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Comparing Growth and Development of China and Sub-Saharan Africa

From the perspective of institutional theory, explain the contrasting growth and development experience of China and sub-Saharan Africa since 1980.

 

Introduction:

With the current worldwide challenges of the World’s economy, questions about the impact of institutional theory in economic growth have come to the forefront of debates on development (Deepak, 2000).  Many scholars determine the growth and the development theories by the production function: Q=f(K,L) . Usually, there is two ways to measure the productivity of a country in terms of Gross Domestic Product (GDP): the spending (demand) and the producing (supply).  .

Sub-Saharan Africa’s GDP reached an average of 1,3% in 2016 and is estimated to pick up to 2,4% in 2017 and to 3,2 % in 2018 (World Bank, 2017a) . This positive growth is due to different macroeconomics factors: strengthening external demand, increasing commodity prices and the end of drought in a number of countries (World Bank, 2017b ). As presented on the McKinsey Global Institute (2010)  ‘Global businesses cannot afford to ignore Sub-Saharan African potential’. Similarly, since its reforms in 1978, China has had a significant period of growth shifting from centrally planned to a market based economy. Chinese GDP moved from 7,298 in 2014 to 6,689 in 2016, this economic slowdown is a result of challenges to environmental sustainability, ageing population and rapid urbanization. (World Bank, 2017c)

In this essay an explanation of the divergent growth and development experience of China and sub-Saharan Africa since 1980 will be provided. The basic approach is institutional. Comparing these two regions of the world will aid an understanding of the manner in which their institutions influence their contrast economic growth (Tidsell, 2009).  Acemoglu et al, (2001)  supports this view by stating that, ‘The empirical evidence on the primacy of economic institutions in explaining comparative economic development is overwhelming’

The use of the term institutions has become linked in the last years with the theory of growth. North (1990) defined the institutions theory as: “

‘ Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. They consist of both informal constraints  and formal rules  (…)‘(North, 1990:3-5 )

This definition can be related to the Smith’s assertion that creation of wealth can be done in a world with peace, easy taxes and tolerable justice (Smith, 1755) . According to Williamson (2000) , the informal rules are more important than the formal rule because it takes longer to change it.

For North (2003), institutional incentives structure the human interactions and are the determinants of economic performance. Without that, we will live in a world with “frictionless” and we would not know how to deal with each other:

Using the PMM (Predictive Mean Matching ), informal norms in Sub-Saharan Africa are the more significant one in the world. Indeed, heterogeneity is at the heart of economic and political conflicts (Birdsall, 2007 ). Informality level is different depending of every counties, in instance: South Africa and Mauritius have low PPM of 20 to 25 percent comparing to Benin or Nigeria with level high of 50 to 65 percent. These differences are explained by better economic incentives undertake by these governments  (Medina, 2017). Moreover, due to the combination of resources disparity and weak states, plenty of ethnic conflicts are caused and can be spread quickly if not stopped by the government reforms (Peace and Conflict, 2001:11-13; 2003) . We can give here the example of the case of Old Fadama, an informal settlement within central Accra in Ghana, which had created polemics in terms of claiming citizenship rights (Morrinson, 2017 ).

Despite the fact that China attracts many foreign investors with FDI inflows of 133 billion in 2016 (World Investment Report, 2017) , it has a heterogeneous and complex market because of the mix of different cultures and languages barriers. The Chinese informal rules are really important to bear in mind in order to access the market. Indeed, the two main concept for learning Chinese business etiquette are: ‘Mianxi’ and ‘Guanxi’. The first one means that we mustn’t make fun of Chinese representatives because “lose face” is terribly insulting for a Chinese person. The second one means that it’s important to spend long time cultivating business relationships and getting to know your counterparts. That’s why many foreign companies decide to ask for a Chinese agent’s assistance in order to facilitate the business and avoid cultural mistakes (Buckley, 2006).

About the formal institutions, the SSA region is suffering from a weak institution trap represented by insufficient foreign investments and unskilled workforce. The middle class is rising but it’s not sufficient to overcome dependency with western countries. Indeed, one of the causes of that is the mismatch between education learning and employment skills required for a first job. That’s why many African firms choose to employ expats, who are costly and legally risky instead of recruiting locally but it can be a good solution only for short-term period (World Bank, 2015c) . Moreover, the system of industrialization in SSA countries is stagnating due to deteriorating economic development. It is symbolized by high rate of unemployment (7.5 in 2016)  and also low level of economic diversification (Rowden, 2013).   The diversification and adaptation of the economic activities is paramount to respond to the new consumer needs (World Bank, 2016) . The urbanization and the advent of new technologies must push companies to be more innovative in order to enjoy the new economic opportunities (Rosenberg, 2015 ). This kind of dynamic is already underway in the major emerging economies, such as China. However, government are weak in every part of SSA. Nigeria for instance is the first African government in the world to introduce the Extractive Industries Transparency Initiative (EITI) in order to verify all cash flow made by the oil sector. Thanks to this audit $2.4 billion of the lost revenue was recovered (World Bank, 2017).  “The new Africa story is consumption,” says Graham Thomas, head of principal investment at Standard Bank Group (Myth of Asia Rise: 1994) . That’s true, because predictions states that in 2035 in SSA, the number of people reaching working age will exceed that of the rest of the world combined. This exponential growth is a great potential for mutual benefit from FDI that flows from the aging economies such as China to younger and more dynamic ones in Africa (Chen et al,: 2015 ).

Regarding China, formal institutions have been developed since the reforms of 1978. In the agriculture field, the “Household responsibility system” has helped the economy to boost production and growth of rural industry. According to the World Bank, this reform was ‘the cause of generating half of all the agricultural output growth from 1978-84’(HBS, 2006: 6a) . In the demographic side, it was the launch of “One-child policy” in order to control the population growth in China (HBS, 2006:5b). However, these reforms also have highlighted some challenge of doing business in China. One of them is about understanding Chinese digital transformation through due diligence. Indeed, before any business transfer with a Chinese firm, a MNE should develop for instance a security tools to transfer their innovation capabilities and set up an autonomous IT structure to prohibit its access to servers of headquarter (McKinsey & Company, 2014).

In addition to informal and formal norms, North added what he called the “the enforcement characteristics”. He give the following example to support his point of view: “when you go to a third world country (Sierra Leone, Ethiopia) and try to improve performance, there is only one of the three elements of institutions that you can alter and that is the formal rules of the game”(North, 2003a)  .

– Countries with better “institutions” more secure property rights, and less distortionary policies will invest more in physical and human capital, and will use these factors more efficiently to achieve a greater level of income. Any market that works well, whether it is a product market or a factor market, does so because it is structured in such a way that the players compete at those margins, and those margins alone, that ensure that people pursuing their self-interest also improve the well-being of society (North, 2003b)  .

Olson (1996:5)  argues that there are only two serious possibilities to explain the difference in per capita income across countries. The first one is related to the scarcity of productive resource (capital and land) and the second one is related to the quality of institutions and economic policies. As this essay focuses on the institutional side, Olson believes that the wealth of nations results in the quality of economic incentives that can protect individual’s rights and maintain political structure stability.

According to the World Bank review (2016a) , some few African countries are showing progress in the quality of their institutions and government policies but it is not sufficient to increase the scores on the global rates. The 2016 Country Policy and Institutional Assessment (CPIA) for Africa highlights the progress made by Rwanda that lead the region (average of 3,2 out of 6) with a score of 4.0 followed by Cabo Verde and Kenya. However, this report indicates the slippage in different policy areas for other fragile countries such as Eritrea and South Soudan (average of 1.9) (World Bank review, 2016b),   This is mainly due to repressive government and the weak African civil society which fails to protect the property right; hence the investments and risk-taking are exceptional (Birdsall, 2007a ).

Moreover, the harmful impacts of “hyper-presidentialism” on the state institutions are emphasized by the lack of freedom of executive power represented by little autonomy and accountability in most cases (all, 2007b or Van de Walle).   Weak rule of law, tight controls over information channels and poor institutions are the significant characteristics of Sub-Saharan African countries (Stephen Knack, World Bank, 2005).  Nevertheless, “Africa could be on the brink of an economic take-off, like China was 30 years ago” (World Bank report, 2011a) , but it cannot imitate the Asian miracle without investing in social institutions with skilled and healthy workforce and integration programs (World Bank, 2011b)

In 2016, East Asian CPIA (CPIA transparency, accountability, and corruption in the public sector rating) scored an average of 3,143 out of 6 (World Bank 2016) . If focus is placed only on China, from 1978 the economic reform made by the PRC (People’s Republic of China) has increased the productivity level to become now the second largest economy in the world. China has transformed itself from a centrally planned closed economy to an exporting and manufacturing hub for all kind of product (World Bank, 2017) . The major paradox of Chinese success is that their institutional change has occurred without one of the central elements of institutional theory- that of property rights (HBS, 2006c) .

According to Hall, (1999: page) , Social infrastructure is favourable to high level of output per worker, encourages capital accumulation and transfers of technology between the countries. All the institutions policies that help produce output are part of social infrastructure. For China, many economic reforms were introduced from the rural area to the modern area with SOE such as by chronology: “The household responsibility system”, “The Special Economic Zones (SEZ)” or “ The One-Child policy”. Following that, the health care reform created for the first time a rural cooperative Medical System however it only covers the employees but not the other family members (Hou, 2011) . Furthermore, despite all this institutional development, the current Chinese president- Xi Jinping, is still fighting against corruption as one of the most far-reaching campaigns in the country since 1976.  Indeed, the current anti-corruption campaign has to be changed in order to control corruption in an effective way (Zengke He, 2000) .

According to Todaro (2011) , “Linear-Stages Theory” is the most outspoken and influential growth model used by industrialized countries.  Rostow (1960)  describes the transition process of a country from traditional society to the age of mass consumption in terms of 5 sequential steps. With recent increase in FDI and high economic growth rates, it could suggest that the Sub-Saharan continent can become in the next few years one of the next economic world power. However, we should consider that currently SSA countries are in transition between the pre take-off and the take off. Indeed, population start to consume the output from their own industry and government are in mobilisation of savings in order to fund future investment.

Following the Chinese Cultural Revolution period (1966-1976) and the institutional reforms, China is becoming an important player on the world economic growth. Chinese institutions had chosen to boost their economy and inject incentive in order to raise productivity and modernisation. The most powerful measure to highlight that is the considerable GDP growth of China from 5,2% in 1981 to 6,7% in 2016 (World Bank, 2016) . Thus, we can state that China is nowadays on the 4th stage of Rostow, the “Drive to maturity” due to different factors. One of them is the unusual nature of China’s institutions, which include centralized political control but in the same time with decentralized economic management (Xu, 2011).   On other hand, Qian (2002)  suggest that Chinese government is working in form of “transitional institutions” that success when they complete two conditions in the same time: improve economic efficiency and make the reform a win-win game for those in power on the other.

Related to that, Harrod and Domar (1960) had explained the economy growth of a country using level of savings and productivity of capital illustrated by this formula: ΔY/Y = S/K. Their theory is that mobilization of foreign savings (S) is necessary to generate investment (K) and this same capital stock (K) leads to higher national income (Y), therefore, the economic growth is accelerated. In term of economic share output, Sub-Saharan African represents 1/10 of East Asian economic size. This disparity is explained by the dependence on commodity exports and on foreign aids (Congo depended of 126%). Thus, Sub-Saharan Africa can ‘t generate sufficient resource to find investments → Very poor people cannot save, and thus their societies cannot generate sufficient resources to fund much investment (Jeffrey Sachs,2004 ). Therefore, aids could have a “Dutch Disease” effect if they are not following by modelling of the exhcnage rate (Fielfing and al, 2012)

Contrary to Africa, Chinese government give a significant importance to investment by making 50% saving while the savings rates in most African countries are under 25% (World Bank, 2015) .  Some reforms allowed farmers to start saving by owning capital in most case plots of land. In the same way, controlling the demographic growth  allowed household saving to sharply increase from 7% to 17% (HBS Case Study, 2006) .

The Lewis’ structural change model (1954)  presents the mechanism by which countries are transforming from traditional agriculture to urbanized manufacturing and service economy. This model allows the surplus of rural labour to be absorbed into the modern industry in order to sustain development and promote industrialization (Todaro, 2011).  Regarding SSA government, the development of industrialized economy has been deserted/missed because of the limited range of commodities and lack of diversified industries (Rowden, 2013) . In contrast, China with labour-intensive growth in manufacturing sector has helped 800 millions of people to emerge from the poverty (World Bank, 2017) . That’s why the Chinese government has decided to no longer limit itself to rural sector reforms and to consider the global Chinese economy and so the whole urban sector (HBS Case Study, 2006) . Indeed, the lack of labour in farm has created a rural urban migration in china between 1980-1990 and China’s farm output soard as agriculture communes were dismantled (FT, 2015).

According to the Neo-colonial dependence model, the existence of underdevelopment in some developing countries is due to the domination of rich countries  within political, economic and cultural polices (Todaro, 2011) .

Using this model, we can explain that the main factor why Sub Saharan Africa experiences today the weak institution trap is because they were controlled in the 19th century by rich European colonies (Acemoglu & Robinson, 2010) .

– Birdsall (2007) , argues that neoclassical theories of growth, which highlight the role investment, cannot explain growth patterns in SSA. The evidence shows that levels of wealth and investment alone cannot predict growth (P2-3). Birdsall (2007)   and others, such as Dani Rodrick (2003)  who presented convincing evidence that “institutions rule” argues that “good” institutions are necessary to sustain growth, even when it’s from primary commodity exports that are subjected to price volatility in international markets.

-Notwithstanding, The differences in colonial experience could be a source of exogenous differences in institutions. Some articles rejects the “developmental state” theory by giving the example of Botswana. In the last 35 years, the rich diamond country has achieved the highest rate of per-capita growth of any country in the world . This unique success was possible by a juxtaposition of historical conditions and following right institutions. Acemoglu et al,(2010)   argue that the hands off colonial experience and an elite ruling class has influenced the developmental outcome of this part of the world. Moreover, they state that Botswana is form of a gate-keeping state that should not be underestimated in term of growth development.

The Neoclassical Counterrevolution with the market fundamentalism theory argue that competitive free markets allow to stimulate economic growth by privatization of state-owned enterprises, welcoming foreign investors, promoting free trade and reducing state intervention (Todaro, 2011) . China has followed the Asian Tiger’s model in adoption of an export strategy and had increase trade from 10% to 45% of GDP (HBS Case Study, 2006) .  This “Trade Liberalisations” (World Bank) is due to the creation of SEZs (Special Economic Zone). Based on the theory of choice (North, 2003) , the free trade zone (such as Chengdu) and the “laissez-faire policy” had promoted the export level and give more freedom in doing business in China (Krugman, 1994)  . Finally, It’s important to notice that Deng Xiapong (2009)  (motto was) has defined the Chinese strategy by “Crossing the rivers by feeling the stones” meaning the government will try new ideas, if they were proved to be succeed, then they were encouraged otherwise he will change it.

In the last 10 years, the global boom in commodity prices and the good management on the macro-side allow some Sub-Saharan African countries such as Ghana and Mozambique to develop their economy growth (Birdsall, 2007) . However, it wasn’t a sustain solution for the lacklustre growth of SSA. Low trade opportunities and inability of the government to control internal ethnic conflicts has created a risky economic context for foreign investors (Birdsall, 2007) . Finally, Sub-Saharan Africa relies more heavily on trade taxes revenues than South Asia, which damage growth.

Most institutional economist believe that traditional neoclassical economics is unable to provide an adequate explanation of the forces that promote or retard economic development (see, for example, North 2003, pp.2-3) because it fails to take into account factors that shape institutions, particularly political institutions. In this context, North (2003, p.3) states, ‘The economic institutions we have that shape directly our world derive from political institutions.

→ When looking at the factors that explain economic issues in SSA, it is important to mention the “Weak institutions trap” as one of the main cause. Birdsall (2007)  argues that the heavy dependence on primary commodity reinforces the fragility of the continent. She continues by stating that low natural openness, ethnic heterogeneity, lack of executive accountability and corruption represents the main factors that contribute to lacklustre growth in SSA. Thus, to avoid that we should invest in effective institutions that evolve needs, incentives and opportunities for the population.

One of these incentives can be, the government investment in infrastructure (Schools, formation centre, hospital) in order to increase the export revenue and provide more credibility to donors to invest.

Conclusion:

→ We must combine new knowledge with the other two dimensions that shape the human experience. One is demography. That looks as though it is solvable in the sense that fertility and mortality patterns are evolving in ways that probably mean we are not going to have the Malthusian worries that we used to have. The other is the institutional structure. To the degree that problems are evolving, we must evolve institutions, political, economic and social, that will solve those problems. Our best chance of doing it is by developing what I have called elsewhere5 adaptive efficiency. Adaptive efficiency kicks in when there are flexible institutions that provide a maximum of choices at a given moment of time. In a world of uncertainty in which nobody knows the right answer, you need to try out a lot of things and hope you will find one that works. And you must also have laws and rules, such as bankruptcy laws, that eliminate those that do not work. If you have a society that creates such an institutional framework, it obviously has the best chance of being successful with respect to survival and continuous performance (North, 2003).

– The only generalization is that there is no general recipe – and outsiders are unlikely to help if they try to push institutional forms and norms that have worked for them, in one place and time, as the solution for others at another place and time. (Birdsall, 2007)

To conclude, over the last 30 years, Sub-Saharan Africa had experienced radically different growth and success. Institutional theories have played a major role to explain major issue in the continent. Different visions and opinions can be applied because there is no single approach suitable for the entire continent. GDP growth and increase in trade volumes in SSA are consequences of improving global conditions and high commodity prices and rise of capital inflows. Notwithstanding, additional efforts are needed to sustain this economic growth and address revenue shortfalls (World Bank, 2017) . As highlighted above, the problem is not a lack of savings and investments due to low average income, but the absence of a “developmental state” (Rowden, 2013) . Thus, the business outlook is attractive but it is still a tricky terrain to enter with its heterogeneous cultures and political instability (Lago, 2014) .  Finally, SSA countries should start depend on their own creative powers and local efforts instead of depending on foreign aid (World Bank, 2015).

For China, institutional reforms have clearly determined their economy’s allure, what we should learn is that it is possible to change the course of history (World Bank, 2015) . Thanks to government incentives, good institutions, demographic changes and structural reforms, China has grown by 10 percent each year, this is a remarkable level of growth (World Bank, 2017)  . China has shifted from a centrally planned to a market based economy in 25 years. Nowadays, their economic growth is driven by industrial production with the limited supply of labour force from traditional rural sector. Thus, wages is beginning to rise and productivity is slowing down (The Economic Times, 2012). Although China needs to improve its governance and eradicate corruption it has made progress in areas of social and economic development (Tanseem, 2015) . According to Harrod & Domar (1960), growth is higher when savings are high and capital stock is low; that’s why, we can say that China knows a diminishing return by capital accumulation (capital stocks is becoming higher), as it is in most advanced economies. However, as predicted by current trends of the IMF, in approximately 3 years China will reach the Lewis Turning Point (IMF, 2013 ). When an institutional approach is adopted,

Otherwise, we can observe close link between Sub-Saharan Africa and China. Indeed, China has become Africa’s main trading partner and the dominant investor in Africa, as well (International Monetary Fund, 2015) . They both present significant challenges more than any other part of the world. Even by applying the specific strategies, it’s very difficult to do business there

One question remains: despite its underdevelopment, is it possible for Sub-Saharan Africa to offer same opportunities for doing business than China? What worked with China that could be applied to Africa?

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Todaro, M. P. (2011) “Classic theories of economic growth and development”. Economic development pp.109-154. Harlow: Addison Wesley

Rowden, R. (2013) The myth of Africa’s rise. Foreign Policy Magazine. (online) (accessed on 17th December)

http://www.foreignpolicy.com/articles/2013/01/04/the_myth_of_africa_s_rise?page=0,0

The World Bank. (2017) The World Bank in China. Washington, DC: World Bank. [Online] [Accessed on 25th of December]  http://www.worldbank.org/en/country/china/overview

HBS. (2006) Case study: China: “To Get Rich is Glorious”. China: Building Capitalism with Socialist Characteristics

Gabriel Wildau, G. (2015). China migration: At the turning point. Financial times Online] [Accessed on 12th of December] https://www.ft.com/content/767495a0-e99b-11e4-b863-00144feab7de

Colonial rulers

Todaro, M. P. (2011) “Classic theories of economic growth and development”. Economic development pp.109-154. Harlow: Addison Wesley

Acemoglu, D., & Robinson, J. (2010). The role of institutions in growth and development (p. 135). World Bank Publications

Birdsall, N. (2007) “Do No Harm: Aid, Weak Institutions and the Missing Middle in Africa”. Development Policy Review. vol. 25, no. 5, pp. 575-598

Birdsall, N. (2007) “Do No Harm: Aid, Weak Institutions and the Missing Middle in Africa”. Development Policy Review. vol. 25, no. 5, pp. 575-598

Rodrik, Dani. 2003. “Growth Strategies.” National Bureau of Economics Research Working Paper 10050.

32-33 of Acemoglu, Johnson and Robinson, ‘An African Success Story: Botswana’,

Acemoglu, D., & Robinson, J. (2010). The role of institutions in growth and development (p. 135). World Bank Publications

Todaro, M. P. (2011) “Classic theories of economic growth and development”. Economic development pp.109-154. Harlow: Addison Wesley

HBS. (2006) Case study: China: “To Get Rich is Glorious”. China: Building Capitalism with Socialist Characteristics

North, D. C. (2003) The role of institutions in economic development. Geneva: United Nations Economic Commission For Europe

Krugman P (1994), ‘The Myth of the Asian Miracle’. Foreign Affairs Vol. 73(6) URL

Yu, A. L. (2009). China: End of a Model… Or the Birth of a New One?. New Politics12(3), 16.

Birdsall, N. (2007) “Do No Harm: Aid, Weak Institutions and the Missing Middle in Africa”. Development Policy Review. vol. 25, no. 5, pp. 575-598

Birdsall, N. (2007) “Do No Harm: Aid, Weak Institutions and the Missing Middle in Africa”. Development Policy Review. vol. 25, no. 5, pp. 575-598

Tisdell, C., 2009. Economic reform and openness in China: China’s development policies in the last 30 years. Economic Analysis and Policy, 39(2), pp.271-294.

Birdsall, N. (2007) “Do No Harm: Aid, Weak Institutions and the Missing Middle in Africa”. Development Policy Review. vol. 25, no. 5, pp. 575-598

Africa’s Pulse April, 2011, FT articles chosen for this tutorial and The Myth of Africa’s Rise

North D.C. (2003). The role of institutions in economic development. Discussion Paper Series No. 2003.2. United Nations Commission for Europe, Geneva

Birdsall, N. (2007) “Do No Harm: Aid, Weak Institutions and the Missing Middle in Africa”. Development Policy Review. vol. 25, no. 5, pp. 575-598

The World Bank. (2017a) The World Bank In Africa. Washington, DC: World Bank. [Online] [Accessed on 3th of December] http://www.worldbank.org/en/region/afr/overview

Rowden, R. (2013) The myth of Africa’s rise. Foreign Policy Magazine. (online) (accessed on 17th December)

http://www.foreignpolicy.com/articles/2013/01/04/the_myth_of_africa_s_rise?page=0,0

Lago, A. (2014) Doing Business In Sub-Saharan Africa: Six Aspects To Consider. Forbes Education. (online) (accessed on 13th January)

http://www.forbes.com/sites/iese/2014/07/31/doing-business-in-sub-saharan-africa-six-aspects-to-consider/#2715e4857a0b46fc0484bc71

The World Bank. (2015) Lessons for Africa from China’s Growth. Washington, DC: World Bank. [Online] [Accessed on 23rd  of December]  http://www.worldbank.org/en/news/speech/2015/01/13/lessons-for-africa-from-chinas-growth

The World Bank. (2015) Lessons for Africa from China’s Growth. Washington, DC: World Bank. [Online] [Accessed on 23rd  of December]  http://www.worldbank.org/en/news/speech/2015/01/13/lessons-for-africa-from-chinas-growth

The World Bank. (2017)The World Bank in China. Washington, DC: World Bank. [Online] [Accessed on 11th  of December]  http://www.worldbank.org/en/country/china/overview

Tasneem, Naila, Institutional Innovations in China: Can China Serve as an Alternative Development Model? (September 1, 2015). International Conference on Institutions, Reforms, and Economic Development, Peking University, 2015.

IMF https://www.imf.org/external/pubs/ft/wp/2013/wp1326.pdf

IMF 2015

Appendices :

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