2002 paper finds that global income inequality
has closely followed the pattern of inter-country
inequalities and come down over the two decades, since
1978. In addition, worldwide poverty numbers have
gone down sharply, signifying an increase in the economic
well-being of the poor.
Milanovic
(1999), on the other hand, finds that the world or
global Gini coefficient, which takes into account
both inter-country and intra-country inequalities,
increased from 63 in 1988 to 66 in 1993. If purchasing
power differences are not taken into account, i.e.
if one looks at the differences in simple dollar incomes,
the world Gini increased from 78 to 80. In a later
study (2001), Milanovic confirms the above results
using both the Gini and the Theil index. He cites
three reasons for this growth in inequality. The first
is the slow growth of incomes, especially rural, in
Asian countries relative to OECD countries. The second
is the pulling ahead of urban China relative to rural
China and India. The third is the 'hollowing out'
of the middle class in Eastern Europe.
In a study from the London School of Economics by
Robert H. Wade ('Is globalization making world income
distribution more equal?', May 2001), similar factors
have been cited as the cause for the rise in global
and between-country inequalities. Rapidly widening
income distribution within the biggest countries (India
and China) has also been a major contributory factor.
While the gap, worldwide, between the average income
of the top quintile of people (top 20 per cent) and
the average income of the bottom quintile within each
country is about 5:1, the gap between the average
income of the top quintile of states and that of the
bottom quintile is of the order of 25-30:1.The report
takes the World Bank and the IMF to task for their
failure to use their formidable research capacities
to look at the trends and causes of world income distribution.
Wade also points to "the need to remember that
East Asian states achieved economic success by creating
national economic space (partially separate from the
world economy) and setting conditions on the entry
of foreign capital" and that "China's current
dirigiste strategy, similar to that of pre-liberalization
Japan and South Korea, is more likely to succeed than
the World Bank's model".
If we look at asset distribution across the world,
financial assets held by 7.2 million individuals in
the top income group were valued at US$27 trillion
in 2000, almost as high as the world 's total GDP
($31 trillion in 2000). The assets of the top 200
richest people amount to more than the combined income
of 41 per cent of the world's population. However,
detailed analysis of wealth distribution, which is
definitely an important indicator of economic well-being,
has been lacking.
Globalization, China and India
Throughout the debate on income inequality in the
globalized world of today, China and, to a lesser
extent India, emerge as key movers of the results.
Some interesting points emerge from a closer analysis
of their roles.
World Inequality, Globalization,
China and India
Robert.
J. Barro, in a recent article, cites the
Sala-i-Martin results to argue that inequality has
decreased in the globalization era. He states that
the 1999 UN human Development Report, 'should base
their assessments of world poverty and inequality
on a better understanding of the facts'. Two points
need to be noted here.
First, when China is dropped from the sample, Sala-i-Martin's
Mean Logarithmic Deviation index (the only one he
reports) shows a relatively flat pattern with no consistent
increase but no clear decline either. In Milanovic's
analysis, dropping China and India seem to re-establish
the rising inequality scenario. Second, as pointed
out earlier, China and India, on whose performance
the Sala-i-Martin results are heavily dependent, cannot
be taken as model examples of globalizers whereas
many of the African countries have actually opened
up much more. So while these two countries are doing
well, it is not because they are relatively more globalized
than the countries which are doing badly. In another
example of such misused definitions, Dollar and Kraay
(2000b) take China and India as globalized and more
open, and find the growth rates of globalized nations
as a whole to be higher. As argued earlier, this classification
cannot be acceptable to the discerning economist.
That including China and India as examples of successful
globalizers is a conceptual mistake, has also been
pointed out by Wade (2001) and Rodrik (2000). In the
words of the latter: "the main trade reforms
followed a decade after the onset of higher growth"
in these two countries. In the Chinese case, "the
increase in growth started in the late 1970s with
the introduction of the household responsibility system
in agriculture and of two-tier pricing", whereas
the trade reforms did not begin till the second half
of the eighties. As for India, its growth rate increased
substantially during the 1980s, whereas serious trade
reforms were not in place before 1991-93. The tariff
averages displayed in the chart show that tariffs
were actually higher in the rising growth period of
the 1980s than in the low-growth period of the 1970s.
Rodrik further argues that the fact that China and
India participated in foreign trade does not mean
that their growth followed increased foreign trade.
One needs to look at proper sequencing of events here.
Income Inequality within China
and India
In the literature (D. Quah, Cornia and Kiiski, Sala-i-Martin,
Milanovic, Wade), there is ample evidence of rising
income inequalities within China and India, as also
in many other countries including some in the developed
world. Most studies find that rising global inequalities
stem from differences in income growth between the
urban and rural sectors in both India and China, though
this has coincided with rises in overall income per
capita. Milanovic and Wade have both identified this
as one of the major factors explaining rising international
income inequality. Even with a reduction in absolute
poverty, rising income inequalities between sectors,
and rising or even constant income inequalities in
general should still be a matter of concern.
So the argument that if one-third of the world's population
is apparently doing well, it indicates that the world
is also doing well (Sala-i-Martin), is compelling
but not conclusive. Firstly, not all of that one third
may be doing that well. Secondly, the rest of the
world, especially the African countries, the erstwhile
USSR and the East European countries are doing much
worse and that has to be a matter of great concern.
As pointed out by Barro and Sala-i-Martin themselves,
stagnancy in African incomes may be a major cause
for a future rise in world income inequality. As poverty
estimates show, the largest number of the world's
poor are now in Africa. Two countries, which happen
to have large populations, cannot change the reality
of the huge disparities that exist between a few rich
countries and numerous small, backward ones.
The Three Concepts of Inequality
While it is useful to measure and analyse all three
concepts of inequality, for the individual in a particular
country it is the concept of within-country inequality
that is the most relevant. And in that regard, the
world is definitely worse off today.
With the increasing integration of economies, it is
perhaps also pertinent to ask what is happening to
the inequalities between countries, which It are supposed
to be the major source of world income inequalities.
The first problem in undertaking this kind of analysis
is conceptual. The fact is that individuals within
a country do not earn the average per capita income
by which the country is represented on the world income
distribution map. Wide disparities within the country
can render such representation meaningless. And most
studies have proved that this is so.
The second problem remains that of data. All studies
focusing on this issue must resort to empirical evidence.
However, it is very difficult to construct data-sets
across countries that are consistent, clean and comparable.
- Disaggregated household-level income and consumption
data for a long enough time period are hard to get
even for a single country. Most countries do not
conduct intensive surveys at the levels required
for such analyses. India's National Sample Survey
(NSS) data is one among a few examples of systematic
and detailed data that can be used for such purposes.
This poses a problem for measuring intra-country
inequalities too, but is much more acute in the
case of inter-country analysis.
- Even detailed sources of data, like the NSS,
are now being contaminated and tampered with in
order to arrive at the 'desirable' results. A major
problem here is that conducting wide and intensive
surveys to get the required data is very expensive
and can be pursued by very few agencies, sometimes
not even by the government of a country. If the
few that do have the resources have their own agenda
to push in this regard, then one cannot but question
the veracity of such data. Recent history tells
us that such fears are very real today.
- Unless data-sets can be kept robust across countries,
the error margin for a study involving a large number
of countries would be huge. From base-level information
(if available), such data are generally estimated
first at the district level, followed by the state/province,
national and finally the international level. At
each step, these estimations involve a lot of assumptions,
many of which can also be biased. Most studies,
including that used by Milanovic and Sala-i-Martin,
involve wide extrapolations and interpolations that
puts into question the veracity of the final data-set
that is constructed.
- Comparing data-sets that specifically relate
to individual countries raises another major problem.
Despite using the notion of purchasing power parity,
such comparisons are very difficult. And, as discussed
later, the World Bank standards of purchasing power
equivalence, which are commonly used in such studies,
have problems in themselves.
- The concept of world inequality is an attempt
at resolving the first kind of problem with between-country
inequalities. This is supposed to take into account
both the first two concepts of inequality. However,
though an interesting analytical concept, it has
limited relevance in reality. The phenomenon of
globalization notwithstanding, individuals in the
present day do not function as members of a single
economic community. They exist under varying economic
and political regimes. Therefore, to cite their
economic positions and income ranking as if they
did live in a homogeneous society does not say much
about the actual state of the world. Even if world
inequality were down, would it really mean that
the poor in Africa were better off? Arguably not.
Also, as we have seen, the measurement of world
inequality can get biased by the presence of a few
large nations. Again, studies like those by Milanovic
and Sala-i-Martin take inter-country inequality
as a higher contributor while calculating overall
world inequality. This, apart from being fraught
with the data problems discussed above, is of limited
relevance for a specific country. Even if world
inequality is shown to be declining, driven in large
part by higher average per capita incomes in China
and India compared to other countries (the between-country
factor), it does not really mean that the poorer
people in China are better off unless inequalities
within China are also declining. Ultimately, therefore,
it is within-country inequality that we need to
take into account.
Two more issues need to be addressed before concluding
our discussion.
Economic Growth, Globalization
and Income
The first concerns the role of overall economic
growth in increasing incomes of the poor and income
inequality. Economic growth by itself cannot be
a measure of proportionately increasing incomes
and well-being, if there is a simultaneous rise
of income inequality within the country. Martin
Wolf's (2000) argument is an example of this kind
of serious misconception.
Many scholars, Dollar and Kraay (2000a) and D. Quah
(2002) for example, have tested a relation
between overall growth of an economy and poverty
reduction. Quah, in a major study on China and India,
finds rising and constant income inequality, respectively,
in the two countries (over a period of rising growth
in per capita incomes). But his argument is based
on poverty numbers. He argues that growth definitely
led to a decrease in poor people in absolute terms
in both countries. The Gini coefficient would have
had to rise phenomenally to compensate for this
fall in poverty numbers, of which there is no evidence.
So there is an overall fall in poverty resulting
from growth. Dollar and Kraay (2000a) found a similar
positive relation between growth and mean income
of the poor (as discussed earlier). But they did
not find that growth had any impact on the distribution
of income. Weller and Hersh have also tested the
impact of economic liberalisation on growth and
as mentioned earlier, the results indicate that
global deregulation has no measurable, robust impact
on growth rates. At the same time, in a regulated
environment, trade and possibly capital flows may
actually have a beneficial effect on growth in the
long-run. On the basis of this, the authors argue
for more trade and capital flows in a regulated
environment.
There are many questions that arise here. First,
even if growth leads to reduction of poverty, increasing
within-country inequality may lead to a less-than-proportionate
distribution of this growth across different segments
of the population. The increasing rural-urban income
gap in China and India is an indicator of this fact.
Second, even if growth does lead to reduction of
overall poverty, the crucial question is, 'does
globalization lead to growth?' This crucial link
has not been tested by Dollar and Kraay, but simply
assumed. The growth argument is not enough if globalization
is advanced as an explanation of poverty reduction
(though not by Quah). Again, as mentioned earlier,
Kraay and Dollar find no significant impact of globalization
on poverty reduction.
Measurement Errors in World
Bank Estimates
The second issue involves possible errors in measurement
methods that might have contaminated all measures
of inequality and poverty which are routinely used
by economists in measuring disparities in these
variables.
For example, in a recent paper, Sanjay G. Reddy
and Thomas W. Pogge argue that "the estimates
of the extent, distribution and trend of global
income poverty provided in the World Bank's World
Development Reports for 1990 and 2000/01 are neither
meaningful nor reliable." First, the Bank uses
an arbitrary international poverty line unrelated
to any clear conception of what poverty is, and
one that will allow identification of the commodities
that must be commanded in order to avoid being poor.
Second, it employs a misleading and inaccurate measure
of purchasing power "equivalence" that
creates serious and irreparable difficulties for
international and inter-temporal comparisons of
income poverty. Finally, it extrapolates incorrectly
from limited data and thereby creates an appearance
of precision that masks the high probable error
of its estimates. "The systematic distortion
introduced by these three flaws likely leads to
a large understatement of the extent of global income
poverty and to the false appearance that it is falling."
Since poverty estimates are widely quoted to contradict
or support income-inequality effect arguments (D.
Quah, Robert J. Barro, Sala-i-Martin, Dollar and
Kraay, Martin Wolf), it has a great relevance for
the latter and for the study of the impact of globalization
on global income movements.
Conclusion
It is undeniable that the world needs more studies
testing the links between specific aspects of globalization
and income inequality. From the available analyses,
the following points emerge. The movement of a few
large, high-growth, developing countries like China
and India may sometimes throw up statistics showing
that world inequality has fallen, but given the
evidence of rising income inequality within them
and the stark and growing inequalities in a large
chunk of the less-developed countries like Africa,
Latin America, Russia and East Europe, we cannot
be complacent. The latter countries have also experienced
rising disparities in average incomes compared to
those of the richer developed countries. Rising
inequalities have been noted within some developed
countries too. Further, globalization cannot be
claimed as the definitive factor that has driven
growth in countries like China and India. In fact
the very opposite may be true. And there are enough
examples of African and Latin American countries
that have actually been badly damaged after following
a more open policy. Finally, there is need for conceptual
clarity and intellectual honesty to register and
acknowledge facts, and then to prescribe or uphold
the necessary policy. This holds for the statistics
and data that are generated and published widely,
for methods of analysis that are resorted to, and
interpretations that need to look at results more
critically and sometimes beyond the outer covering.
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'The
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