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HENRY JL BADENHORST

CHINA: Current
Development and
prospects for future
growth and addressing
human welfare
Henry JL Badenhorst
Email: henry_badenhorst@yahoo.com
4/20/2010

Soli Deo Gloria

Abstract

Many years ago, Napoleon warned that when China awakens, the world will shudder. His prediction
has been fulfilled over the last two decades. Thirty years ago, China had minimal contact with the
international capitalist market and most of its people were based in agriculture, but since the late
1970s, when the Chinese leadership made a strategic choice to reform its economic system and to
open up to the world economy, it has sustained an average annual economic growth of 10 percent, the
fastest and most unprecedented in world history of economic development.

(i)

Title:

Development in China with respect to:


(a) The gains and the losses for Chinas poorer classes in current
Chinese development.
(b) Prospects for future Economic growth and Human Welfare.

TABLE OF CONTENTS
PAGE
1. Introduction

2. Chinas current success.

3. The Third Way: Resisting Maoism and free market democracy.

4. Issues that confront Chinese development:

a. Political and Social

6-7

b. Financial and Economic issues

7-8

c. Environmental issues

8-9

5. Prospects for future Economic Growth and Human Welfare

9-11

6. Conclusion

11

7. Bibliography

12

Introduction
Many years ago, Napoleon warned that when China awakens, the world will shudder (in
Ho & Vermeer.2006:155). His prediction has been fulfilled over the last two decades.
Thirty years ago, China had minimal contact with the international capitalist market and
most of its people were based in agriculture, but since the late 1970s, when the Chinese
leadership made a strategic choice to reform its economic system and to open up to the
world economy, it has sustained an average annual economic growth of 10 percent, the
fastest and most unprecedented in world history of economic development
(Wang.2009:1). Chinas rapid rise has given concern to many, especially the three
musketeers of world economy, the U.S.A., Japan and South-Korea, so much so that in the
1990s the perception of China threat arose (Wang.2009:1). In order to still suspicions
and concerns, China coined the term theory of peaceful rise, which argues that China
could take a very different route than other major powers in world history, posing an
opportunity to the world, instead of a threat (Wang.2009:2). Whether its peaceful or not
the fact remains that China is here to stay and that it will replace the U.S. according to
many projections, as the largest economy by 2025-2040 (Wang.2009:1).
This essay will explore Chinas development since economic reforms with regards to
Chinas current success as the newest economic super power on the block, but also the
political, financial, economic, social and environmental issues that confront Chinas
development. In other words, what the gains and losses for the poorer classes in current
Chinese development are. The argument that China should resist both a return to Maoism
and a complete move to the model of a free market democracy is also discussed. Lastly,
the prospects for future economic growth and human welfare in China are discussed.
Chinas current success
China has had successes over the past two decades with regards to their economic
explosion, due to economic liberalisation; allowing Foreign Direct Investment into the
country, where other countries have exercised protectionist policies; for improving the
per capita GDP, improving income and purchase power of consumer goods by its
citizens; and for its commitment towards developing high technology industries, such as
electronics, specifically computers.
Since economic reforms in the late 1970s, China has enjoyed one of the most
remarkable periods of economic growth (Nolan.2005:241). The world has over the past
two decades, witnessed the fastest change ever and anywhere of a rural economy and
society where over 200 million rural inhabitants were lifted out from absolute poverty
and tens of millions became wealthier than the average urban resident (Eyferth, Ho &
Vermeer. 2003:97) China has radically liberalised its economy to the effect that it now
produces high technology goods, is nurturing a vibrant private sector, and has attracted

nearly US$ 500 billion in FDI, causing an economic explosion (Foreign Direct
Investment) (Hale & Hughes Hale. 2003:135).
Chinas decision to open its economy by promoting trade and FDI, ensured their smooth
integration into the world economy, ensuring their success, where others like Japan and
Korea with strict protectionist policies have failed (Hale & Hughes Hale. 2003:136). In
2003, China was the fifth largest recipient of FDI in the world, but was expected to
leapfrog into second place in 2004 (Hale & Hughes Hale. 2003:136). Foreign companies
now hold large shares in many sectors of the Chinese economy. The foreign invested
sector, whose share of the business sector output is 15-20 percent, dominates the export
sector, accounting for nearly 60 percent of all exports and 90 percent of exports
designated high-tech by the Chinese government (Kroeber.2008:32-33).

American

companies investment alone is worth more than US$ 70 billion in contracts and they
generate more revenue from China than any other developing country they have invested
in (Hale & Hughes Hale. 2003:136).
Deng Xiaoping has popularised the term xiaokang, which represents an ideal society
that provides well for all its citizens, by translating it into a goal of US$ 800 GDP per
capita before the end of the 20th century, a goal that was achieved, and which hugely
improved Chinas real income and living standards (Hale & Hughes Hale. 2003:138).
Chinas economic liberalisation has led to a GDP of US$ 1.3 trillion in 2003 and seen
together with the fact that China has stemmed population growth to 1 percent per year, its
growth of output has translated into large gains in income per capita, leading to high
penetration rates for many consumer goods, enabling many more Chinese consumers to
afford technological luxuries such as TVs, computers, refrigerators, etc (Hale & Hughes
Hale. 2003:138). Residential real estate sales in big urban centres such as Shanghai and
Beijing has skyrocketed and its estimated that 90 percent of urban Chinese now in fact
owns a home, with only Singapore at 92 percent in a higher position in Asia (Hale &
Hughes Hale. 2003:138).
Chinas quick embrace of the information economy as part of its commitment towards
the development of high technology industries, even to the detriment of the governments
control over communication networks and its distribution of information throughout
China, has led to the fact that more Chinese have access to the outside world through
fixed phone lines, internet access, cable television and cell phones (Hale & Hughes Hale.
2003:140). China has become a serious player in the computer hardware and software
industries with considerable growth in domestic consumption within both sectors (Hale
& Hughes Hale. 2003:140). China has also become the leading producer of certain types
of electronics, such as DVD players and digital cameras due to the influx of foreign
investment. The electronic industry has been boosted further by world leading Taiwanese

electronics firms, who have moved their base of operations to mainland China (Hale &
Hughes Hale. 2003:140-141).
The Third Way: Resisting Maoism and free market democracy
China is at a crossroads with regards to is political economy and its unsure which
direction it will take. China has four choices. It can adopt primitive capitalist
accumulation or Democracy and the free market or it can go backwards to Maoism or it
can learn from its past. Nolan is of the view that China should neither revert back to
Maoism, nor move towards a model of a free market democracy, but should in fact
reform its system and improve the state, its level of effectiveness and eliminate
corruption, the road which he refers to as the choice of no choice (Nolan.2005:254).
Many believe that the overthrow of the CCP (Chinese Communist Party) is necessary to
improve the welfare of Chinese people, an idea supported by the U.S. (Nolan.2005:247).
According to Nolan (2005:247) however this would plunge the country into social and
political chaos. Avoidance of great turmoil has been the focus of political thought from
earliest times, and the core of the Chinese reform programme after the death of Mao
followed suit, by trying to prevent Chinas political economy from disintegrating and
descending into big turbulence, which would deprive the Chinese people of all hope
and leading to a system meltdown as was the case in Russia, Yugoslavia, Argentina and
Indonesia (Nolan.2005:247). The penetration of the US dominated mass media, in
accordance with WTO agreement ensures that external pressure is applied upon Chinese
internal ideology to convert to a American or natural path of development instead and
which equals in American eyes, a regime change (Nolan.2005:247).
Should China revert back to Maoism? Mao Te Dong led the CCP on an attack on social
inequality in attempt to transform the people work motivation, to overcome the classical
principal-agent problem, by liberating the peoples productive energies from the link
with material reward (Nolan.2005:248). Mao hoped to create a non-capitalist, humane
society, which provided the opportunity for the whole population to fulfil their potential
and indeed from the mid 1950s to mid 1970s, Chinas GNP growth rate was faster than
most developing countries and most people enjoyed a high degree of livelihood security
(Nolan.2005:248-249). However, China paid a high price to suppress market forces
completely, to cut China off from the global economy and society, to drastically
constrain the dimensions of inequality, to eliminate material incentives and to radically
limit cultural freedom (Nolan.2005:249). Maoist ideologies, the cultural revolution and
Maos Great Leap Forward, brought suffering to many, crushed the diversity of
thought, destroyed cultural expression, slowed technical progress, led to a fall in capital
productivity and average per capita incomes, led to a decline or stagnation in per capita
consumption, caused a dramatic rise in absolute poverty and with the Great Leap

Forward, the biggest famine of the 20th century with as many as 30 million excess deaths
(Nolan.2005:249). The Maoist development path left a trail of suffering and death and
not many would like to return (Nolan.2005:249).
Even though China has made great technical advances, even before the West, it has failed
to experience an industrial revolution and many believe that its history of traditional
totalitarian state has crushed the development of the market over its history and that it
should learn from the past by reducing the economic role of the state even more
(Nolan.2005:249). China has been groping for its own third way for 2000 years whereby
they both stimulated and controlled the market at the same time according to a deeply
thought-out system for rulers, bureaucrats and ordinary people (Nolan.2005:253).
According to Nolan the Third way is the choice of no choice. China cannot go back to
the Maoist period, nor can it choose the path of state desertion and free market
fundamentalism, since it will lead to uncontrollable tensions and social disintegration
(Nolan.2005:253). Chinas choice of no choice must be to make more effective the role
of the state to solve the intensifying socio-economic challenges to ensure Chinas system
survival, which in turn can contribute towards global survival and sustainable
development (Nolan.2005:254).
China is however embracing capitalism, because its demographics are becoming like
that of the West (Hale & Hughes Hale. 2003:139) According to Kroeber (2008:30),
China must be understood in terms of its long history as a bureaucratically administered
state, which both enables and legitimises the increasingly effective modern bureaucratic
state that has emerged in the last few decades China is in economic terms, neither on a
pre-ordained path to full market capitalism, nor the unitary statist China Inc., but rather
a mixed economy with a large state role and an equally heavy reliance on continued
access to the liberal capitalist international order (Kroeber 2008:30). Bureaucratic
authoritarianism, however repellent to the West, is a system with considerable purchase
in China, which

isnt founded on discredited Communist ideology, but on well

established traditions and lastly has proved increasingly successful over an increasing
range of functions (Kroeber 2008:32). For the next decade, Chinas people and the rest
of the world will have to deal with the reality of a successful, effective bureaucratic
state (Kroeber 2008:32).
Issues that confront Chinese development
China is confronted by a myriad of developmental problems and challenges. As Nolan
notes (2005:241-246) China faces deep economic, political, and social challenges,
which include; the vast extent of poverty and rapidly growing inequality; the challenge
for Chinese businesses from the global business revolution; a deeply degraded natural
environment; declining capabilities of the state; a comprehensive challenge in

international relations; widespread corruption; and extreme dangers in engaging closely


with the global financial system The mere size of China (9.6 million km), and its
population (1.3 billion people) imply a wide regional diversity in economic, political,
ecological, sociological and ethnic terms (Eyferth, Ho & Vermeer. 2003:96).
Issues that confront Chinese development: Political and Social
The totalitarian tradition of state control over peoples lives as well as the economy, even
though it has largely diminished since the 1980s, still remains in the form of state
imposed institutions and constraints on human action. Public debate and participation in
any decision making processes are excluded due to the CCPs monopoly of political
power, its ban of free speech and free association, as well as the lack of an independent
judiciary (Ho & Vermeer. 2006:150) Even though China is a bureaucratic authoritarian
state that is repressive, its also dynamic in its ability to identify and respond to societal
problems, which lends to it an important measure of legitimacy, despite the lack of civil
liberties and the high degree of corruption within (Kroeber.2008:34).
The CCPs secret to success and longevity seems to be Chinas size (Kroeber. 2008:35).
History has shown that as traditional agrarian societies industrialize, they exchange their
despotic governments for representative governments. Early stage industrializing
countries following the Bismarckian model of state led development, tend to have
bureaucratic authoritarian governments in which a technocratic elite organises the
commandeering of agricultural surplus for the purpose of high speed industrialisation,
which then lasts until the country is industrialised and urbanised. In Taiwan and Korea
this process lasted only a generation, since they have smaller populations of 23 and 49
million people respectively, but China with 1.3 billion plus people will have to face a
longer term (Kroeber.2008:36).
Behind almost every aspect of Chinas development process in the early 21 st century,
lies the harsh reality of the Lewis model of economic development, with unlimited
supplies of labour (Nolan.2005:241). Almost 70 percent of the 1.3 billion Chinese
population still lives in the countryside, with as many as 150 million surplus farm
workers (Nolan.2005:241). According to official Chinese data, there are approximately
580 million rural dwellers who has to survive on less than US $ 360 per year, calculating
to less than one US dollar per day, signalling absolute poverty (Nolan.2005:241). Chinas
WTO membership forcing China to open the country to greater food imports, which will
be competing against local food production, may further depress rural income, leading to
rural-urban migration and consequent social instability of urban centres (Hale & Hughes
Hale.2003:139)
Rural-urban migration was prior to political reforms, detained by household registration
requirements (hukou), rural commune contracts and food rationing, but since 1990, due

to the elimination of communes and the emergence of a free market for grain and other
food items in the late 1980s, rural to urban migration has picked up, first to Township
and Village Enterprises (TVEs) in rural areas, and then to the urban coastal regions
(Brooks in Prasad. 2004:54-55). There are 150 million rural workers who have migrated
to Coastal urban regions to find employment (Nolan.2005:241). Despite considerable
progress made on reforms over the past two decades, surplus labour remains on State
Owned Enterprises (SOEs) and farms (Brooks in Prasad. 2004:56-57).
Unemployment and underemployment of a significant portion of the rural population
remain pressing concerns as the Chinese economy adjusts to the effects of SOE reforms
and WTO accession (Prasad & Rumbaugh.2004:4). SOE reforms in the late 1990s saw
about 24 million SOE and other collective employees laid off from 1998 to 2002 as part
of a xiagang program (re-employment program, which provided these workers with a
three year safety-net) (Brooks in Prasad. 2004:56). In 2005 there were 40-50 million
workers who lost their jobs due to reforms in SOEs (Nolan.2005:242). According to
Eyferth, Ho and Vermeer (2003:101), is the rapid rise in urban unemployment, caused by
the state owned sector restructuring, pressurising urban governments to reserve
remaining jobs for the underemployed, limiting rural migrants chances on finding urban
employment. Alongside the unemployed and rural migrants, a new urban middle class
is fast emerging, due to FDI by multi-national firms giving rise to clusters of modern
businesses and residential areas (Nolan.2005:242).
Issues that confront Chinese development: Financial and Economic
In 1992, the CCP formally embraces Deng Xiaopings view that the market system was
not incompatible with the ideals of socialism and called for the establishment of a
socialist market economy (Prasad & Rumbaugh.2004:2). Chinas economy, according to
Kroeber (2008:32), is mixed and has three major elements, namely the state sector, the
domestic private sector and the foreign invested sector. The state sector, whose share of
business sector output is approximately one third and falling, completely dominates the
upstream and network sectors of the economy, such as resource extraction, transportation
and communication networks, electric power generation and distribution, finance and
basic material industries, such as steel and petro-chemicals. The domestic private sector,
whose share of output is 50 percent and rising, dominates consumer goods manufacturing
and retail. This sector virtually generates all employment growth. The last sector is the
foreign invested sector, whose share is only about 15-20 percent, but dominates the
export sector, accounting for nearly 60 percent of all exports (Kroeber.2008:32).
Since the 1980s, China has implemented industrial policies aimed at nurturing a group
of globally competitive large firms, but has failed fundamentally and instead of
becoming the workshop of the world, it has become the workshop for the world, with

over 60 percent of its industrial exports coming from foreign invested companies (Nolan.
2005:242). As Wen (2009:5) states; China is the kitchen and the West the dining room.
China is churning out more and more consumer goods for Western consumers, while
most of the profits are amassed by multi-national corporations that control the brands and
distribution channels (Wen. 2009:5). China has lacked to produce a group of
internationally competitive large firms, like all successful industrialising countries, such
as Korea and the U.S. before them. China does not have a single of the top 100 brands,
nor has any of the 14 Chinese companies in the Fortune 500, become a truly globally
competitive

company

that

could

compete

without

government

protection

(Nolan.2005:242). The likely cause seems to be that firms are state owned and therefore
subject to state interference in their operations (Nolan.2005:242).
China is facing important fiscal challenges in the course of its transition to a market
economy. The government are shouldering various costs with relation to;

the

restructuring of a still largely state owned economy; the costs of recapitalising state
owned banks; the funding of social security for a rapidly aging population; possible
liabilities that sub-national governments are contracting, especially large scale
infrastructure projects; and significant government programs to alleviate regional
disparities, including the increasing spending on health care and education (Fedeline &
Singh in Prasad.2004:29) The government has to shoulder all these costs, but according
to the World Bank, the central government revenue accounted for only 7 percent of the
GDP, which has forced the state to look for drastically increased contributions from fees
paid by people when they use health and education services (Nolan.2005:243).
Issues that confront Chinese development: Environmental
Due to Chinas rapid rise economically and industrially and its huge population, which
has left serious damage to the environment, China is now facing an environmental crisis,
like no country before. Chinas economic reform has increased the pressure on the
environment, from air and water pollution to soil erosion and desertification (Eyferth, Ho
& Vermeer. 2003: 107). According to the UNDP, is around 38 percent of China been
effected by soil erosion and is the area of desert increasing at an annual rate of 2 500 km
(Nolan.2005:243). Over the past 4 decades nearly half of Chinas forests have been
destroyed, leaving China with one of the most sparse forest covers in the world
(Nolan.2005:243). The majority of Chinese lakes are seriously eutrophied, yet chemical
fertilizer usage is on the rise (Ho & Vermeer. 2006:147). Chinas emission of organic
water pollutants is as large as that of the U.S., Russia, India and Japan combined
(Nolan.2005:243). The massive overuse of fertilizer and pesticides has caused serious
soil degradation and has undermined food safety (Wen.2009:40). According to Wen
(2009:24), has China already overtaken the U.S. as the worlds largest CO emitter in

2007, and the worlds biggest coal producer, accounting for almost 30 percent of global
output (Wen.2009:24).
China is severely over populated, which leads to land scarcity for food production. The
area of farm land per capita is low according to the world average and is aggravated by
substantial losses in arable land due to rapid urbanisation, industrialisation and
environmental problems , endangering food security (Eyferth, Ho & Vermeer. 2003:
107). China is also facing one of the worlds worst water shortages, since per capita it
only has 35 percent of the worlds fresh water resources. Distribution is furthermore
highly uneven, since the Dry North has one third of the cropland, but only one fifth of
the water, while the Humid South with the same amount of cropland has four fifths of
the water, an imbalance which may be furthered by climate change (Wen.2009:5)
Climate change, due to greenhouse gasses and global warming are also threatening
Chinas food security and according to calculations could lead to a 20-37 percent drop in
the rice yield (Wen.2009:11; Nolan.2005:243)
Chinas five year plan for environmental protection admits that ecological deterioration
is not under effective control and emphasises the linkages between economic growth,
prevention of pollution and ecological conservation as parts of a needed economic
restructuring, but its command and control type policies and legislation makes the
reconciliation between environmental reform and economic growth, extremely difficult
(Ho & Vermeer.2006:149) The absence of well protected private land property and
persistent state ownership in major industries, services and resource exploitation, have
enhanced a top-down, bureaucratic character of decisions over resource allocation and
environmental control (Ho & Vermeer.2006:151). Factors that have limited the
effectiveness of environmental policies are; the uneven commitment to environmental
goals, the lack of effective public pressure on government and polluting enterprises,
limited awareness and the states inadequate capacity to monitor and control (Ho &
Vermeer.2006:151) While China has faced severe environmental problems, it has made
considerable efforts in the direction of green government policy, but even though these
efforts

are

applauded,

business

and

government

accountability

still

lacks

(Stewart.2007:14)
Prospects for future Economic Growth and Human Welfare
An issue today in China is whether rapid growth is sustainable or whether the problems
produced by growth will force China to pursue a more regulated and conservative course
or whether it will lead to political and economic crisis (Stewart.2007:12). There are
strong prospects that Chinas rapid economic growth and trade expansion could be
sustained well into the future (Prasad &Rumbaugh.2004:1). However, a number of
macroeconomic and structural vulnerabilities need to be addressed for this potential to be

10

fully realized. Given the size and complexity of the Chinese economy, many of these
reform challenges are interrelated (Prasad &Rumbaugh.2004:1). Chinas traditional
approach to reform has been incremental but, in view of its rapid opening up to the world
economy, a more concerted and multifaceted approach to the reform process will be
crucial to maintain rapid growth and manage the challenges associated with the process
of global integration (Prasad &Rumbaugh.2004:1). Chinas economy has good potential
for sustained robust growth over the medium term, based on its attractiveness as a
destination for FDI, a high domestic saving rate, underlying improvements in
productivity stemming from reduced barriers to both internal and external trade, and
significant surplus labour (Prasad &Rumbaugh.2004:4).
Chinas rapid economic growth and the rise in the nations overall wealth have been
accompanied by widening income inequality both among and within regions. In addition,
while successful technology innovation will help China continue to increase its
agricultural productivity, China faces the great challenge of water scarcity. Water
shortages, particularly in northern China, and increasing competition from industry and
domestic use; do not provide much hope for large gains in irrigation expansion or in
areas already under irrigation. In addition to water scarcity, there is considerable stress
being put on the agricultural land base. While the use of modern technologies is essential
to achieve efficient food production, inappropriate uses, such as the excessive application
of fertilizers and pesticides, could result in serious environmental problems and food
safety concerns. The decline in cultivated land and rising water scarcity are thus among
the greatest concerns regarding national food (grain) security. (Huang &Rozelle:3)
The overall prospects for Chinas continued growth and development over the medium
term are positive, although there are several reasons for concern, both in the international
and national contexts. At the international level, there are serious imbalances in some
countries trade, most notably current account deficits in the United States and surpluses
in China and oil-producing countries (He, Li & Polaski. 2007:26). If the imbalances
were to be corrected rapidlyfor example, by a sharp shift in exchange rates or a rise in
protectionismthere could be strong negative effects on Chinas export sector (He, Li &
Polaski. 2007:26). There is excess productive capacity at the global level in labourintensive manufactures, such as textiles, apparel, and consumer electronics, and in some
capital-intensive products, such as steel and ship building. This has put sustained
downward pressure on prices for such goods, affecting the income for labour and capital
employed in those sectors. In contrast, world energy prices have been trending higher,
which accentuates the relatively inefficient use of energy in the Chinese economy (He, Li
& Polaski. 2007:26). As China liberalizes its financial markets in compliance with its

11

WTO commitments, the flow of international resources may increase, but there is also a
greater risk of financial instability and contagion (He, Li & Polaski. 2007:26).

Conclusion
China is experiencing an economic explosion and a phenomenal level of development,
never seen before. Economic liberalisation due to government reforms, has taken China
from an agrarian economy towards an industrial super power who threatens the U.S.
Chinas successes include attracting Foreign Direct Investment into the country, ignoring
protectionist policies that have failed others, improving the per capita GDP, improving
income and purchase power of consumer goods for its citizens; and its commitment
towards developing high technology industries. Chinas political economy is at a
crossroads and there is debate which direction it should take. Nolan is of the view that
China should neither revert back to Maoism, nor move towards a model of a free market
democracy, but should in fact reform its system and improve the state, its level of
effectiveness and eliminate corruption, the road which he refers to as the choice of no
choice. Bureaucratic authoritarianism, however repellent to the West, is a system with
considerable purchase in China, which has proven increasingly successful over an
increasing range of functions. China is facing many different types of developmental
issues. The communist states single party authoritarian leadership, widespread
government corruption, poverty and inequality, unemployment, rural-urban migration,
surplus rural labour, state interference in companies, lack of access to improved
education, health, water and electricity, disparities in regional development, industrial
pollution, water scarcity, soil erosion and desertification, gender discrimination, food
security, climate change, lack of sufficient mineral and natural resource for exploration
within China, land scarcity, lack of social security for its aging population and its carbon
emissions. At its currents pace of industrial growth, China will have to commit to
environmental conservation not only for their survival, but also for the rest of the worlds
survival. China will need to balance economic growth with environmental protection to
ensure the welfare of its citizens. Economically speaking, China faces good prospects,
but macro-economic and structural vulnerabilities need to be addressed for this potential
to be fully realized. A multifaceted approach to the economic reform process will also be
crucial to maintain rapid growth and manage the challenges associated with the process
of global integration. Chinas economic growth has led to widening income inequality
both among and within regions and has exerted huge amount of pressure on its water and
land resources, posing threats to its food security and are serious issues that needs
attention. China has come to stay, but to ensure its sustainability, continued economic
and environmental reforms are crucial if it wants to keep rising.

12

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