Nicaragua
Negotiating the Crisis: A Modest Proposal
The real goal of the structural adjustment is that we continue paying our foreign debt. It’s time to plan together a program in which Nicaragua exchanges debt for stability and development.
Nitlápan-Envío team
Michel Camdessus, managing director of the International Monetary Fund, came to Nicaragua on March 12 to deliver the latest version of the IMF's highly controversial Extended Structural Adjustment Fund (ESAF) agreement to the government and defend it to other organized sectors. In his departing press conference two days later, Camdessus said, in a partly chiding, partly humorous tone, "Let's get serious! Let's not tell this country that poverty can be reduced without changing anything. The greatest service that can be done to this country is not just to bring it financing, but to tell it the truth!"
Fifteen days later, the government finally invited different social sectors to come to a consensus about the ESAF accord. In his letter of invitation, Minister of the Presidency Antonio Lacayo stated that "we all know there is no alternative to executing the adjustment and implementing the changes."
Is this "the truth" that must be said to this country that there really is no alternative? Or is the problem that no one knows where to begin to build it?
Nicaragua's reality is defined by the economic agenda right now. Although the priorities of this agenda are not identical for the different sectors of society, all are involved in the transcendence of the moment, in which final negotiations are about to take place with the IMF, the World Bank and the Interamerican Development Bank. The resulting accord will probably guide the course of Nicaragua's economy for the next several years.
For the first time, discussions about the content of these negotiations with the IMF are based on clear information that transcends the closed circle of the IMF mission and eminent members of Nicaragua's executive branch. The National Assembly has never been consulted and representatives of both the political parties and the business and labor associations are just beginning to get a grip on the extent and probable impact of the measures.
Once again, envío wants to collaborate in a careful reflection of what we all Nicaragua's international friends included can do about the country's economic problems at such a critical time. This reflection involves a brief summary of the logic behind the ESAF proposal, who benefits and who pays, and why it is in the whole nation's interest to oppose the direction it would lead us. With those elements in mind, we then offer the outline of an alternative approach.
It is too late to hammer out an alternative to ESAF itself. Any alternative requires consensus and commitment by both the government and society. While the reconciliation process has begun that could make those two elements possible, the clock has run out on ESAF. But there are still other negotiations ahead, including with the Club of Paris members. This time around, Nicaragua's negotiators should go armed with a genuine national strategy, one forged by all sectors of Nicaraguan society and thus one to which they are willing to commit themselves. Only such a proposal will permit our friends to lobby for it and the international community to take its viability seriously.
Eye Catching DetailsWith the ESAF, the Nicaraguan government is being asked to commit itself to a three year framework of economic policies, in exchange for which it will get additional foreign resources from the multilateral lending agencies and a green light for the international community to continue supporting it. In particular, it will get a go ahead to renegotiate its foreign debt with the member countries of the Club of Paris. Without the ESAF, both lights go red for Nicaragua.
There are two key documents. One is the Matrix of Macroeconomic Policies and Structural Adjustment, which summarizes the objectives and the measures necessary to meet them and provides a timetable for their application. The other is the government's Letter of Intent, which presents the general philosophical framework of the economic policies and program.
The first version of both documents to make the round of government circles was in English, leading to the supposition that even the Letter of Intent was drafted by the IMF, not the national negotiators. Another eye catching point is that the policy matrix is not limited to the general macroeconomic aspects for which the IMF is responsible in accords of this sort for example, the public sector savings goal or the proportion between debt service and export earnings. It goes into great detail about how to instrumentalize the policies, thus venturing into fields that, by right, are the domain of the executive branch.
One point in favor of the newest version of the policy matrix is that, for the first time, it stresses that certain laws must be passed to fulfill the proposed objectives. This is a healthy recognition of the National Assembly's legitimate role and of the strength it has been recovering as a result of the national political class' growing maturity.
Hydra's Logical HeadUS political observers, too, recognize that Nicaragua has never been closer to national reconciliation, but then the economy has never been so out of balance. It could tip to any side with the slightest push. What forces are pushing it today and what interests do they represent?
As always in Nicaragua's history, many of these forces and interests are found in the United States, not in Nicaragua. Even though US diplomacy has begun to take a "constructively neutral" position with respect to Nicaragua, all societies have contradictions and the US empire is no exception. Like the Hydra of Greek mythology, its power has several heads; diplomacy the Department of State is only one of them. The Treasury Department, of which the IMF has become something of an international arm is another, and Congress is a third. Their different actions and interests affect Nicaragua in different ways.
The IMF's first interest is the adjustment's own economic logic. Applying this logic worldwide is the IMF's supreme mission, as laid out in Article 1, Point 2, of the IMF statutes: "To facilitate the expansion and harmonic growth of international commerce and contribute in this way to installing and maintaining high levels of employment and real income and developing the productive resources, which are the main objectives of economic policy."
The phrase "in this way" shows that increasing world commerce is seen as the means to development, which logically leads to the IMF's heavy handed conditions of promoting exports and lifting import restrictions. The latter involves lowering most import duties, even though this goes against another of its economic policy goals, which is to shrink the fiscal deficit. (As in many countries of the South, import duties have traditionally been a major source of Nicaragua's public income over 30% in 1993.)
According to point 5 of the same article, the IMF must also "give member countries the possibility of correcting the disequilibriums in their balance of payments." But, as in most underdeveloped countries, Nicaragua's balance of payments disequilibriums cannot be treated as symptoms of a brief illness. Importing more than the country exports, paying more in debt service than it receives in foreign aid, seeing more private capital flee the instability than enters through new foreign investments are all historical structural problems.
They exist because Nicaragua's insertion in the world economic system has always been on unfavorable terms. And because the resulting blockade against development possibilities has led to a distribution of the factors of production and thus of income that makes it very hard to apply the regulatory instruments used in all industrialized countries in this century. Such countries have a strong regulatory state, willing and able to use budget and monetary policies to regulate private activity, which by its nature is not self regulating. Even in these "wealthy" countries, the state always nationalizes the losses and privatizes the efficient assets, thus succoring certain private sectors for the nation's "greater good."
To Cure or Kill?Charged with "curing" so many economically ill patients around the world, the IMF has come up with an oversimplified official diagnosis: if the symptoms reflect a financial crisis, the cure is to adjust the financial books. The logic is to reduce demand and cut spending until the balances are reestablished.
Since the private sector indeed cannot spend what it doesn't have, cutting access to credit does reduce its spending. But public spending is harder because it is "autonomous." The only way the IMF can effectively contract it is by forcing a commitment to these measures in its policy matrix.
The IMF has picked the state banking system one of the few areas of action left to the government's otherwise totally passive policy as a systematic target. Using the illogical neoliberal argument that the private sector is more efficient than the public one, the aim here is to openly grant privileges to the private financial sector. It would get the best of the state banking system's portfolios and would also control the liquid funds from AID.
The policy matrix document has reached the absurd level of insisting that even subsidies to secondary and university education be reduced, as if education were a simple "current" expenditure, and not an "investment in human capital," as the World Bank itself says. Or, as the current US Secretary of Labor phrases it, "people's main challenge in facing the 21st century."
For the past four years, the Chamorro government has tried to push through the structural adjustments the IMF told it were needed to create a foundation for economic growth based on consolidating "private sector" efforts. It has done so too fast and too indiscriminately, a radical treatment recommended by the IMF that aims only to kill the disease. But since the need to also apply "rehabilitation therapy" is not taken into account, there is a risk that the patient will die before being cured.
It is absurd to apply too rapidly a series of measures that presuppose a well functioning market and institutions that can promote, regulate and, when necessary, correct these measures. Why absurd? Precisely because the concept behind structural adjustment is to create these very markets and build these institutions. No wave of a magic wand can solve all the problems involved in structurally transforming a country that suffers highly unequal income distribution, lacks human capital and a business culture, faces an extraversion and segmentation of its markets, and is technologically very dependent.
If the Nicaraguan state does not begin to rearticulate the economy, we risk, at a minimum, the amputation of entire regions. Río San Juan, for example, is already more economically linked to Costa Rica. Despite the reversals that country suffered in the 1980s and the fact that it has fewer national resources than Nicaragua, it has a functioning national market that still enjoys the effects of decades of policies consistent with economic growth and national income distribution. In short, Costa Rica insisted on applying the medicine more gradually and selectively.
Hydra's Ideological HeadThe reactionary right in the US Congress is another of Hydra's heads, one that takes pleasure in using the contradictions in any society as an ideological battering ram. Some of its intentions, which are politically dangerous to Nicaragua's incipient reconciliation process, have made their way into the policy matrix document.
The most dangerous one is the document's position on the property issue. Most level headed Nicaraguans know that this issue should be resolved through a definitive political understanding. Very few have anything to gain from continuing the current haggling and interminable bureaucratic battles over individual properties. Most of those who do have already changed nationality and live in the United States; they no longer have economic interests in the country. These "wronged US citizens" still find backing in Congress.
Two Possible ScenariosThe Chamorro government runs the risk of going down in history as the government of nobody, a mere executor of these outside impositions. But the contradictions of structural adjustment are not just external a positive factor if there is a genuine willingness to negotiate. If there is not, we all run a risk: that Nicaragua will not make the structural transformations that could turn it into a viable nation in today's world. While this risk is not unique to Nicaragua, it is particularly serious given its nearly two decades of recession and destruction.
An extreme but possible scenario is that the ESAF could end up unsigned due to outbreaks of urban violence, or civil war in the countryside. The organizations closest to the classes that do the actual dying would capitalize politically from such a hypothetical case. Although the more privileged classes would initially have greater interest in economic stability, they could end up longing for US military intervention to put an end to the chaos.
A much more positive possibility also exists: reaching a national understanding to adjust the economy and distribute its costs more equitably. A commitment to this understanding could be presented to the international lending institutions together with serious and responsible amendments to the ESAF, thus making room for dialogue, reason and negotiated solutions. But this cannot come about without the government playing a key part.
Where's the Government?Neoliberal economic arguments can be challenged and, if the government negotiating team had the ability to do so, many could be reversed. What is good could be accepted and the rest thrown out based on both the country's reality and the economic theory itself. Many renowned economists around the world have criticized the IMF proposals as simplistic. People able to debate technically with the IMF mission can also be found in Nicaragua.
Carrying out the good and necessary transformations facilitated by the adjustments if "adjusted" and applied gradually requires a high level of social consensus regarding the economy. Here, too, the government has an indispensable role. Economic policy is the art of managing the contradictions between social sectors. In this, a first rule is that the same social sectors cannot always be made to pay. A second rule is that the interests of the different social sectors are never totally at odds. Some are shared, and it is the role of economic policy makers to find and promote those. The state's job should be to promote development and support the potential of the different economic sectors, respecting the delicate social balances.
Listen to the VoicesAn illustration of how economic contradictions can exist within a broad economic sector is found in agriculture. This issue is of particular interest right now, with the new cycle nearly upon us.
Those farmers and ranchers who have access to medium term investment loans are most worried about the recently announced increase in bank interest rates, which will be almost like indexing interest to the dollar. Euphemistically called "value maintenance," the term says a mouthful about the economic policy makers' minimal confidence in the fragile national currency.
The vast majority of producers who are not eligible for credit for one reason or another are much more concerned about how to gain access to it. They also want the competent authorities to establish a regulatory framework that avoids prejudicial price fluctuations, stimulate the marketing network, improve the infrastructure, provide information about the domestic and international markets, offer technical support and generate appropriate technical solutions to the problems of each sector and region... In short, they have many aspirations, all within what is known as an active sectoral policy, one that turns speeches about the "private sector" into something more than rhetoric. After all, these small and medium producers are the bulk of this sector.
No country has ever been able to do without an active agriculture policy. Any time a country has tried to favor other interest groups, such as importers or urban industrialists, it has had to reverse that decision later, and at tremendous social cost.
In most Latin American countries, the agricultural sector's basic problems grow out of the formidably unequal interests existing within it. Big landowners scoop up the occasional benefits of agricultural policies while most rural inhabitants are only seen as a cheap labor force.
In Nicaragua, on the other hand, the Chamorro government had the luck to inherit an important strata of small and medium producers who have resisted successive political incarnations for many generations. This sector was strengthened by a genuine agrarian reform before 1990, and by the provision of land to demobilized soldiers from both sides subsequently. Despite its weaknesses, this is the sector that sustains the nation's economy.
Today these producers need effective measures to legalize their property and support their productive activities. Without them, a fundamental objective of structural adjustment to base economic development in the private sector will be nullified. Also without them, we will feel only the adjustment's costs, never its promised benefits.
Despite this sector's great economic potential, it cannot make the mutations required by Nicaragua's new insertion in the international markets all by itself, but it could if supported with appropriate policies. The problem is that it is by nature a very numerous sector made up of dispersed individual agents who cannot make their voices heard over those of the more easily organized pressure groups. That is where the state's active role in respecting social balances comes in.
The Law of the FunnelThe publicly promoted objective of the structural adjustment programs is to carry out transformations that promote economic growth. But that is really a means to another end more than an end in itself. The underlying goal of these programs, which were conceived mainly as a result of the 1982 debt crisis, is to restore a country's capacity to pay on its foreign debt, even if only the interest.
The ESAF policy matrix, for example, makes quite clear that fiscal spending should be reduced only after making the debt service payments. It's the law of the funnel: they get what's in the bowl, we get the part in the neck.
The ESAF measures will allow Nicaragua to pay the priority service on the debt for the next few years, but there is ample evidence that they will in no way resolve the overall indebtedness. In fact, the burden of payment will expand in proportion to any growth of the gross domestic product. This is yet another reason, perhaps the most important one, for opposing the structural adjustment programs as they have been applied.
The Modest Proposal: Trade Debt for StabilityGuidelines should be proposed to negotiate a reduction of the overwhelming foreign debt in exchange for strong commitments by the government and the main political and economic organizations to apply a structural adjustment program effectively conceived to lead the country to development and economic growth. To a degree, it would be a new kind of tradeoff, exchanging a substantial reduction of Nicaragua's international obligations for its social stability and incipient economic development.
The interest on Nicaragua's foreign debt should be reduced enough to allow the country to become a viable economic subject again. As such it could attract private and official capital with profit guarantees and a promise of stability. The commitments that Nicaragua would have to take on are not necessarily those presented in the 1994 96 ESAF program.
Numerous examples can be cited of countries whose situation has only worsened after applying recessive recipes to limit internal absorption without adequate mechanisms to turn the savings into productive investment or prevent the supplementary income generated by exports from being used to simply increase superfluous imports. We cannot go on listening to economists who think a country is like a corner grocery and quote their simplistic textbook equations: less public spending means more private savings and more investment and more private production and more growth and more welfare... If that ever does happen, it will be so far in the future that we'll all be dead.
An adjustment program aimed at eliminating the inefficiencies that have flourished in favor of monopoly privileges is, however, correct and necessary. Such inefficiencies, supported by the states themselves, grew mainly out of Latin America's protectionist import substitution industrialization strategy of the 1970s. When managed well, trade competition is a healthy part of such a program, but throwing open the market rapidly and indiscriminately is not. It just deepens market extraversion and technological dependency, both powerful historical causes of underdevelopment.
It is also incorrect is to apply this recipe to peasants, small and medium rural farmers and urban artisan manufacturers. The only way they can compete in such a market is to take any drop in their sales price out of their own family income, thus reducing both their purchasing power and their investment capacity.
Three Virtues and Three Focal PointsWe should follow the same road that the now industrialized countries took in the last century. They protected the vital sectors of their economies, particularly the food sector. This in no way means isolation and autarchy, even more unthinkable now than it was then. It is simply an issue of applying appropriate policies that promote and support the macroeconomic virtues of the country's largest economic groups: artisans, peasants and small and medium farmers.
Their three virtues are the following:
* A consumption structure based less on imports than that
of other economic groups.
* A productive technology that is less capital intensive and
uses more adapted local techniques.
* An investment capacity dependent partly on their own
labor, not only on the financial circuits.
Although these groups can be identified as the main bearers of Nicaragua's economic development potential, none of the country's major problems can be resolved by the effort of any one sector of the population. To deal with these problems, the government and all economic associations must take on a series of commitments regarding the three key aspects of Nicaragua's underdevelopment:
* Investment behavior
* The role and use of foreign aid
* The state's role in the economy
These three aspects should constitute the integral focal points of an overall economic program consistent with the effort that the international community is demanding. They are a necessary part of any proposal that takes up the reduction of the foreign debt, to give it sufficient solidity and make it acceptable and politically sustainable. We discuss each one below.
Investment BehaviorInvestment is key to future growth, but not just any investment. In the 1980s, the Nicaraguan state was the dominant investor, involving itself in highly capital intensive projects. These technological "white elephants" ended up not contributing to the sustainable growth of the nation's potential gross domestic product. While they were supposedly "coming on line," the real GDP fell given an unwillingness to make use of existing productive capacities. To make matters even worse, these investments caused a significant volume of the current debt.
It is presumed that, today, utilization of Nicaragua's productive capacity is low and that, paradoxically, there are strong technical productive bottlenecks at the same time. But this is only an apparent paradox. The incremental capital product relationship (the increase in product expected from each córdoba invested) should be considered as a variable, which can be lowered through appropriate actions based on the following three principles:
Public and private investment are complementary. Private investment is more sensitive to uncertainty than public investment, which gives the government a role both as a motor force and a stabilizer of investments. On the one hand, the state can create a positive environment for economic stability. On the other, it can complement the shortfall of private investment in areas the private sector is unwilling to move into but that are key to the functioning of a national economy conceived of as a whole cloth. This complementary investment could increase the linkages and relationships between the different sectors, thus creating more indirect value added.
A higher investment level is necessary. This is true despite the low utilization level of existing productive capacities and should not be allowed to hamper the appropriate import level of intermediate goods needed to increase this utilization level. This involves carefully identifying strategic points of economic activity, particularly those that the reconstruction investment programs and thus international cooperation efforts are directed toward today.
The different sectors of private investment do not all share the same motivations. Each has its own limitations, which must be taken into consideration in order to support any growth strategy.
Among the social sectors are three possible investor categories, whose situation and attitude is touched on below. Understanding their investment attitudes helps explain the theory that posits that no obligatory link exists between savings and investment. Their unstable behavior is a major obstacle to such linkage, as is the structure of the financial system.
Large Capitalists. This sector suffered through the structural and political changes of the last 15 years by sending a significant portion of its productive capital abroad. Today, in the vacuum left by the Sandinista state, those willing to invest are competing with new groups linked to finance and foreign trade. The privatization of state enterprises has favored this sector, but in many cases its purchase of the decapitalized state assets on credit has not implied any willingness to inject the financial capital necessary to upgrade these companies' obsolete technology. This is particularly true since the trade opening which favors big importers over national producers has shown just how obsolete they are, and Nicaragua's labor laws do not allow more exploitative reforms to increase worker productivity.
Small and Medium Producers. This sector did not transfer its activities abroad, but its lack of dominion over the circuits that supply and market its production left those aspects in the hands of the state during the last decade and in those of big buyers and distributors today. At the beginning, the market opening did not hit these producers as hard as it did the capitalists, the state or the cooperatives, since their costs were not as high. But it has now depressed domestic prices so much that they cannot adequately remunerate their labor or even always recover their capital outlay, given their historically low productivity. They certainly cannot invest, despite their great potential to raise that productivity.
Foreign Investors. A reasonable hypothesis is that the foreign private sector, which brings risk capital, will not invest significantly in Nicaragua as long as national capital is not willing to do so. But foreign capital, generally larger than its national counterpart, may possibly be attracted by the low price of the obsolete productive assets and would be unaffected by the complex political rivalries that continue to paralyze national capitalists. If foreign investment does come, it should not do so only to take advantage of a cheap labor force, as the maquiladora plants in the free zone do. They leave virtually no benefits in the country, beyond the measly wages they pay.
Most state enterprises that have not yet been privatized could attract risk capital. Although some may have to be closed because they are too inefficient to be attractive to private investors, basic services are not examples of this. These are monopolized activities that must continue to be provided.
In such cases, the state should seek co financing probably from foreign private companies since Nicaraguan capital does not have the size necessary to move into such areas without losing control over the main purposes of these companies.
Selling Telcor, the country's telecommunications system, for an amount equal to less than 15 days worth of exports only to accumulate reserves in 1994 is not an intelligent transaction. The Nicaraguan people have a right to better representation from their representatives in such operations. Nicaragua's government is obliged to negotiate conditions to protect its own population and not just satisfy the voracity of the foreign companies.
Role and Use of AidForeign aid is indispensable to development, but is also its opium. In the 1980s, for example, huge volumes of foreign aid were squandered on the technological white elephants mentioned above, even though the extensive state bureaucracy necessary to maintain them did not exist.
Apart from the fact that international aid is being reduced worldwide, there is clear evidence that the main obstacle to increasing Nicaragua's aid levels today is the Chamorro government's inability to draw up or execute investment projects, much less ones consistent with the country's economy. This inability encompasses limitations of human capital and political desire even more than of financial resources, since the budgeted public sector has even shown itself unable to execute the outside aid available for already approved projects over the past few years. Reliable information suggests that donor governments and organizations would be willing to contribute much more if the Nicaraguan government had more capacity to do so.
Foreign cooperation is tending to shift its aid from specific projects to integral programs of territorial development. But this should not suggest turning the responsibility for developing certain municipalities, for example, over to foreign cooperation. Their financing limitations are such that these programs can only have the necessary multiplier effects if plugged into a larger development strategy in a given region.
The State's Role in the EconomyThe state's capacity to act must be strengthened in what are essentially its own domains, such as macroeconomic administration and defense of the citizenry's human and property rights. But, to supplement the private sector's historic deficiencies and act as a development promoter, its capacity should also be buttressed in areas such as basic health and education services, financial intermediation and infrastructure.
Since the nongovernmental capacity to execute projects based on foreign aid is too small to be a medium term alternative, the state is key to the overall investment process. In this regard, the previous points about both investment and foreign aid apply to any reflection about the state's role. To make reactivation viable, it is thus indispensable to reestablish the state's capacity as quickly as possible.
If Nicaragua had an ideal private sector, made up of agents competing in equal conditions and maximizing their individual benefits, overall well being would undoubtedly result. But the real private sector is not like this idealized scheme; it has serious contradictions rooted in a hugely distorted income concentration. Private banks only want to loan to merchants because peasants are too dispersed; no private business is farsighted enough to consider it profitable to built a port or a network of roads; and none is interested in investing in low cost health and education for the sizable population that simply cannot afford high priced services.
The government's inefficiencies due partly to the difficulty of setting up a more progressive tax system to finance the necessary spending thus cannot be resolved by voluntaristically transferring the government's functions to the private sector. Apart from being barely willing to invest in activities pertaining to it, much less in ones whose magnitude traditionally makes them a government responsibility, it doesn't have much more human capital than the state. Society as a whole must take charge of these indispensable activities, through the state that represents it and expresses its overall rationale, above and beyond its particular contradictions.
Summarizing the Essential DifferencesThese alternative economic policy options that the Nicaraguan government should present to argue for reducing the debt in exchange for growth are not aimed at frightening the negotiators. They may express the country's crude limitations, but they also coincide with the idea that economic progress which is also social progress grows fundamentally out of the energies of the private sector. In addition, they coincide with the best intentions of the structural adjustment programs, since the combination of private monopolies and bureaucratic inefficiency that has dominated Latin America's economic scene brought people neither benefits nor development.
But there are differences. These options oppose the view that governments need not strengthen their own managerial capacity or development promotion; that is their mission. Because of the profound contradictions within the private sector, an arbitrating body is needed to help it negotiate and harmonize its interests so that coherent economic policies can be designed. This task cannot be left to those who oversee the fulfillment of the accords with the lending agencies, even though they can play an important pedagogical role.
Who will take on the role of promoting this plan? Have the majority of the organized social sectors, those who can make their voices heard in the political scene, become sufficiently aware of the gravity of the problem to be willing to sit down together and hammer out some workable agreement? Or do they still prefer the road of violence?
The ESAF must be signed in any case, and the deadline is upon us. There is no time left to undertake the complicated discussion among all sectors of society that would permit the emergence of an alternative plan that both offers acceptable amendments to the ESAF and keeps the necessary objectives of the adjustment in sight. But a national strategy could be hammered out to share the costs of the transformation process better, a strategy that could be used to adjust the economic policy along the way.
If we cannot affect ESAF, can we reach some basic accord before the deadline for renegotiating the foreign debt? Could we even show some positive effects of such an accord by then? For example, could we deal with the agricultural cycle so that it brings a bit of temporary relief, starting by providing credit to those who most need it and who have more possibilities of making it bear fruit in the near future?
The answers to these questions will determine whether Nicaragua can find a viable road certainly not a smooth one, but one that leads toward recovery. AID, the UN Development Program, the Interamerican Development Bank and the US Department of State would undoubtedly support this road economically and politically. It is in the hands of Nicaraguans to take advantage of this last possibility.
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