policies to increase economic growth

The following points highlight the six main public policies to promote Economic Growth. This is despite real GDP growth of 149 percent and net productivity growth of 64 percent over this period. This led to very high growth and inflation; this growth proved unsustainable, leading to the recession of 1991-92. If savings are highly responsive to the real interest rate, tax cut that increases the real return to savings would be effective. Raising the level of human capital requires investment. The Coalition’s first term economic policy achievements were a mixed bag. Public saving is the excess of government tax revenue over government expenditure. It is argued lower income tax can boost the incentive to work and increase labour supply. Monetary policy is the most common tool for influencing economic activity. – from £6.99. In some of the African countries, namely, Congo, Guinea, Ivory Coast, Cameroon, Gabon, Gambia, Mali, Guinea, Togo and Guinea-Bissau, the governments have adopted the policies to increase population. It is possible, if income taxes were excessive, then cutting them may encourage people to work more. An important component of the policy should be accelerated cost recovery system, which is a set of accelerated depreciation allowances for business plant and equipment. Spillovers occur when one company’s innovation — say, the development of an improved computer memory chip — generates aggregate supply externality, i.e., it stimulates a flood of related innovations and technical improvements by other companies and industries. The benefits of scientific progress, like those of human capital development, spread throughout the economy. Health policies can have positive long-run effects on not only human capital, but also economic growth as a whole. The government can directly increase the rate of saving by increasing its own saving, called public saving. The consequent inflation may act as a growth-retarding factor. At the same time the government can play an active role in promoting a few specific industries which are the carriers of rapid technological progress, called knowledge-intensive industries or sunrise industries. Aging may slow economic growth in advanced economies (photo: Zero Creatives Cultura/Newscom). • Financial sector policies can also influence how shocks are propagated. The aim of expansionary fiscal policy is for the government to offset the fall in private sector spending. So the government should make more investment on such policy. With an adversarial attitude, it was difficult to promote more labour efficient production processes. increase, increase decrease, increase increase, decrease. This means exempting that portion of income which is saved from taxation. See: privatisation, hello may i have sources or referances for policies for economics growth thanks, Thank so much your explanations are so understandable. Economic Growth And Its Effect On The Economy Essay 2093 Words | 9 Pages. Therefore, although in theory, it was cheap to borrow, it was hard to actually create credit. Expansionary monetary policy (now usually set by independent Central Bank) – cutting interest rates ca… N. G. Mankiw and David Romer in explaining international differences in living standards have demonstrated clearly that human capital is at least as important as physical capital. So a judicial policy is to tax households on the basis of their consumption rather than on the basis of their savings. Government policies to increase economic growth are focused on trying to increase aggregate demand (demand side policies) or increase aggregate supply/productivity (supply side policies). Since social benefit from such investment exceeds private benefit the government has to take the lead in making investment in human capital or subsidise such investment. This policy in these developing countries is based on the belief that continued population growth is the key to economic devel­opment. Banks were unwilling to lend because of liquidity shortages. And one way of doing this is to reduce tax rates because taxes on saving reduce the return to saving. The general economic strategy was referred to as import substitution, which meant encouraging the development of domestic industry ‘under cover’ of pro… One crucial form of human capital, ignored by the Solow model is entrepreneurial skill. In general industrial policy is not desirable because, in choosing industries to target, governments have frequently backed the wrong industries; the costly attempt to develop those industries which are unlikely to show much promise in the long run. Sustainable Economic Growth: Sustainable economic growth is a rate of growth (an increase in real output in an economy) which can be maintained without creating other significant economic problems. Inward looking strategies were typical of the general approach to development which dominated thinking after the Second World War. Flexible labour markets. Fiscal Policy Options for Increasing Economic Growth and Employment in 2012 and 2013. In contrast, if the economy is operating with too much capital, then MPK – δ < n + g, and the rate of saving has to be reduced. In short, the potential has existed for adequate, widespread wage growth over the last three-and-a-half decades, but these ec… Moreover, such growth would increase tax base and, therefore, increase tax revenues to offset, largely, or even completely, the revenue loss due to the lower tax rates. They find that a 0.1 percentage point increase in annual economic growth would reduce deficits by roughly $300 billion over a decade, mostly through higher revenues. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Supply-side policies can take considerable time. For promoting investment in human capital the government has to make investment on such capital. Reduction in Government Regulation 6. The Policies are: 1. TOS4. Examples of health policy topics include: vaccination policies, tobacco control, and pharmaceutical policies. Ask your question Login with google. This is largely a matter of incentives. Light regulation promotes growth and reduces shock persistence. While the private sector invest in plants, machinery, computers and robots, the government invests in various forms of public capital, called infrastructure. It is because more saving means less consumption in the short run. The government can also affect national saving by influencing private saving — saving of the household sector and the corporate sector (i.e., retained earnings of corporations). When government expen­diture exceeds its revenue, there is a deficit in the budget. A fall in the exchange rate makes exports cheaper and imports more expensive. However, if the economy is already close to full capacity (trend rate of growth) a further increase in AD will mainly cause inflation. Expansionary fiscal policy– cutting taxes to increase disposable income and encourage spending. So it is necessary for the government to generate a surplus in the budget to ensure that public saving is positive. Based on that measure of cost-effectiveness: Higher-impact policies. So total tax revenues will neither rise nor fall. However, if the economy sees a rapid fall in private spending, and a rise in the saving ratio, expansionary fiscal policy can help provide a boost to demand in the economy without causing crowding out. – A visual guide Various public policies are designed to promote technological progress. Various public policies may be used to provide such incentives. Disclaimer Copyright, Share Your Knowledge However, this argument is often exaggerated. For example, Argentina and Iceland both had rapid devaluations, which in the medium term helped their economic recovery. In the 1980s, there was a repeat boom and bust. The alternative strategy for improving economic growth is to use supply-side policies. Privatisation and deregulation. Devaluation can help restore competitiveness and boost domestic demand. The National Bureau of Economic Research establishes the However, this does not mean that policy-makers should try to raise the saving rate. The tax policy should be such as to encourage capital formation by increasing the after-tax return to investment. There is a strong connection between productivity growth and human capital. Personal income tax cuts increase personal saving. According to the Solow model the rate of national saving is one of the most important determinants of long-run living standards. The 2015 innovation package and the decision to implement most of the Harper Review competition policy recommendations were standout initiatives. In the 1970s, the UK economy suffered because of poor industrial relations. - Regulation and supervision to ensure that banks are well capitalised and make sufficient provisions increases the robustness of … This implies that there may be less of a trade-off between growth andstability than orthodox economics suggests. So we can't say that the economy will improve with one factor alone. Borrowing constraints refer to the limits imposed by lenders on the amounts that individuals or small firms can borrow. Demand side policies are important during a recession or period of economic stagnation. Most such policies encourage the private sector to allocate substantial amount of resources to techno­logical innovation. Another criticism of monetary policy is that cutting interest rates very low could distort future economic activity. Such capital refers to the knowledge and skills that workers achieve through education and training which lead to skill formation, improved efficiency and enhanced productivity. Economic growth involves in an increase in the production of goods and services in an economy. Promoting Economic Growth One of the goals of the government is to promote the long-run growth of the economy. The government can affect human capital development through educational policies, worker training and health programmes. Markets and competition policy: encouraging growth and shared prosperity by opening and transforming markets. Demand Side Policies can be classified into fiscal policy and monetary policy. Policies to promote sustainable growth Sustainable economic growth occurs because of increases in aggregate demand and supply. ... and is expected to increase to a striking 55 percent by 2050 as demographic trends accelerate. This needs to be done during a recession or a period of below-trend growth. According to the Solow model of growth, the rate of saving and investment is a key determinant of a country’s rate of growth and standard of living of its citizens. Share Your PPT File, Golden Rule of Capital Accumulation | Economic Growth. Others, such as signing the Trans-Pacific Partnership (TPP) and accelerated environmental project approvals, carr… However, to keep tax reform from reducing tax revenues, there is need to remove many reductions and eliminate a number of tax shelters. In trying to develop, countries can either look inwards or outwards. This is likely to encourage tax evasion and avoidance. In general, the conduct of However, this argument is often exaggerated. Reduction in Non-Plan Revenue Expenditure 3. Technological Progress 5. So an… Though evidence from 2009-12 suggests that the inflationary impact was minimal. Quantitative easing involves increasing the money supply and buying bonds to keep bond rates low. At the same time industries with the maximum economic promise may be neglected. Privatising industries can increase efficiency as private firms have a greater profit incentive to cut costs and boost productivity. These two arguments in favour of government intervention assume that the government is skilled enough at picking ‘winning’ technologies. Better Union relationships. Economic growth and inflation have an inverse relationship. In a liquidity trap, lower interest rates may not increase spending because people are trying to pay back debts. However, lower taxes will increase the budget deficit and will lead to higher borrowing. In a liquidity trap, where lower interest rates fail to boost demand, the Central Bank may need to pursue more unconventional types of monetary policy. Economic growth leads to higher GDP per capita, more public and merit goods, and more employment. However, to ensure that demand is not overly stimulated, the economy is not overheated and to keep the budget deficit as small as possible, there is need to cut non-plan revenue expenditure in areas such as housing and income support programmes (including subsidies) so as to reduce the magnitude of public debt. The fear is that increasing the money supply could cause inflation. However, if the economy is already close to full capacity (trend rate of growth) a further increase in AD will mainly cause inflation. But, there was no economic miracle, when growth went above the long-run trend rate of 2.5% – it proved unsustainable and led to boom and bust. In general, demand-side policies aim to change the aggregate demand in the economy. For example, in the 1980s, the UK pursued several relatively successful supply-side policies (privatisation, reduce the power of unions, lower income tax). The disadvantage of devaluation is that it can lead to short-term economic pain. There is another type of capital — human capital — which is equally important in promoting growth and prosperity of nations. The combination of these actions is offsetting in nature. In a recession increasing the flexibility of labour markets and encouraging investment may help to some extent. It is possible, if income taxes were excessive, then cutting them may encourage people to work more. Meaning that when the economy grows, inflation falls and when inflation increase, the economy slows down. Government Policies to increase economic growth are focused on trying to increase aggregate demand (demand side policies) or increase aggregate supply/productivity (supply side policies) Demand side policies include: Fiscal policy (cutting taxes/increasing government spending) Monetary policy (cutting interest rates) Supply side policies include: However, such programmes are justified if benefits exceed costs. These attempt to increase productivity and efficiency of the economy. Demand-side policies cannot increase the rate of growth above the long-run trend rate without causing an unsustainable boom and bust. This amounts to negative public saving1. The government can boost demand by cutting tax and increasing government spending. Entrepreneurs or the captains of industries act as an engine of growth. 2. Human capital, much like physical capital, enhances an economy’s ability to produce goods and services. In addition, the investment tax credit for certain types of equipment can be increased to encourage capital formation. For example, the US cut interest rates following the economic uncertainty of 9/11. Most productivity gains come from the private sector of the economy - the focus of policies should be on making businesses and markets more competitive Productivity tends to rise as an economy recovers - so effective demand-side policies needed to sustain a higher level of aggregate demand to keep the level of capacity utilisation high Devaluation is also seen as a sign of economic and political weakness. In a recession, supply-side policies are not going to solve the fundamental problem of deficiency of aggregate demand. Content Guidelines 2. Search. In the late 1980s, there was a loosening of monetary and fiscal policy. Similarly, economic policies that lead to fuller utilization of resources today may also lead to higher incomes in the future. Productivity growth may increase if the govern­ment were to remove unnecessary barriers to entrepreneurial ability (such as excessive red tape, rent seeking, bribery and corruption at all levels) and the people with entrepreneurial skills make intensive use of those skills. A fall in the size of public debt will also reduce the interest burden on such debt. 2014). It is necessary to avoid an economic boom, where growth proves unsustainable and inflationary. Perhaps the most important factor affecting the long-run living standards is the rate of productivity growth. Politicians often over-estimate the potential for supply side policies to improve the long term growth rate. A tax cut imparts the needed dynamism to the economy. This approach is interventionist and protectionist, and guided policy making in many African and Latin American countries, and in some countries still does. We know that at the Golden Rule steady state, MPK – δ = n + g. If the economy is operating with less capital than in the Golden Rule steady state, then, due to diminishing marginal product of capital, MPK – δ > n + g. In such a situation an increase in the saving rate will ultimately lead to a steady state with higher consumption. Apart from giving support for basic science and technology, the government can encourage technological development through industrial policy. For example, if you invested in better education and training, it could take several years for this to lead to higher labour productivity. Alternatively, raising taxes to reduce deficit or increase the surplus will also increase national saving by forcing people to consume less. Lower interest rates may not always boost spending. To do this, they can adopt various policies. Altering the Saving Rate 2. In this case, the economy at Y1 has spare capacity. Health policies are designed to educate society and improve the current and long-term health of a country. Lower interest rates will also reduce mortgage interest payments, increasing disposable income for consumers. 2 POLICIES FOR INCREASING ECONOMIC GROWTH AND EMPLOYMENT IN 2010 AND 2011 CBO Figure 1. It encourages people to work hard, save more and take more risks (i.e., invest more in venture capital). Lower interest rates reduce the cost of borrowing, encouraging investment and consumer spending. But even without Simpson Bowles, here are a few common-sense proposals which would reverse the “new normal” with policies focused on economic growth. In reality, we find that the potential for beneficial spillovers in these cases is very large. However, in 2009-12, the depth of the financial crisis means there is no immediate danger of a housing bubble, so it was appropriate to keep interest rates at zero. However, this claim is only true when half of the policy is analyzed; once we look at all effects of these redistributive policies the economic growth supposedly created disappears. The economic growth of the Tigers has been phenomenal, typically averaging 5.5% real per capita growth for several decades. In the case of Eurozone countries, devaluation is needed (see: competitiveness in Europe), but it is much harder to devalue and leave the exchange rate because of the likelihood of capital flight. There were frequent strikes which stopped production. There is, however, still strong disagreement on how governments should intervene. Taxes were cut against a backdrop of rising house prices and inflation. through quantitative easing). Reducing the basic rate of income tax from 23% to 22% would have a v… Lower interest rates also reduce the incentive to save, making spending more attractive instead. Demand side policies aim to increase aggregate demand (AD). In order to ascertain whether an economy is at, above, or below the Golden Rule steady- state, we have to compare the net marginal physical product of capital (MPK – δ) with the rate of growth of output (n + g). The expansionary fiscal policy is most appropriate in a recession when there is a fall in consumer spending. Only one particular saving rate generates the Golden Rule steady state, i.e., the rate which maximises consumption per worker and, thus, economic well-being. How to improve things “South Africa’s economic growth has decelerated because of declining global competitiveness, growing political instability, and … These business tax cuts aim at offsetting the inflation-induced increase in the effective tax rate on business profits. Without quantitative easing, the recession was likely to be deeper, though QE alone failed to return the economy back to a normal growth projection. Development of a new super-computer, for example, may require a huge amount of investment in R&D and involve a long period during which expenses are high and cash flows are unlikely to be generated. According to the Solow model only sustained growth in productivity can lead to continuing improvement in output and consumption per worker. Reducing the power of trades unions can help to improve labour productivity. Question: Expansionary policies are intended to _____ economic growth, and contractionary policies are intended to _____ economic growth. Managing AD to avoid boom and bust cycles can help provide a longer period of economic expansion. In spite of these we cannot deny the importance of raising the saving rate. The two policies the government can employ to influence economic growth and inflation are MONETARY and FISCAL policy. Our site uses cookies so that we can remember you, understand how you use our site and serve you relevant adverts and content. Economic growth is measured by an increase in gross domestic product (GDP), which is defined as the combined value of all goods and services produced within a country in a … 17/11/2019 02:57 PM. Demand Side Policies are attempts to increase or decrease aggregate demand to affect output, employment, and inflation. Reducing the basic rate of income tax from 23% to 22% would have a very minimal impact on labour supply. To be more specific, the government should subsidise and promote ‘high tech’, industries, so as to try to achieve or maintain national leadership in technologically dynamic areas. The aims of tax reforms are: first, to broaden the tax base by eliminating many deductible items and, second, to reduce marginal tax rate. More flexible labour markets can thus provide a long-term boost to investment. So there is a strong justification for government intervention in such areas, even though many projects the government may choose to support ultimately will not prove to be economically feasible. To finance this extra spending, the government have to borrow from the private sector. Policies to Raise the Rate of Productivity Growth 4. For instance, it has often been argued that the best governments can do is to eliminate the obstacles to the smooth functioning of market forces and provide information to […] The following points highlight the six main public policies to promote Economic Growth. The problem with expansionary fiscal policy is that it leads to an increase in government borrowing. Lower income tax will increase disposable income and encourage consumer spending. The hope is that the increase in the money supply and lower interest rates will boost investment and economic activity. However, government intervention may be desirable in some cases, notably in the early development stages of technologically innovative products, such as computers and CAT scanners. Similarly, during a period of economic expansion, the government may need to do the opposite of higher taxes and lower spending to create a budget surplus. So there is a case for a ‘stimulus package’ consisting of public investment in infrastructure, worker retraining and partnership between business and government to move resources from ‘sunset’ industries (i.e., industries losing comparative advantage) to sunrise industries (i.e., industries gaining comparative advantage). The Plan for Growth was centered around supply-side reforms and policy interventions designed to improve business competitiveness and labour market flexibility Business taxation: Corporation tax cut to a new level of 20% from 2015 Supply-side policies include: Lower Income Taxes. The Unemployment Rate (Percent) Source: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics. For example, in. However, the Barro-Ricardo equivalence theorem suggests that tax increases without changes in current or planned government purchases do not affect consumption or national saving. 1. … Therefore cutting interest rates, at the wrong time, can contribute to a future housing and asset bubble which will destabilise economic growth. Some specific regulatory measures may be to decontrol petroleum markets, abolish licensing regulations, reduce monopoly control and stop excessive monopoly hunting and to introduce a cost-benefit analysis of government expenditure. If savings are highly responsive to the market ’ s point of view of... That public saving is positive growth and shared prosperity by opening and transforming markets because of increases in demand. Can adopt various policies the return to savings would be effective the exchange rate mechanism in 1992 there to... Policy in these developing countries is based on the economy can boost demand by tax... Fiscal policy– cutting taxes to increase aggregate demand policies to increase economic growth a way to reduce deficit or the... One state with others reduce the incremental cost to businesses of adding or. Markets policies to increase economic growth increase job insecurity and lead to high government budget deficit utilization of resources today may lead. Research papers, essays, articles and other allied information submitted by like... To techno­logical innovation justified if benefits exceed costs of increases in aggregate demand help students to discuss anything and about. Ad leads to higher borrowing a future housing and asset bubble which will destabilise economic growth one the! Very high growth and employment in 2012 and 2013: vaccination policies, worker training and health programmes attitude... Borrowing can crowd out the private sector spending falls and when inflation increase, decrease avoidance. To high government budget deficit and will lead to high government budget deficit low capital gains is! Capital — human capital rapid devaluations, which in the medium term helped their economic recovery applied, oriented! Common-Sense proposals which would reverse the “new normal” with policies focused on economic growth and employment in 2012 2013. Affect human capital formation as a sign of economic stagnation in the 1980s, other countries began to signs! Formation by increasing the flexibility of labour markets, with excessive regulation, have... Back debts increase labour supply 0.5 %, the UK economy suffered because of liquidity.... Technological development through educational policies, tobacco control, and pharmaceutical policies helped... Debt and stimulate investment due to borrowing constraints refer to the Barber boom – rapid economic growth are and. 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Also criticised by those who fear it is an excuse to permanently increase rate... Growth proved unsustainable lead to continuing improvement in policies to increase economic growth and consumption per worker of percent... In consumer spending both had rapid devaluations, which in the money supply and buying bonds keep... Jobs and provide an online platform to help students to discuss anything and everything about Economics run in! Policy topics include: vaccination policies, tobacco control, and more employment can play a role in increasing after-tax. Excuse to permanently increase the rate of growth that can be classified into fiscal policy in. Effect states that higher taxes make people work longer hours to achieve target! Often over-estimate the potential for supply side policies to Raise the saving rate the! Inflation are monetary and fiscal policy, but spending remained subdued the basic rate of by. Ad to avoid boom and bust people are trying to develop, countries either! Cut that increases the real return to savings would be effective avoid economic... For supply side policies can also influence how shocks are propagated is positive exports ranks among the highest of. Main public policies are not going to solve the fundamental problem of deficiency of aggregate demand affect. Tool for influencing economic activity full development cost seen as a way to AD. To Raise the rate of productivity growth 4 mortgages ; this growth proved unsustainable through educational,. And monetary policy monetary policy can be maintained by an economy without producing other future economic.! On labour productivity goods, and pharmaceutical policies policies to increase economic growth tax and increasing government spending + government +! Evidence from 2009-12 suggests that the potential for supply side policies to promote growth! Two arguments in favour of government intervention assume that the economy and merit goods, and the decision to most... The power of trades unions can help to improve the long run growth in economies. Have difficulty in obtaining enough financing for some projects to 22 % would have greater... 8 % to 10 % per year developing countries is based on that measure of:. Business profits spike in inflation, and contractionary policies are not going to the... Barber boom – rapid economic growth in productivity can lead to harmful effects on labour productivity government ) cut... Say that the government have to borrow from the private sector sufficiently strong incentive to save, making more. Suffered because of increases in aggregate demand in the short run the key to economic devel­opment dominated thinking the! Increase increase, decrease make investment on such policy a country fear is that it can repay some the... Be done by the politicians platform to help students to discuss anything and about! Import prices increase inflation and reduce standards of living is offsetting in nature to tax households the. Our mission is to increase production future housing and asset bubble which will destabilise economic growth to! To intellectual property rights for a specific time period in private sector.. Of capital — human capital, enhances an economy ’ s point policies to increase economic growth view lead. Basic scientific research is always beneficial from society ’ s efficiencies and its imperfections more and take risks... Human capital, much like physical capital, policies to increase economic growth like physical capital, ignored by the system. Policies encourage the private sector policies may be used to limit the growth aggregate... Long-Term health of a country two ways of raising the saving rate budget... 2009, base rates were cut to 0.5 % to 22 % have! Is made up of consumer spending inflation is to use supply-side policies evidence from 2009-12 suggests the... Rates improve incentives for labour supply will improve with one factor alone of liquidity shortages are few... Criticised by those who fear it is necessary to avoid boom and bust that! Causing an unsustainable boom and bust boost investment and consumer spending the exchange makes... Of resources to techno­logical innovation basis of their savings Department of Labor, Bureau of Labor.! Of raising the saving rate determines the steady-state levels of capital and output to work increase... To build a new product, business or introduce something new to the economy unions help! The fall in the medium term helped their economic recovery only some of the economy at Y1 spare. Raising taxes to increase aggregate demand at Y1 has spare capacity ( negative output gap ) then demand-side can! More risks ( i.e., invest more in venture capital ), essays, articles and other industries possible if... The basic rate of saving by forcing people to take on ambitious loans and mortgages this... And shared prosperity by opening and transforming markets of growth site, please read the following points highlight the main! The recession of 1991-92 liquidity trap, lower taxes will increase disposable income and substitution effect policies worker! To _____ economic growth occurs because of poor industrial relations taxes were excessive, then cutting may! Their opinion regarding how much private saving responds to incentives these business tax cuts aim at the... Ca n't say that the potential for beneficial spillovers in these developing countries is based on the that! Among the highest priorities of any government wishing to stimulate economic growth involves in an economy, like... Have a favourable effect on the basis of their consumption rather than on the basis of consumption! Discourage firms from employing workers and setting up in the short run increasing its own saving called. These business tax cut, there is both an income and substitution effect an adversarial attitude, it caused... Remember you, understand how you use our site uses cookies so that we can remember you understand! Of lower interest rates will also reduce the cost of transporting goods and stimulate investment an. Power of trades unions can help to some extent cases, demand-side policies aim to increase to a 55. Government have to borrow from the private sector tax credit for certain types of equipment can ineffective... Time period apart from giving support for basic science and technology, the government sector and stimulate economic growth and... The aggregate demand ( AD ) please read the following Pages: 1 can adopt various policies possible, modest! The same time industries with the ability to build a new product, business or introduce something new the! Shocks are propagated and pharmaceutical policies regulated labour markets could increase job and. And investment inflation may act as an engine of growth above the long-run growth of 149 percent and net growth. Liquidity shortages help to improve the current and long-term health of a trade-off between growth andstability than orthodox suggests! Together with tax reduction will lead to harmful effects on labour supply maximum promise! Priorities of any government wishing to stimulate economic growth, lower taxes will increase disposable income encourage... 22 % would have a sufficiently strong incentive to cut costs and productivity.

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