Thursday, July 31, 2008

India Blamed for Doha's Death

India led the charge to kill Doha, say the western government officials and commentators about the failure of the latest round of World Trade Organization (WTO) talks in Geneva to conclude a wide ranging agreement on world trade. Backing India's demands, including right to impose food import tariffs and end to agriculture subsidies in US and Europe, were Brazil, China and other developing nations in Asia. Africans were angry that their trade issues, particularly cotton, were not even discussed as the negotiators from developing giants fought pitched battles with their counterparts in developed nations.

"The way the Doha Round collapsed is a preview of what we're likely to see in other negotiations," said Kimberly Elliott, a senior fellow for the Center for Global Development, a Washington think tank, told the Wall Street Journal. "Emerging markets [such as China and India] are taking a big role," she said, sometimes elbowing out even poorer nations. Other important multilateral negotiations underway include carbon emission reductions which are likely to see similar discord between developed and developing nations.

By all accounts, the key reason for the Doha collapse was the failure to reach agreement on agriculture tariffs by developing countries and farm subsidies by US and Europe. Both sides were looking to protect their farmers from the downside of free trade. To learn more about the political power of US corporate farm lobby, please read my recent post "The US Food Aid and the Farm Lobby". Neither side could muster the courage to face the wrath of their powerful domestic lobbies in reaching a comprehensive agreement that would dramatically increase trade for a whole range of goods and services and significantly cut tariffs. There is a lot of interest by western companies in selling a broad range of luxury goods, financial services and high-tech products in emerging markets. The developing world would benefit by lowered tarriffs and easier access for their goods and services to markets in US, Europe, Japan and South Korea.

Mr. Pascal Lamy, the director general of the world trade organization, said negotiators' positions had converged on 18 of 20 topics on their "to-do list." But they couldn't narrow the gaps on the 19th, a safeguard mechanism sought by developing countries that would let them temporarily raise tariffs when food imports surge and severely lower prices for domestic farmers, according to Mr. Lamy. In particular, China and India wanted the trigger for such tariffs to be a 10% increase for imports, and the U.S. wouldn't settle for a threshold lower than 40%, The Wall Street Journal reports. Once "it became clear that the differences were irreconcilable," Mr. Lamy said, "the remaining issues, including cotton, were not even negotiated." The agreement on cotton was of particular interest to cotton producers in Africa. A successful agreement on cotton would have been felt most keenly in the West and Central African countries of Benin, Burkina Faso, Chad, Mali, and Togo, where cotton accounts for up to 60 percent of exports, as well as other African producers such as Uganda and Tanzania.

Venting his frustration at the failure, Lamy said to reporters, “What members have let slip through their fingers is a package worth more than $130 billion in tariff-saving annually by the end of the implementation period, with $35 billion saving in agriculture and $95 billion in industrial goods".

Prior to the collapse, Pakistani delegation led by Commerce Minister Mr. Ahmad Mukhtar, appeared to be hoping for significants benefits to flow to Pakistan from the success of Doha.

Before hitting the food import tariff deal-breaker, there was a weeklong meeting of 35 trade ministers of leading countries, including Pakistan, which produced significant agreements. Dr. Manzoor Ahmed, Pakistan’s Ambassador to WTO, told Dawn that it has been agreed that the US would cut its allowable subsidies by 70 per cent from $48 billion to $14.7 billion while EU has agreed to cut them by 80 per cent.It has also been agreed that developed countries could cut their agricultural tariffs by an average of 60 per cent.

A few days ago, Dr. Manzoor Ahmad also told Dawn that the most important area for Pakistan’s concern was cuts for tariffs on industrial goods. It had been agreed that all tariffs in developed countries would be brought below 6.5 per cent under the proposed package. Thus, current tariff of 19.6 per cent on export of cotton shirts would be reduced to 5.6 per cent or by over 70 per cent. For knitted shirts of man-made fibers where Pakistan could only manage exports of only two million dollars because of high tariffs of 32 per cent, this would now come down to 6.4 per cent, he said prior to Doha's collapse.

There would be many such new market opportunities for Pakistani exporters, the Pakistani trade rep hoped and added similar opportunities would arise in case of EU where Pakistani exporters would pay tariffs of eight per cent and 12 per cent on most of their exports. All these tariffs would be reduced to below five per cent, he said. On top of that generalized system of preference (GSP) of 20 per cent would likely stay. This would imply a reduction of over 50 per cent in duty on our exports to the EU, Dr Manzoor said and added in many other countries, such as Canada and Australia, also there would be many openings for Pakistani products.

All of Pakistani delegations' hopes and those of other developing nations were dashed, at least for the moment, with the collapse of Doha. There was also regional discord on display among South Asia nations as Bangladesh delegate complained about unfairness. He said, "We ask the Chair to apply the same methodology that was applied for selecting the tariff lines for Pakistan and Sri Lanka, and then give us the tariff lines that come up for Bangladesh." Bangladesh representative continued, "We strongly believe that same and equal methodology should be used, and we will accept the tariff lines that will be selected after application of that methodology".

The Doha collapse has revived the angry rhetoric that has often characterized the WTO standoffs in recent years, arguments that have tended to embrace the urgent geopolitical issues of the day. U.S. trade representative Susan Schwab told the Wall Street Journal that "in the face of the global food crisis, it's unconscionable that this came down to how much countries could raise their barriers to imports of food." Indian trade and commerce minister Kamal Nath, expressing a view felt widely among developing-country negotiators incensed at what they see as excessive, insensitive U.S. demands, said "it's unfortunate that in a development round" -- a major theme of Doha -- "we couldn't agree to an issue of livelihood and security." Mr. Lamy, Le Monde adds, declined to engage in what he called the "accusation game" and said he would consult with WTO members on what to do next.

Free trade advocates argue that the trend toward freer trade is essential for continued growth of the world economy. In 1990, trade represented about 40% of world GDP, according to the World Bank. By 2004, trade exceeded 55% of world GDP, and the global economy had expanded by 50%. The five fastest-growing countries from 1990 to 2004 were Albania, Bosnia and Herzegovina, China, Ireland and Vietnam, and all of them had annual double-digit increases in trade. Meanwhile, the countries that traded the least -- Iran, many African countries -- have stagnated.

Lamenting the demise of Doha, the Wall Street Journal editorial singles out Kamal Nath, the Indian Commerce Minister, for the harshest criticism. The Journal editorial says, "The real battle is between those who want to expand this era of global trade and prosperity, and those who want to carve out their own protected niches."

The Journal editorial goes on to say, "The latter seems to include Indian Commerce Minister Kamal Nath, who is the main villain in this week's failure. He preened as a Third World hero by refusing to open his country further to farm imports, insisting on a "special safeguard mechanism" that would have let countries jack up their tariffs if imports rose too rapidly. He claimed this would protect the "livelihood of millions of farmers" in India. But the rise of India's middle class has coincided precisely with the move of millions from the countryside to cities, as well as India's growing engagement with the world economy. More Indians will stay poorer longer because of his obstinance."

Not everyone is unhappy with the collapse of Doha. The critics of free trade hail Kamal Nath as a hero. Reuters reports that anti-globalization groups welcomed the collapse of talks on a new world trade treaty as a triumph for farmers, workers and the poor around the globe and a blow against "big business." And even mainstream labor and farm groups argued that the deal on the table at the World Trade Organization (WTO) Doha round negotiations over the past few days was so bad that it was just as well that it had been abandoned. "Victory for small farmers, workers, civil society and developing nations," declared the US-based Public Citizen group, which for over a decade has campaigned against the WTO and its drive to liberalize international trade. Public Citizen group is just one of many NGOs that have organized and gained strength over the last decade. This new breed of NGOs opposes what is perceived as the corporate-led globalization efforts to serve the interests of the big multi-national corporations rather the ordinary people in developing and developed countries.

Here's a video clip of Pascal Lamy announcing the failure of WTO Talks in Geneva on July 30, 2008:

Related Link:

Pakistan Trade Policy Review 2008

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Thursday, July 24, 2008

Pakistan's Best Tax Collector Fired by PPP Government

Abdullah Yusuf, the most effective tax collector in Pakistan's history, has been fired, without explanation, by the PPP government while he was traveling overseas in his official capacity. When the surprise news came, he was in the Russian Federation to discuss customs issues and planned to go to Geneva, Switzerland next, according to Business Recorder newspaper.

Mr. Yusuf's key accomplishments include doubling of the revenue collection to achieve an aggressive target of over Rs 1.04 trillion in 2007-08; implementation of broad-based reforms within the tax system; universal self-assessment regimes; paperless customs clearances and e-filing systems and customer responsiveness with the business trade and bodies for creating a friendly business environment. Before Mr. Yusuf's reforms, the tax collection bureaucracy in Pakistan was notoriously corrupt and inefficient and he faced a lot of internal resistance. Mr. Yusuf is a chartered accountant and financial management consultant with extensive experience in public and private sectors.

Mr. Yusuf was appointed by Prime Minister Shaukat Aziz to the position of the Federal Board of Revenue (FBR) Chairman as part of his broad agenda for reform in governance. Mr. Yusuf is also known to be close to President Musharraf. While there has been no explanation offered for Mr. Yusuf's termination, it appears to be politically motivated. This action is particularly troubling, given the revenue growth target for the next five years set at an ambitious 25% per year. Such lofty targets require a highly competent and aggressive FBR leader with a proven track record, like Mr. Yusuf. Pakistan's highest national interest requires that key appointments not be politicized.

It seems that the critics of President Musharraf have been obsessed with a YouTube video clip showing Mr. Yusuf dancing and President Musharraf and former Prime Minister Shaukat Aziz smiling. The focus has been on judging the performance of Mr. Yusuf on the dance floor and his relationship with Mr. Musharraf rather than his undeniable accomplishments as the chief tax collector of Pakistan. Indeed, this is sad day for Pakistan.

Earlier this year, I found myself on the receiving end of lots of email traffic after Mr. Yusuf's video appeared on YouTube. I'd like to share with you one particular message that I found closest to reflecting my own feelings about it. Here it is:

We seem to be a nation of hypocrites. I say this because we seem to judge people quickly from their outward appearance. Surely a human being is much deeper than the outward appearance. There is a hadith that our Prophet prohibited people from condemning any one as kafir, as he said that this was a secret between that person and God. There is a deeper lesson in this.We as a nation are quick to pronounce judgment on the moral fiber of all and sundry in quick time; but do we judge ourselves? Jesus had said, when a prostitute was brought before him for judgment, "let he who has not sinned cast the first stone". Do we ever think along those lines? This is what makes ours a nation of hypocrites. The CBR Chairman, and I did not know him personally; was mentioned to me by many friend and acquaintances of mine who had the experience of dealing with CBR, and I got a unanimous positive appraisal that during the tenure of this chairman, CBR's performance had improved quantum fold in attitude and performance. I also felt this in the form of a major tax-payer of Pakistan; and certainly the level of harassment that one went through the tax department was greatly reduced. Should we be judging this chairman for his good performance at his job, or condemning him for what he does on his own leisure time. To the citizens of Pakistan his performance at his job is most important for the well being of this nation. Dancing, I think, is a natural out-pouring of happiness, and man has been dancing through the ages. So what is wrong here!! I think what is wrong here is using these videos to malign him and judge him unreasonably. May Allah guide us all in the right direction.

Here's the "controversial" videoclip:

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Monday, July 21, 2008

$100B Business at Stake in US-India Nuclear Deal

As the Indian parliament gets ready for a confidence vote this week, the fate of the government of Prime Minister Manmohan Singh and the US-India nuclear deal hangs in the balance.
The Indian government is pulling out all stops to win this vote to salvage the US-India nuclear deal. In addition to the Indian people, the international community and the nuclear suppliers group (NSG) are also watching the vote closely.

The NSG's interest lies in the estimated $100 billion worth of nuclear business in India over the next two decades. U.S. companies hope to capture as large of a share of that business as possible. Private studies suggest that if U.S. vendors win just two civil nuclear reactor contracts, they would create 3,000–5,000 new direct jobs and 10,000–15,000 indirect jobs in the United States, according to US International Trade Administration.

It has now been three years since the signing of the historic agreement between President Bush and Indian Prime Minister Manmohan Singh. During this period, political parties and media in India have been debating the merits and pitfalls of the agreement.

India has also asked the International Atomic Energy Agency to place the draft India-IAEA Safeguards agreement before its Board of Governors. After the board's approval, the U.S. will seek an exemption from the international Nuclear Suppliers Group that would allow the deal to proceed. The final step will be a vote in the U.S. Congress on the so-called 123 Agreement.

As the deal makes its way through the Indian parliament, the IAEA, the NSG and the US Congress, there is heavy lobbying taking place on all sides. The US nuclear suppliers lobby is actively pushing for passage in the US Congress, even if it requires a lame-duck session after the November elections. Some nonproliferation advocates in the U.S. have also stepped up their campaign against the deal. They claim the agreement will facilitate a new nuclear testing by India, and thereafter will allow India to upgrade its nuclear arsenal. Non-proliferation advocates have also argued that India could expel IAEA inspectors in the future and thwart the IAEA inspection regime.

The US legislation passed in 2006 -- the so-called Hyde Act -- that gave preliminary approval to the U.S.-India agreement, requires that Congress be in 30 days of continuous session to consider it. Congressional aides said that clock can begin to tick only once India clears two more hurdles -- completing an agreement with the International Atomic Energy Agency, and securing approval from the 45 nations that form the Nuclear Suppliers Group, which governs trade in reactors and uranium. Because of the long August recess, less than 40 days are left in the session before Congress adjourns on Sept. 26, according to the Washington Post.

India is said to be running short of uranium needed to fuel its reactors. It is anxious to win "clean" agreements with the IAEA and the NSG that would not result in fuel cutoffs if it decides to resume testing nuclear weapons.

Sen. John McCain, the Republican presidential candidate, is a strong supporter of the agreement, but Sen. Barack Obama, his Democratic rival, is more skeptical. During the congressional debate on the Hyde Act, Sen Obama added language in the bill limiting the amount of nuclear fuel supplied to India from the United States to deter nuclear testing. Though proliferation is a constant concern raised in the US, there has not been much discussion of the implications of this deal for other nations in the neighborhood: Pakistan, Iran and China.

Pakistan's nuclear fuel needs are currently very modest and they currently are met by China. China has promised to help Pakistan achieve its target of generating 8,800 MW of nuclear power by 2030 by speeding up the delivery of the six nuclear plants and supply the necessary fuel, according to various reports. At the same time, Pakistan is building a $1.2 billion facility to develop the capability to manufacture full-cycle nuclear fuel and power plants. The Iranian situation is currently very murky with the US and EU threatening sanctions if Iran continues to enrich uranium.

If India wins the IAEA and the NSG approvals that would not result in fuel cutoffs in the event it decides to resume testing nuclear weapons, it could easily bypass any US restrictions and obtain needed nuclear supplies from other nations eager to do business with India.

Here's a brief video clip with Dr. Leonard Weiss, an NPT expert, explaining the US-India nuclear deal:

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Thursday, July 17, 2008

Retail Investors Protest Falling Stocks in Karachi

The investor confidence reached new lows when hundreds of irate investors took to the streets in Karachi today. A number of windows were broken and at least two people injured, Reuters news agency reported. They were protesting continuing slide in share prices in Karachi for the 14th consecutive day, eroding about 14% of capital since Monday, reaching a new 18-month low of 10,058.37. The KSE-100 is now down 36% from its peak of 15739.25 earlier this year. Fall of 20% or greater in major indices is considered a bear market.

Earlier in June, there was a brief respite for investors when the authorities imposed a temporary ban on short selling and tightened the circuit breaker lower limit to 1% and increased upper limit to 10%. But, as soon as the trading range was revised to plus or minus 5% last Friday, many investors took advantage of it and sold off their holdings, putting further downward pressure on share prices.

"The measures taken on Friday proved to be an exit strategy for foreign investors," Asad Iqbal, managing director at Ismail Iqbal Securities Ltd. told Business Recorder newspaper in Karachi.

Pakistan's State Bank has recently raised interest rates from 10% to 12.5% and cut 2007-8 growth from 7.2% to 5.8%. This forecast comes on the heels of dire talk of economic "meltdown" by the new leadership that is facing serious political instability amid growing differences in the PPP-PML(N) coalition government. The ongoing unease with new leadership is continuing to accelerate loss of confidence in Pakistan's economy by businesses, investors and consumers. The rupee is continuing its slide which has seen it lose 16.9% of its value against the dollar so far this year.

With the dramatic rise in international commodity prices, the food and fuel subsidies have contributed to Pakistan's rising budget deficit, which the central bank said would reach 6.5 percent to 7 percent. The deficit was just 4.3 percent in fiscal 2007. With imports rising faster than exports, the central bank said Pakistan's current account deficit will rise between 7.3 percent and 7.8 percent - a record high.

While it is true that at least part of the inflation in Pakistan is imported from global markets, it is important for the Pakistani leadership not to use it as an excuse for inaction on the economic front. Faced with international turmoil, it becomes even more important to assert leadership in economic matters to keep the national economy afloat and able to recover quickly in the future. The first step toward fixing the current mess is to put credible economic leadership in charge and stop the erosion in business, consumer and investor confidence.

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Tuesday, July 15, 2008

Pakistani Economy Returning to Bad Old Days

Just like the bad old days

BRIGHTLY painted Tata lorries, laden with sacks of onions, wait in the noon heat at the Wagah border post between India and Pakistan. Once past customs, the onions will go on to Lahore and beyond. But the lorries must turn back. Their produce is laboriously loaded onto smaller vans, driven by locals.

Pakistan's costly imports of food ($3.5 billion in the first ten months of this fiscal year, which ends on June 30th), fertilizer ($823m) and fuel (over $8.6 billion) may pull the economic rug from under its newly installed government, which presented its first budget, belatedly, on June 11th. The State Bank of Pakistan (SBP), the central bank, reckons the country's current-account deficit might reach 7.8% of GDP this fiscal year, its highest ever. Growth has slowed to 5.8%, inflation has quickened to over 19% and the government's budget deficit, at about 7% of GDP, is the highest in ten years.

Such macroeconomic disarray will be familiar to the coalition government led by the Pakistan People's Party of Asif Zardari, and to Nawaz Sharif, whose party provides it “outside support”. Before Mr Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. But since then, as the IMF remarked in a report in January, there has been a transformation. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion as recently as in October.

But in the months since, the turnaround economy has threatened to turn full circle. The political turmoil that followed President Pervez Musharraf's imposition of a state of emergency in November and Benazir Bhutto's assassination in December is not wholly to blame. Pricey fertiliser and April hailstorms hurt the wheat harvest. The mealy bug and other afflictions cost about 16% of the cotton crop, which in turn hurt the textile industry. And over 27% of Pakistan's higher import bill was due to the spike in oil prices alone.

But all this made it a bad moment for Pakistan to spook foreign investors with its wobbly politics. They bought just $97m-worth of shares in the first ten months of this fiscal year, compared with over $1.5 billion in the same period a year earlier. Reluctant to test the foreigners' appetite for its securities, the government has turned to the charity of multilateral lenders and friendly governments. Pakistan also received over $5.3 billion in remittances from migrant workers in the ten months to April, half of it from the Gulf.

Mr Zardari has recently returned from a pilgrimage-cum-begging mission in Saudi Arabia. The Kingdom reportedly agreed to defer charges on some of the 250,000 barrels of oil it sells Pakistan each year. This forbearance comes on top of a $300m handout to the government.

What will his government do with this money? Its new budget aims to narrow its fiscal deficit to 4.7% of GDP, based on an optimistic forecast of revenues. It will raise sales taxes across the board and impose heavy duties on luxury items such as perfume and chocolate. It has resolved to “prune” the “unbearable” subsidies, mostly of fuel and electricity, which now consume one-fifth of its budget, promising instead to give poor households 1,000 rupees ($15) a month in cash. The scheme will be named the “Benazir programme”, lest the beneficiaries forget which party to thank. The budget's allocation to the army was less in real terms than it was last year. But even as it spends less on guns, it promises to spend more on soldiers, raising their pay by 20% along with that of every other federal employee. Other expenses on the bureaucracy, however, are to be frozen: civil servants will have to forgo their new cars and air-conditioners.

As the finance minister unveiled his plans, Pakistan's lawyers began their “long march” to Islamabad, demanding Mr Musharraf's removal and the reinstatement of the senior judges he sacked last year. On June 7th Mr Musharraf told the press that he was not about to leave his post or the country. He will know when to quit, he said. He will not sit around like a useless vegetable, or like the onions waiting to cross the border at Wagah.

Source: Economist June 12, 2008

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Monday, July 14, 2008

Relaxed Trading Rules Trigger Karachi Stocks Selloff

In spite of cheaper valuations of Karachi stocks from shrinking price earnings multiples relative to other markets, foreign investors in Pakistan continue to be nervous. As soon as the trading range was revised to plus or minus 5%, many investors took advantage to sell their holdings Friday and pushed the KSE-100 down more than 4%. The decline continued this week as the KSE-100 index lost 265.84 to close at 11,695.82. Earlier in the morning, it opened at 11,961.66. This is a far cry from the peak of 15739.25 earlier this year.

"The measures taken on Friday proved to be an exit strategy for foreign investors," Asad Iqbal, managing director at Ismail Iqbal Securities Ltd. told Business Recorder newspaper in Karachi.

Securities and Exchange Commission Chairman Razi-ur-Rehman believes the market has a liquidity crisis and he blamed the bearish trend in the equity market on the State Bank of Pakistan's (SBP) tight monetary policy, which has affected market liquidity.

The State Bank raised interest rates to 12 percent from 10.5 percent in May which hurt the stock market. Traders are expecting another increase in the next scheduled meeting before July 31 to curb inflation and support the rupee.

The rupee ended firmer at 69.50/60 on Monday as sentiment improved slightly after the introduction of stabilization measures last week and on rumors the government may curb imports, traders said, according to Business Recorder. State Bank of Pakistan is reportedly taking steps to arrest the rapid decline in Pakistan's dollar reserves. According to the latest SBP weekly report, the foreign currency reserves fell to $11.123 billion, down from $15.6 billion at the end of last year.

The State Bank last week moved to stabilize the rupee after it set its weakest ever closing level at 72.85/90 on July 8.

Among the most active stocks Friday, volume leader NIB Bank fell 8.7 percent to 9.69 rupees, Oil and Gas Development Co Ltd shed 5 percent to 110.45 rupees, while Arif Habib Securities was 4 percent lower at 143.49 rupees.

The Karachi stocks had rallied earlier from measures that included a 1-month ban on short selling, a special 30 billion rupee ($446 million) fund set up to stabilize volatility, and revision of the short circuits to 10% on the upside and 1% on the downside, announced June 24, 2008. Please read my post "Karachi Stocks Rally after Ban on Short Selling" to learn more about recent changes at the KSE.

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Saturday, July 12, 2008

Cricket and Commerce Come Together

International cricket megastars with large paychecks to match their egos, Bollywood's elite actors, big business magnates, provocatively dressed cheerleaders, the big sports media, huge worldwide audience, deep pocket sponsors all come together to put on spectacular three hour, 2020 games of the two newly formed Indian cricketing leagues.

This is a revolution in the world of cricket, a sleepy, colonial era, gentleman's game that the British brought to their colonies including India and Pakistan. Taking a leaf from the sports leagues in US and Europe, it represents a coming of age for the business of sports in India. According to the New York Times, the Indian billionaires are for the first time staking their prestige on sports teams. The Indian Premier League’s most expensive franchise, at nearly $111.9 million, is the Mumbai Indians, fittingly owned by India’s richest man, Mukesh Ambani. The flamboyant liquor baron Vijay Mallya picked up the Bangalore-based Royal Challengers for $111.6 million, and the actor Shah Rukh Khan is backing the Kolkata Knight Riders for $75.09 million.

Forbes magazine reports that the Board of Control for Cricket in India (BCCI), a nonprofit body controlling the game in the country, has racked up $1 billion to date from selling commercial rights to Indian cricket for the next five years. (One source: Nike paid $45 million to flash its logo on players' apparel and to sell garments to cricket fans.) "It's all about extracting the most value," said Lalit Modi, BCCI's new marketing chief, who hopes to eventually make $1.5 billion from Indian cricket, ten times what BCCI made in the last go-around.

IPL offered contracts to several Pakistani players including Shoaib Malik, Shoaib Akhtar, Muhammad Asif, Shahid Afridi, Younis Khan, Muhammad Yousaf and Inzamam ul Haq.

According to the BBC, the players were offered to the franchisees in an auction process. Australia captain Ponting is among 13 of his compatriots in a pool of international cricketers available to the franchises, which were allowed to spend a maximum of $5m on eight contracted players. There have been recent reports that several top Australian players have been promised the IPL's salary cap will be axed in the future. The biggest stars could then expect IPL contracts of about $15 million. Australian captain Ricky Ponting has opposed this move. "I have certainly heard there may be no salary cap next year but I'm not sure if that will be good for the IPL," Ponting told Australia's Courier Mail. "The more I've thought about it, it might be detrimental to the whole set-up.

The winning bids, which were selected electronically in a sealed room, offered Pakistani players as follows: Shoaib Akhtar $425,000, Younis Khan $225,000, Kamran Akmal $150,000 and Umar Gul $150,000. These amounts are several times larger than the current compensation they receive from PCB.

According to BBC Sports, IPL's top 10 winning auction bids in February were:

Mahendra Dhoni: $1.5m (Chennai)
Andrew Symonds: $1.35m (Hyderabad)
Sanath Jayasuriya: $975,000 (Mumbai)
Ishant Sharma: $950,000 (Kolkata)
Irfan Pathan: $925,000 (Mohali)
Brett Lee : $900,000 (Mohali)
Jacques Kallis: $900,000 (Bangalore)
RP Singh: $875,000 (Hyderabad)
Harbhajan Singh: $850,000 (Mumbai)
Chris Gayle: $800,000 (Kolkata)

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Wednesday, July 9, 2008

Common Myths About India's Resurgence

Hardly a day goes by without headlines about India's success. The headlines proclaim the newly-minted millionaires and billionaires in India, major international acquisitions by Indian companies, the phenomenal growth of Indian economy, India's entry into satellite launch business, the special invited presence of Prime Minister Manmohan Singh at the G8 summit, etc. etc. Indian democracy also gets an honorable mention, along with its economy, particularly when comparisons are made with the other Asian giant China. However, there are many myths associated with India's recent economic resurgence on the world stage and its democracy. Here are a few that I have looked into:

India's Success in Information Technology:

There is a common misperception in Pakistan and other countries that India’s information technology(IT) success is the result of Indian government’s grand vision and smart policies in recent years. Based on my knowledge of the situation, nothing could be further from the truth. The Indian entrepreneurs in Silicon Valley have succeeded in promoting IT in India, in spite of the Indian government, not because of it. It was their own desire to improve profits by taking advantage of India’s lower costs and availability of skilled engineers and programmers. The essential role the Indian government played started back in the 1950s with the establishment of Indian Institutes of Technology (IITs) which have produced a lot of very good engineers and technologists. In fact, Silicon Valley owes much of its success to the availability of IIT engineers.

Indian Institutes of Technology:

The credit for the IITs goes mainly to Maulana Abulkalam Azad, India's first education minister, who conceived the IIT system and won Prime Minister Jawahar Lal Nehru's backing to implement it. If other governments are inspired to help the IT sector or any other sector, they must focus on improving access to quality education. But the results are not instantaneous. IITs are like a tree that was planted in the 1950s and it had to be nurtured and cared for to begin to bear fruit beginning in 1970s and 1980s. But the real impact of it started to be felt around the world in the 1990s. Economic reform in India also played an important role in 1990s. Successive Indian governments deserve a lot of credit for the dramatic success and international recognition of the IIT system.

For those interested in learning about the role of India’s governments in promoting business and industry, I recommend watching the Bollywood movie “Guru” that shows the travails of Dhirubhai Ambani, the great but illiterate entrepreneur and industrialist who created the Reliance Group behemoth. Two of his billionaire sons, Mukesh and Anil, are now among the top 5 richest people in the world. The movie might not be totally accurate, but it does capture the essence of India’s socialist government’s fundamentally anti-business attitudes in the 1950s, 60s and the 70s.

India's Democracy:

India continues to be the home of the largest number of poor people in the world. It has the highest population of malnourished children. Its farmers are committing suicides at an alarming rate. It has the dubious distinction of being the murder capital of the world, with the largest number of homicides in the world recorded last year. Some Muslim holy places have been destroyed and a large number of Muslims massacred in Gujarat, UP and Maharashtra riots. In short, the Indian democracy has failed to serve the vast majority of its citizens. For those who sing the praises of India’s democracy, I would suggest viewing Bollywood hit “Sarkar Raj” that portrays the Godfather-like corrupt, criminal and murderous behavior of India’s powerful politicians. Again, I am certain India is blessed with many honest leaders and this must be a caricature of the reality of Indian democracy, but it does bring out the fact of criminals' presence in Indian politics. According to political science Professor Pradeep Chibber of UC Berkeley, as many as 30% of India's legislators have criminal records. However, the good professor contends that democracy is a messy process that must be allowed to work its bugs out. It should not be interrupted or abandoned because the alternatives are far worse. India is a functioning democracy with an independent judiciary and other institutions that are respected. I agree with the professor's assessment.

India as a Model:

It is very tempting to try and copy India's success, particularly among other South Asian nations such as Pakistan. I think it is good to be inspired by your neighbor's success but it's also important to do so smartly. Pakistanis need to think about what they need to accept from India's successful experience. For example,the Pakistani diaspora, particularly the entrepreneurs in developed world, must play their role to spur development and economic growth in their country of origin. But they should reject what does not make sense for them. In fact, Pakistanis should choose the best ideas to adopt from the experiences India and China as well as other successful emerging economies. For example, there should be an exploration to see if the Chinese efficiency can be combined with India's democracy. There should be an attempt to learn from the Chinese experience of lifting over 30% of their population from poverty and building world-class infrastructure at the same time. It is not unusual to see the rich-poor disparities grow in periods of rapid economic growth but there must be constant efforts made to minimize such disparities. And an effort to avoid the scourge of very large number of farmers' suicides that afflicts India's rural population. Pakistanis and others should learn how to embrace diversity and pluralism from the Indian experience that encompasses a large number of ethnicities and religions, while shunning the evils of the caste system and discrimination against women and female infanticide that still plague India.

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Monday, July 7, 2008

Karachi's Business and Political Elite Welcome Musharraf

President Musharaf found a friendly crowd in Karachi during the last weekend visit which coincided with the first anniversary of the Red Mosque raid in Islamabad. As the President met with Karachi-ites, a series of bomb blasts in Pakistan's largest city served as a reminder that there is no escaping the worsening security situation that plagues the entire nation.

At a gala reception in President Musharraf's honor by Karachi's business community, business leaders including Khalid Tawab, Mian Zahid Hussain, Abdul Haseeb Khan, Majyd Aziz warmly welcomed the President and reiterated their full confidence and support for him. Governor Sindh Dr. Ishartul Ibad Khan and City Nazim Mustafa Kamal also joined in the welcome, according to Karachi's Business Recorder newspaper.

The President thanked the community and called upon the industrialists to help promote rapid industrialization, investment and jobs creation in the country. He met with a delegation of leading industrialists and chairmen of industrial estates, which called on him at the Governor's House in Karachi on Monday. Sindh Governor Dr Ishratul Ibad Khan was also present on the occasion. The members of the industrialists delegation told the President that the number of factories at Nooriabad Industrial Estate in Dadu has grown from 17 in 1999 to 70 now.

Pakistan's tax base has grown with rapid economic growth over the last 9 years. The President lauded the performance of the Federal Board of Revenue and said that tax collection had crossed Rs 1.02 trillion in 2007 from Rs. 500 billion in 1999. With the revenue growth target for the next five years set at an ambitious 25% per year, the tax base and collection efforts need to continue to expand. Pakistan needs to build confidence to stop flight of capital and grow its exports, he added.

Why is it important to grow Pakistan's tax base and revenue collection, now more than ever? Government spending will jump 30 percent to 2.01 trillion rupees ($29.8 billion) next fiscal year from 1.55 trillion rupees in the previous 12 months, according to acting finance minster Naveed Qamar's budget proposals for 2008-2009. Outlays on subsidies on items including food, power and fertilizer are forecast at 295 billion rupees.

Confusion over who is managing Pakistan's $146 billion economy has deterred much-needed foreign investment, which has already fallen this fiscal year for the first time since at least 2004, according to Standard & Poor's, which reduced its debt rating for Pakistan on May 15, said in mid-June that the government's revenue and expenditure targets faced "significant implementation risks." Pakistan's rating would be lowered if fiscal and current account deficits do not improve, S&P said in a statement.

As part of his tour, the President also visited the State Bank of Pakistan (SBP), along with Governor Ishratul Ibad Khan, where he met with the State Bank Governor Dr Shamshad Akhtar. The State Bank of Pakistan on May 23 unexpectedly raised borrowing costs by 1.5 percentage points to 12 percent, the second increase this year, to curb runaway inflation. "Higher interest rates and a steeper drop in growth still lie ahead," Philip Wyatt, a senior economist at UBS AG in Hong Kong told Bloomberg. "The fiscal funding problem is precarious and unsustainable in current global conditions."

Among the political leaders, the President met with Pakistan Muslim League (Functional) Chief Pir Pagara, who called on him. The details of this meeting were not immediately available.

The President emphasized the need for national consensus in Pakistan to solve the pressing problems of deteriorating economy, political instability, terrorism and growing threat of Talibanization. As the President talked about the need for national consensus, the Sindh information minister appeared before the media and condemned the President and the City Nazim. None of the Sind government's PPP ministers attended any events hosted in Musharraf’s honor either. The Sind Chief Minister Qaim Ali Shah instead chose to host a reception in honor of the Punjab Chief Minister Shahbaz Sharif on Friday in his hometown, as reported in the Pakistani media.

The growing rift between the PPP and MQM does not augur well for the city of Karachi or Sind province. Nor does it give hope for the badly needed economic recovery for the nation. Let's hope that the Sind political leadership reflects on the gravity of the current crises to rise above petty politics. The Sindh government must address the real day-to-day problems faced by all Sindhis, rural and urban.

Here's a brief video clip of the President's address:

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Thursday, July 3, 2008

Assessing Shaukat Aziz's Economic Stewardship

Is Shaukat Aziz to Blame?

Former Prime Minister Shaukat Aziz is frequently blamed in Pakistani media and political and economic circles for the rapid decline of Pakistan's economy during the last six months. The critics say the economic boom under Mr. Aziz was short-lived because it was achieved by easy, plentiful consumer credit, massive borrowing and construction spending in public and private sectors. They further charge that Mr. Aziz promoted the service sector while ignoring large infrastructure projects to enhance Pakistan's agricultural and industrial sectors. They also claim that, if Mr. Aziz had done a good job, the economy would have continued to perform well in spite of all the changes that have transpired since he quit. Some go to the extent of claiming that there was no real economic boom and the whole boom story was a fabrication.

How Do Modern Economies Work?

To examine the validity of the charge sheet against Mr. Aziz, let us try and understand how modern economies work. Modern economies are all consumer driven and cyclical. To manage growth in modern economies, there are a number of tools and policy options deployed by economic leadership consisting of government and central bank officials. Controlling money supply is a key tool. When the economy is slowing, the governments resort to deficit spending, and central banks lower interest rates to encourage consumer borrowing. Government and consumer spending then produce increased demand for goods and services which encourage more investment in plant, equipment and real estate etc. These investments create jobs which further stimulate demand.

Can the Economy run on Autopilot?

There is no such thing as an economy on autopilot that continues to perform well by itself over long periods of time without competent human intervention. As the economy overheats, the inflation starts to become an issue which then requires the central banks to raise interest rates and tighten money supply to cool growth. The governments act in concert with the central banks to reduce spending and limit money supply in the economy. The monetary and fiscal policies must be coordinated. Pakistan's latest 2008-2009 budget should not have massive deficits with 30% increase in spending to cancel the effects of the central bank raising interest rates to tighten money supply.

Wise stewardship by country's economic leadership helps reduce the severity of the economic cycles. But it does require close monitoring and constant tweaking to keep the economy performing well.
The confidence of business and investor community in the economy also plays a significant role. If the businessmen and investors feel the government and central bankers are managing the economy well, they continue to play their role to maintain economic health. On the other hand, if they lose confidence in government's economic team, they begin to slow or even withdraw their investments which hits the economy hard.

How Did Shaukat Aziz Do?

Unlike many of his critics, Shaukat Aziz is a banker by training and extensive experience in New York. He is not an academic. His credentials are similar to those of the successful US treasury secretaries such as Bob Rubin and Nick Brady who did well under Clinton and Reagan administrations. He understands the role of banking, finance, investment and consumer credit in economic growth of a nation. He focused on building strong banking, investment and finance sectors in Pakistan to underpin its economy. He strengthened capital availability, an essential and increasingly important economic input, in addition to labor and land improvements. With higher education budget up 15-fold and overall education spending up 36% in two years, he focused on education to improve the availability of skilled labor to fill new jobs. He pushed land development and public and private construction spending to improve infrastructure and facilities to attract greater business investment. Mr. Aziz was largely successful in his efforts.

Taking a leaf from the US housing policy to stimulate the economy, Mr. Aziz introduced low-rate mortgages in 2003. This initiative led to a construction boom and expanded housing for the growing middle class in Pakistan, contributing significantly to the GDP growth.

Pakistan's tax base grew with rapid economic growth over the last 9 years. The Federal Board of Revenue's tax collection surpassed Rs 1 trillion in 2007 from Rs. 500 billion in 1999. This effort was essential in managing the current account deficit during Shaukat Aziz's term in office.

When Shaukat Aziz took over as finance minister and later as Prime Minister, Pakistani economy was in shambles. In 1999 Pakistan’s total debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8% respectively in 1998) and India (44.0% & 358.4% respectively in 1998). Read more about it here.
Most recent figures in 2007 indicate that Pakistan's total debt stands at 56% of GDP, significantly lower than the 99% of GDP in 1999. It also compares favorably with India's debt-to-GDP ratio of 59% and Sri Lanka's 85% in 2007. From being the highest debtor nation in South Asia, Pakistan has, in fact, become the lowest debtor nation in its region and achieved economic growth rate of about 7% a year during the last 6 years.

The Economist magazine in its June 12 issue comments on Pakistan's current and past Economic Performance as follows:" (The current) macroeconomic disarray will be familiar to the coalition government led by the Pakistan People's Party of Asif Zardari, and to Nawaz Sharif, whose party provides it “outside support”. Before Mr Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. But since then, as the IMF remarked in a report in January, there has been a transformation. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion as recently as in October."

The turn-around engineered by Shaukat Aziz was applauded around the world. A 2005 Bloomberg headline, as reported by China's Peoples Daily, proclaimed as follows: "The world's second-fastest growing economy after China is no longer India. It's Pakistan."

Here's an excerpt from a UN Economic Survey 2008 report: "Pakistan’s economy maintained its momentum in 2007, growing by 7%, slightly more than the 6.6% for 2006. Agricultural sector growth recovered sharply, from 1.6% in 2006 to 5% in 2007, while the manufacturing sector growth continued at 8.4% in 2007, slightly more moderate than the 10% for 2006. Services grew at 8% in 2007, down from 9.6% in 2006. But exports were sluggish in 2007, with economic growth largely driven by strong domestic demand. Investment overtook consumption, helped by a surge in domestic private investment and record foreign direct investment (FDI) flows. In 2007, investment in real terms increased by over 20%."

The strong consumer demand in Pakistan drove large investments in real estate, construction, communications, automobile manufacturing, banking and various consumer goods. Millions of new jobs were created. By all accounts, the ranks of the middle class swelled in Pakistan during Shaukat Aziz's term in office. According to Tara Vishwanath, the World Bank's lead economist for South Asia, about 5% of Pakistanis moved from the poor to the middle class in three years from 2001-2004, the most recent figures available.

The one sore spot that sticks out in Shaukat Aziz's record is his lack of attention to the rising energy needs of the country. Appropriate planning should have comprehended new power plants to support growth forecasts. There were other mistakes as well, such as the decision to export wheat in 2007 that created shortages and price hikes that helped bring down the PML (Q) government.

What Comes Next?

As the PPP and PML leaderships continue their political posturing, the larger story is the massive loss of confidence by business and investment communities in Pakistan. There is no one in charge of the economy at the moment.

It is worrying to see a sudden halt to foreign investments and the flight of capital by Pakistani investors to investments elsewhere in the world. Foreigners bought just $97m-worth of Pakistani stocks in the first ten months of this fiscal year, compared with over $1.5 billion in the same period a year earlier. No amount of blaming and escape-goating of Shaukat Aziz can be a substitute for real action by a competent economic team to stabilize the economy. Instead of shifting blame, Shaukat Aziz's critics should help fix the current mess Pakistan finds itself in. The first step toward fixing the economy is to put an experienced and competent leader in charge with a few smart technocrats on the team.

Here's a video clip of world leaders, including Shaukat Aziz, at the World Economic Forum in Kuala Lumpur talking about Global Food and Energy Crises:

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Tuesday, July 1, 2008

Global Warming Impact in South Asia

At 8 feet below sea level, Pakistan's financial capital Karachi shows up on the list of world's mega-cities threatened by global warming. Other South Asian cities likely to come under rising sea water in the next 100 years include Mumbai, Kolkata and Dhaka.

The South Asian governments are sufficiently concerned about potential effects of global warming to warrant a meeting to hammer out a regional response. South Asian experts on climate change are beginning two days of talks in Dhaka today, ahead of a meeting of environment ministers from countries of the South Asian Association for Regional Cooperation (SAARC). According to Reuters, Bangladesh has proposed the creation of a fund to fight climate change in densely populated South Asia, which experts say is vulnerable to rising seas, melting glaciers and greater extremes of droughts and floods. For the rich South Asians thinking of fleeing to real estate in Dubai, the forecast for the GCC countries is no better. Experts believe the Palm and the World projects in Dubai will disappear underwater in 50 years if the issue of climate change fails to be addressed by governments.

The nonprofit Worldwatch Institute has compiled a list of 21 "mega-cities" of 8 million people or more that are in direct danger as a result of global warming and rising seas: They include Dhaka, Bangladesh; Buenos Aires, Argentina; Rio de Janeiro, Brazil; Shanghai and Tianjin in China; Alexandria and Cairo in Egypt; Mumbai and Kolkata in India; Jakarta, Indonesia; Tokyo and Osaka-Kobe in Japan; Lagos, Nigeria; Karachi, Pakistan; Bangkok, Thailand, and New York and Los Angeles in the United States, according to studies by the United Nations and others.

More than one-tenth of the world's population, or 643 million people, live in low-lying areas at risk from climate change, according to U.S. and European experts. Most at risk, in descending order, are China, India, Bangladesh, Vietnam, Indonesia, Japan, Egypt, the U.S., Thailand and the Philippines.

As a nation, Bangladesh has the most to worry about the effects of climate change in South Asia. A recent story in the Guardian talks about Bangladesh as "flood-prone" because of its geography. Situated across a vast delta where three great rivers join, Bangladesh is known to be flood-prone. Not only does it have monsoon rain to deal with, but the slow warming of the earth's atmosphere is releasing more water from Himalayan glaciers above the flatlands of Bangladesh. Climate change, say scientists, also means higher tides in the Bay of Bengal. The result is trillions more liters of water sloshing over the country, depositing billions of tons of sediment. Experts say a third of Bangladesh's coastline could be flooded if the Bay of Bengal rises three feet in the next 50 years, displacing 20 million Bangladeshis from their homes and farms, according to Reuters. Across the region, warmer weather could cause more intense and more frequent cyclones and storm surges, leading to more salt water fouling waterways and farmlands, the experts said. Corp yields in South Asia could decrease up to 30 percent by the mid-21st century, they added.

Bangladesh has taken the initiative by proposing a SAARC fund for climate change and allocated US$44 million for this purpose in its current fiscal year budget. "We want to find a common stand among the South Asian countries and will raise our voice together against the perils of climate changes," said Raja Devasish Roy, head of the Environment and Forest Ministry of Bangladesh, after opening the experts' meeting in Dhaka today. Devasish said industrialized countries were the most to blame for global warming and should compensate poorer nations by providing them grants -- not loans -- to fight the effects of climate change.

While Bangladesh is admirably leading the charge to address the impact of climate change, it is important that the rest of South Asians, particularly India and Pakistan, join it to protect the planet in this noble effort. As part of this challenge, it is time for SAARC leaders to think of structural changes needed for a world without oil. The SAARC nations owe it to their future generations and the rest of the planet.

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Can South Asia Survive in a World Without Oil?

The world will eventually run out of oil. When it does, will south Asians be able to cope with life as we know it? To answer this question, let us examine where India and Pakistan stand today in terms of oil consumption relative to the rest of the world.

Pakistan consumes about 400,000 barrels per day.
India's consumption is 2.6 million barrels per day.
China's daily consumption is 7 million barrels.
United States uses 22 million barrels a day.
The entire world uses 80 million barrels per day.

While China, India and Pakistan are currently at very low per capita energy consumption, their energy requirements are growing at about 6-8% per year, much faster than the US or Europe. While some nations use energy more efficiently than others, the amount of oil used per capita is a rough measure of the standard of living of a nation. Most of the oil is used as fuel for transportation and electricity but a substantial amount is also used in essential materials such as fiber, fertilizer, plastics, industrial chemicals and asphalt which people rely on for clothing, food, cars, toys, housing and paved streets. When the price of oil goes up, there is a cascading effect on all other prices and causes serious inflationary pressure.

As everyone today feels the effects of high oil prices, it is not hard to imagine what the impact would be if the world were to run out of oil without workable alternatives. In all likelihood, the alternatives would be several different sources of energy and raw materials. For example, water, solar, wind and nuclear may become predominant energy sources and organic biomass and widespread recycling may be the source of materials for other uses. Even with these alternatives, our lifestyles would have to change significantly.

India has just announced its plans to deal with climate change which calls for focus on solar and other renewable energy sources. Prime Minister Manmohan Singh said that over time India must shift from economic activity based on fossil fuels to one based on non-fossil fuels, and from reliance on non-renewable and dwindling sources of energy to renewable ones.

At a scientific conference in Lahore in March last year, President Pervez Musharraf, announced that the government would encourage development of all alternative energy sources — particularly solar and wind energy — to increase electricity generation by 10–12 per cent annually to meet growing energy demands. He also favored the use of nuclear power for producing more electricity to help fill the gap. With the recent change of government, these pronouncements have yet to be followed by a coherent energy policy and plans.

In the absence of oil, there will have to be lifestyle changes in South Asia and elsewhere. The starting point is to think in terms of a smaller radius of activity. Today, our food travels hundreds of miles from the farms to our tables. There will be a need for more local grown foods and greater local production of non-food items to reduce the need for transportation. The globalized economy will have to be replaced by the localized economy. The need for housing, workplaces, local services, production, farming and shopping to be in close proximity would have to guide land-use policies in towns and cities across the world. There will be many more local farmers markets with local, homegrown fruits and vegetables for sale. Telecommuting and shorter work weeks would also become popular.

Recycling will have to become the normal way of doing business as other commodities such as iron and copper also become scarce. Sustainable living will not just be nice but necessary for the human race to survive.

Given the relatively small energy consumption and essentially localized economies in South Asia, both India and Pakistan have the time and the opportunity to develop their energy policies and plans based on the scenario of the world without oil.

For those interested, here is a link to alternate reality games based on world without oil.

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