Chapter II.
Sectoral Analysis of the International Situation and Japan's Foreign Policy

B. Securing Global Economic Prosperity and Development Issues for Developing Countries

1. Ensuring a Prosperous World Economy - Japan's Policy Efforts

a) Overview

i) The Progress of Globalization

The global economy took on a basic expansionary trend, with U.S. economic expansion entering its sixth consecutive year and continuing growth in the developing economies as a whole, including the high-growth Asian countries. However, there are issues of concern which should not be overlooked: the widening wage differential in the United States, the restrictions on growth placed by the prudent fiscal policies of major European countries seeking to satisfy convergence criteria for monetary union, and the slowdown in growth caused to some Asian Newly Industrialized Economies (NIEs) by structural factors as well as a temporary decline in export markets.

Against this background, world trade has continued to expand dramatically with the rapid progress of economic globalization in recent years. According to International Monetary Fund (IMF) estimates, the real economic growth rate for the world was 3.8% in 1996 and will be 4.1% in 1997, exhibiting sustained and stable growth, while a WTO report indicates that the value of world trade (goods and commercial services; export base) increased 18% in 1995 from the previous year, topping the US$6 trillion mark, with a continued increase expected in 1996.

Globalization has been brought about by the large-scale expansion of market economy and dramatic advances in information and communications technology. It is a challenge in the sense that it intensifies international competition, yet it also represents an opportunity to add new drive to the global economy and to break through the structural bottlenecks found in the various advanced economies, and should therefore be embraced. At the same time, there is the fact that some people have lost in the competition that accompanies globalization and that others are being left behind by the wave of market economy transition. Appropriate consideration of these people is essential for securing popular support for a positive stance on globalization.

At the 1996 Lyon Summit and the APEC Informal Economic Leaders Meeting, globalization was raised as a key topic and Japan repeatedly expressed the aforementioned stance.

ii) Japan's Response: Policy Efforts with a View toward the 21st Century

Japan needs to continue its policy efforts with a view toward the 21st century, enhancing harmonization between the Japanese economy and the international economy and actively responding to the globalization trend.

iii) Promotion of Economic Structure Reform

First, on the domestic front, it is necessary to actively promote reforms to realize an economic structure poised to take full advantage of market forces. This means pursuing even more vigorous policy efforts to enhance the flexibility of Japanese economy and society in the areas of deregulation and market-access improvement. In the area of deregulation, in 1995 the Japanese Government drew up a Deregulation Action Plan consisting of 1,091 items from 11 areas. It has continued to make improvements and revisions, adding 569 new items in 1996. Furthermore, efforts to construct a free and transparent financial system are required, including financial market structural reform.

iv) Strengthening the Framework for Multilateral Trade and Investment

Next, as economic activities globalize, the framework for multilateral trade and investment must be further strengthened. Japan has emphatically called for the WTO to take an active approach to new issues which accompany accelerated globalization, in addition to the continued promotion of liberalization centered on the reduction and elimination of existing national border measures. At the WTO Ministerial Conference held in Singapore in December, a forward-looking message was delivered which not only ensures the steady implementation of the Uruguay Round Agreement but also addresses further liberalization (such as the Information Technology Agreement [ITA], which will eliminate tariffs on information technology products) and the tackling of new issues such as trade and investment and trade and competition policy. Welcoming these results, Japan intends to continue playing an important role as a core member of the WTO.

Also, in order to strengthen the multilateral free trading system, it is necessary to integrate developing economies and economies in transition into the international economic system. Japan intends to support and encourage their early accession to the WTO. Furthermore, Japan is an active participant in negotiations on the Multilateral Agreement on Investment (MAI) being undertaken in the Organisation for Economic Co-operation and Development (OECD). Japan also partakes in discussions in other multilateral fora such as the United Nations Conference on Trade and Development (UNCTAD).

v) Promotion of Open Regional Cooperation

Alongside this strengthening of the global trade and investment framework, in recent years, the promotion of frameworks for regional integration and regional cooperation, such as the European Union (EU) and the North American Free Trade Agreement (NAFTA), has been observed. As long as advances in regional integration and regional cooperation are designed to offer their benefits to external economies, the stimulation of the economies within the region through economies of scale, enhanced industrial competition and advanced structural coordination will contribute to the development of the global economy. On the other hand, there are some concerns that the advances in regional integration and regional cooperation will become discriminatory, and Japan deems it vital that regional integration and other such efforts be consistent with the WTO Agreement and strengthen and complement the multilateral free trade system. This concept, that regional integration should be to the benefit of the international community as a whole, was shared by the participating leaders at the Asia-Europe Meeting (ASEM). Japan is also actively promoting APEC as a forum for open regional cooperation, and APEC has committed itself to providing the benefits of liberalization on an equal basis to non-APEC members in accordance with the WTO Agreement. At the November APEC meeting in the Philippines, each member submitted an Individual Action Plan (IAP) for achieving free and open trade and investment, marking the start of full-scale liberalization efforts. It is now necessary to steadily implement and improve these IAPs to achieve free and open trade and investment by the years 2010/2020.

vi) Approach to Long-Term Issues

Meanwhile, there is also a need to go beyond traditional economic and trade areas and deal with global, long-term issues such as food, population, energy, the environment and new areas related to social issues in order to ensure the sustainable development of the global economy. At APEC, Japan proposed in 1995 that the impact of fast-expanding populations and rapid economic growth in the Asia-Pacific region on food, energy and the environment be treated as a long-term issue, and actual review work was initiated in 1996. Also, at the Lyon Summit, Japan proposed the "Initiative for a Caring World," through which countries share their knowledge and experiences in the social security area and establish sustainable social security systems. This proposal was endorsed by the Summit participants, with follow-up measures steadily implemented. (For more details on the Initiative for a Caring World, refer to Part C, Section 7.)

vii) Development of Bilateral Economic Relationships

In addition to these global and regional frameworks, it is valuable to continue promoting bilateral economic relationships such as Japan-U.S. economic relations. Individual economic problems and conflict resolution between two countries should be handled primarily through bilateral discussions when possible, while bearing in mind multilateral conflict solutions. The economic relationship between Japan and the United States could be described as being in fundamentally good shape in the last two years, particularly because of the major decline in the U.S. trade deficit with Japan. Consultations in primary areas under the Japan-U.S. Comprehensive Economic Framework Talks have already been concluded, and 1996 saw the settlement of the semiconductor and insurance talks. Continued efforts need to be made to find solutions to other outstanding individual economic issues. (Refer to Chapter I, Part B and Chapter III, Part B for more on the Japan-U.S. economic relationship.)

b) The World Trade Organization (WTO) and Strengthening the Multilateral Free Trading System

i) The First WTO Ministerial Conference

The First WTO Ministerial Conference, held in Singapore in December, was the first regular biennial meeting of the WTO at Ministerial level since the WTO's establishment in January 1995. The focus of the meeting was not only to review the implementation of the Uruguay Round (UR) Agreement and to advance ongoing work (e.g., trade and environment and the ongoing liberalization negotiations on trade in services), but also to show that the WTO is positively addressing the further liberalization of trade beyond the UR Agreement, as well as new trade-related issues arising from the globalization of economic activities with a view to maintaining the momentum to further promote trade liberalization and strengthen multilateral disciplines. Although there were some difficulties in the preparation process for the Ministerial Conference in coordinating the diverse views of member countries, in particular on the so-called new issues, at the end of the day a meaningful outcome was able to be achieved in a flexible manner.

A decision was made to establish three working groups to commence work in the WTO on trade and investment, trade and competition policy and transparency in government procurement, to which Japan attaches much importance. In these areas, long-term persistent work will be necessary concerning, among others, whether they should lead to developing multilateral disciplines in the future.

As for further liberalization, 28 WTO members agreed to the Information Technology Agreement (ITA), a commitment to mutual tariff elimination by 2000 on information technology products regarded as basic industrial infrastructure for the 21st century. Also, they decided that over 400 products would be added to their list of tariff-free pharmaceutical products already agreed to in the Uruguay Round.

Throughout the preparatory stages of the Singapore Ministerial Conference, Japan took the initiative by representing its view that the meeting should positively address new issues and by making various proposals. The head of the Japanese delegation, Minister for Foreign Affairs Yukihiko Ikeda, discharged his responsibility as a minister representing a major WTO member state by contributing actively to forming the agreement to commence work on the new issues, and, where conflicting views were presented from developed and developing members in regard to trade and labor standards, helping to reach the understanding that members recognized the issue but rejected the use of it for protectionist purposes. Japan is also expected to show leadership in the implementation of the outcomes of the SMC.

ii) Universalization of the Multilateral Free Trading System

It is necessary to further integrate more economies, particularly developing economies and economies in transition, into the international economic system in order to strengthen the multilateral trading system under the WTO. From this perspective, at the Singapore Ministerial Conference it was agreed that the WTO would organize a meeting as soon as possible in 1997 with the United Nations Conference on Trade and Development (UNCTAD) and the International Trade Center (ITC), with the participation of aid agencies, multinational financial institutions and least-developed countries. Meanwhile, as of 1 January 1997, 30 applicants, including China, Taiwan, Saudi Arabia and the Russian Federation, were in the accession process to the WTO. In order to accede to the WTO, applicants have to conclude bilateral and multilateral negotiations. In this regard Japan is providing the necessary cooperation toward early accession to the WTO.

iii) Ongoing Liberalization Negotiations on Trade in Services

In the ongoing negotiations on basic telecommunications services, the main points have been securing meaningful liberalization commitments from the major negotiating countries; improvement of market access (especially relaxation of restrictions on foreign ownership); liberalization of international telecommunications; and the formulation of a regulatory framework which will ensure fair competition. Japan actively contributed to these negotiations, putting forward, for example, very forward-looking liberalization commitments, including the elimination of foreign ownership restrictions with a few exceptions, and actively working to achieve the regulatory framework. However, the negotiations did not reach an agreement by the end of April, which was the original deadline, and therefore this deadline was extended to 15 February 1997. In the area of maritime transport services, negotiations were not finalized by the end-of-June deadline because the United States refused to submit its liberalization commitments. It was decided that the negotiations would be suspended and then resumed by the end of 1999 when the comprehensive service liberalization negotiations on services are scheduled to begin. Also, the Working Party on Professional Services reviewed the various countries' domestic regulations, including those related to qualification requirements, on accounting services.

iv) Dispute Settlement Mechanisms

As a result of the UR Agreement, the dispute settlement system under the WTO was greatly improved in terms of its promptness. The number of cases brought under the dispute settlement system has increased considerably compared to the GATT years (during which an average of 6.6 cases were brought per year from 1948 to 1994), with 64 requests for consultation during the first two years after the entry into force of the WTO Agreement in January 1995. The effective use of the system must be encouraged to ensure that trade disputes are resolved in accordance with international rules and to maintain and strengthen this system, which plays an important role in guaranteeing the steady implementation of the WTO Agreement.

c) Regional Economic Cooperation

There continued to be advances during 1996 in regional economic cooperation throughout the world, but at the same time, a diversification and multilayering of cooperative frameworks, including coordination between regional economic cooperation frameworks and cooperation with countries outside the region, was observed.

i) North American Free Trade Agreement (NAFTA)

In the North American region, the North American Free Trade Agreement took effect on 1 January 1994 with the goal of reducing barriers to trade and investment among the signatory countries (the United States, Mexico and Canada), creating the world's largest free trade region, with a regional GNP of nearly US$7.6 trillion and a population of 380 million people-roughly equal to the size of the European Union-on the North American continent. This agreement is wide-ranging and contains provisions on the liberalization of trade and investment, including the elimination of duties and preferential conditions for investment as well as provisions on protecting intellectual property, dispute settlement procedures, labor practices and the environment. NAFTA was shaken by the impact of the Mexican financial crisis at the end of 1994, the year it was launched, but has achieved a steady increase in trade among the signatory countries, with exports from Mexico to the United States and Canada showing particularly strong growth.

ii) European Union (EU)

The European Union proceeded with efforts toward the Economic and Monetary Union (EMU), including its plans to introduce a single currency, the euro, in 1999. At the December meeting of the European Council in Dublin (EU Summit Meeting), a fundamental agreement was reached on the rules for the fiscal policies of the various countries following introduction of the euro, with momentum growing toward introducing the euro on schedule. Japan needs not only to analyze thoroughly the various impacts of European currency integration on the European economy and the global economy, but must also pay adequate attention to the effect that the measures taken by European countries in the process of moving toward integration have on today's global economic trends. In terms of relationships between the EU and countries outside of the EU region, a customs alliance was reached with Turkey in January and new agreements were signed with Morocco and Slovenia in February and June respectively, reflecting the continued trend toward expanding and deepening regional cooperation.

iii) Mercado Común del Sur (MERCOSUR)

In January 1995, MERCOSUR, an official customs union in Latin America comprising Argentina, Brazil, Paraguay and Uruguay, was put into force. This group has contributed significantly to the rapid expansion of intraregional trade and is working to strengthen relationships with countries outside of the region, for example, through the conclusion of a free trade agreement with Chile in June. In light of the deepening ties and expansion of MERCOSUR, Japan held the first government-level meetings in October on methods of promoting future cooperation with MERCOSUR.

iv) ASEAN Free Trade Region (AFTA)

In Southeast Asia, as a specific measure to accelerate and further the realization of the ASEAN Free Trade Area (AFTA), an agreement was reached on legally defining schedules for the reduction of intraregional tariffs. The ASEAN Industrial Cooperation (AICO) Scheme, which is intended as the early implementation of intraregional tariff reduction measures, was implemented from 1 November. Approval was also given to an economic dispute settlement mechanism (DSM) which covers all of the ASEAN economic agreements as a supplementary measure for promoting intraregional economic cooperation and achieving the early realization of AFTA. Prior to 1997, the 30th anniversary of the establishment of ASEAN, efforts are being made to prepare a vision of intraregional economic cooperation after the 2003 realization of AFTA.

v) Cooperation Beyond Regions

When looking into economic cooperation which goes beyond the regional limits of Asia, Europe and the Americas, the Asia-Pacific Economic Cooperation (APEC), in which Japan participates, is significant as the main pillar of economic cooperation in this region, covering Asia, Oceania, North America and Latin America, with great diversity in terms of the social backgrounds, economic systems and stages of development of its members. Outstanding features which distinguish APEC from other types of economic cooperation are its loose intergovernmental cooperation, consisting of collective and voluntary actions by members, and its advocacy of open regional cooperation, which extends the benefits of trade and investment liberalization on an equal basis to non-APEC members. (Refer to Chapter I, Part C, Section 1 for more on the November APEC Philippines Meetings.)

The Organisation for Economic Co-operation and Development (OECD), or "Club of Developed Countries," as it is known, welcomed a new Secretary-General in 1996, with Mr. Donald Johnston from Canada replacing Mr. Jean-Claude Paye, who held the position for the last 12 years. The number of OECD member countries has risen to 29 with the addition of the Czech Republic in 1995 and Hungary, Poland and the Republic of Korea in 1996. Reflecting the drastic changes in the global economy, exchanges of opinions and policy cooperation among member countries, while continuing to focus on the three pillars of economic growth, development and trade, are also taking up new issues common to developed countries, including new social issues such as aging, electronic commerce and cryptography.

Between the EU and the United States, discussions proceeded on the creation of a new Atlantic Market through the reduction or elimination of market barriers based on the New Transatlantic Agenda agreed upon at the end of 1995, with policy recommendation input from the industrial community.

Between Asia and Europe, the First Asia-Europe Meeting (ASEM), at which the leaders of the various countries gathered to discuss comprehensive dialogue and cooperation on politics and security, the economy and global issues, was held in March in Bangkok. In the area of economics, the First Senior Officials' Meeting on Trade and Investment (SOMTI) was held in July in Brussels, Belgium, as a follow-up to the First ASEM, and an Economic Ministers' Meeting is scheduled to be held in Japan in 1997. (Refer to Chapter I, Part C, Section 3 for more details on ASEM.)

vi) Relationship with the Multilateral Trading System

As indicated above, the trend toward regional economic cooperation contains the potential for contributing to a further strengthening of the multilateral trading system by going beyond regional framework limitations and bringing together countries and regions at differing stages of development. Meanwhile, as mentioned earlier, it is important to ensure that regional economic cooperation does not lead to protective economic blocs, and that it is complementary to the multilateral trading system and consistent with its rules. In February, the Committee on Regional Trade Agreements was established under the World Trade Organization (WTO) for the purpose of reviewing the consistency of NAFTA, MERCOSUR and other regional agreements with the WTO Agreement. This Committee will both review the consistency of regional agreements with the WTO Agreement and consider general issues such as the effect of regional integration on the multilateral trading system. Japan is taking an active part in the Committee's discussions.

d) Natural Resources and Energy

Natural resource issues, including food and energy issues, are key areas that are not only of fundamental importance to individual countries and regions, but must be properly addressed by all people as we move toward the 21st century.

Regarding energy, the world energy demand in 2010 is expected to increase by more than 40% over 1993. Especially in the East Asian region, with its particularly rapid economic growth, energy demand is expected to double, which raises the concern that energy issues will restrain its further economic growth in the future. In this context, APEC's First Energy Ministers' Meeting was held in Sydney in August as a step toward creating a framework for dialogue on energy issues in the Asia-Pacific region, and the need for public-private sector cooperation for electric power infrastructure development was confirmed. Also, in light of the growing importance of addressing environmental issues such as the global warming caused by the increase in energy consumption, an informal ministerial meeting on energy and the environment was held by the International Energy Agency (IEA) in Denmark in June, and it was agreed that positive contributions should be made from an energy perspective to the Third Conference of Parties to the United Nations Framework Convention on Climate Change (COP 3), which will be held in Kyoto in 1997. Furthermore, the World Solar Summit, oriented toward promoting environmentally-sound development, was held in Zimbabwe in September. Here, the importance of renewable energy, including solar energy, was confirmed and a decision was made to launch the World Solar Program for the promotion of widespread use of solar power.

Global interest is growing on the topic of food supply, given the rapid rise in population and higher food consumption levels in developing countries with high levels of economic growth, as well as concern about natural resource and environment issues. Against this background, the Food and Agriculture Organization (FAO) under the United Nations sponsored the World Food Summit in Rome in November, at which the importance of eradicating starvation was confirmed through measures such as adoption of the Rome Declaration-which calls for decreasing by half the number of people suffering from malnourishment by 2015-and the drafting of an action plan to accomplish this goal. In the field of fisheries, as world population increases, discussions are being held with a view to sustainable utilization of living marine resources while conserving the marine environment. Especially regarding high-seas fisheries resources, including resources of tuna and other highly migratory species, Japan is actively promoting international cooperation for resource management under various regional fisheries organizations.

2. Development Issues

a) Japan's Official Development Assistance (ODA)

i) The Significance and Importance of ODA to Japan

As the world approaches the 21st century, there are still over one billion people suffering from extreme poverty, and the number of refugees and displaced people from the outbreak of regional conflicts is rising. Furthermore, global issues such as environment, population and new infectious diseases like AIDS are mounting. International society in the post-Cold-War period has taken a much stronger interest than in the past in solving the various problems related to development, and there is a heightened awareness that a more proactive approach is necessary. Meanwhile, some donor countries have lost their political motive for assistance with the end of the Cold War, and severe domestic fiscal circumstances and doubt about the results of assistance to Africa in particular are causing a reduction in the volume of ODA available.

Against this background, Japan continues to attach great importance to ODA and pursues an active policy. Also, Japan has assumed a leadership role among the donor countries in the discussions in the OECD Development Assistance Committee (DAC) to formulate the New Development Partnership Strategy for the 21st Century.

This stance is based on humanitarian concern for developing countries, which are struggling with tough issues, and a desire to help these countries find solutions to their problems. At the same time, it is based on the firm belief that ODA is the most important pillar of Japan's contribution to the international community and that it is of indispensable value to Japan, whose prosperity depends to a high degree on the stability and prosperity of the world. The following three points offer a more specific explanation.

(1) Environmental problems, new infectious diseases, conflicts and terrorism caused by poverty, and other problems can easily cross national borders and spread into Japan, and can also have a serious impact on Japanese people living overseas. Developed countries, including Japan, can no longer achieve prosperity and happiness in a manner that is separate from the problems of developing countries. Support for poverty alleviation in developing countries, improvement of health and medical services, and improvement of the environment through ODA not only help raise the standard of living in developing countries, but also benefit the welfare of the Japanese people.

(2) Supporting the economic development of developing countries results in economic benefits for Japan. Over 50% of Japan's trade is with developing countries. In particular, the economic growth of Asian countries increases the likelihood of trade and investment from Japan.

(3) Strengthening friendly relations with developing countries through ODA is extremely important in maintaining a stable supply of resources for Japan, which relies heavily on foreign countries, especially developing countries, for food, energy and other resources.

By winning the trust of the international community through active participation in various international efforts through ODA, Japan improves its position in international society and, in a broader sense, contributes to its own national security. With deepening interdependent relationships in the international community, strengthening international cooperation through ODA is the best way of realizing long-term stability and prosperity.

ii) Japan's ODA in 1995

Japan disbursed $14.49 billion (excluding aid to Eastern Europe) of ODA in 1995, making it the world's largest donor for the fifth consecutive year and accounting for 24.6% of the total provided by the 21 member countries of the OECD Development Assistance Committee (DAC). While Japan's ODA contributions have shown steady growth in dollar terms, they have leveled off in yen terms, indicating that the growth in Japan's ODA contributions in recent years has been largely due to the higher dollar valuation resulting from the strong yen. Japan's ODA to GNP ratio was just 0.28%, slightly above the DAC average (0.27%).

Both the grant share (the grant portion of total ODA, including grant aid, technical cooperation and contributions to international institutions) and the grant element (an index of the degree of concessionality of conditions for assistance, calculated on the basis of interest rates and grace periods, etc.) continued to be lower than the DAC average, and steady improvement is needed in the future. Also, the recipients of Japan's ODA are becoming more diversified, growing to a total of 161 countries and regions (1995 actual base), while the Asian countries continue to receive the largest share.

(ODA in 1996 [provisional value] is expected to be $9.58 billion [note, however, that this includes aid to Eastern Europe], a 35% decline compared to the previous year and representing just 0.21% of GNP. The main reasons for the decline in the 1996 ODA results compared to 1995 include a change in the exchange rate to a weaker yen; the reduction in subscriptions and contributions to international financial institutions due to prolonged negotiations over replenishment; and an increase in repayments from government loans and others.)

iii) Efforts to Gain the Support and Understanding of the Japanese People

Considering that Japan's ODA comes from Japanese taxpayers, it is necessary that the Government, in implementing ODA, secure the genuine support and understanding of the Japanese people. In this respect, the Japanese Government is working to implement appropriate assistance which takes into account the principles and rules of Japan's Official Development Assistance Charter. At the same time, widely opening information on ODA to the public is significant, and the Ministry of Foreign Affairs is actively promoting publicity work and public information activities, including publication of the ODA White Paper and the ODA Annual Report.

b) New Development Strategy

The most noteworthy assistance-related trend in 1996 was the adoption of the New Development Strategy (officially titled "Shaping the 21st Century: The Contribution of Development Co-operation").

The New Development Strategy adopted at the May DAC High-Level Meeting is a momentous document which defines the direction for assistance for the next 20 years based on the lessons from the assistance implemented by various countries for the past 50 years. Japan contributed significantly to the formulation of this document, including a proposal for setting specific development targets.

The New Development Strategy, based on the lessons of past assistance, calls for a New Global Partnership of collaboration in development efforts, with assistance providers and donor countries sharing responsibility while respecting the authority of the developing countries from the standpoint that the developing countries themselves are primarily responsible for their own development. Also, the Strategy sets targets for achieving results within a certain period of time. Specifically, it specifies (1) goals to achieve by 2015: a) the proportion of people living in extreme poverty in developing countries should be reduced by at least one-half; b) there should be universal primary education in all countries; c) the death rate for infants and children under the age of five years should be reduced in each developing country by two thirds the 1990 level; and d) the maternal mortality should be reduced by three-fourths; and (2) goals to achieve by 2005: eliminating the gender disparity in primary and secondary education and drawing up national strategies for sustainable development. Furthermore, the Strategy, in addition to assistance policies, indicates that (1) contributions to development can also be made by promoting trade and investment and disseminating technology; and (2) the individual circumstances of developing countries should be considered for development to be successful. Japan has for some time expressed this concept of both a comprehensive and a differentiated approach. Also, the Strategy is based on the idea that development should be taken in a direction which enhances the living conditions of all people and should therefore be people-centered, with the aim of enabling people to have prosperous and happy lives.

The New Development Strategy was approved by the DAC in May 1996 and was welcomed at the Lyon Summit in June. Future issues include ensuring that the fundamental framework put forth by the Strategy be widely accepted by the international community, including developing countries, and moving steadily forward with implementation. Japan plans to proceed with efforts to achieve concrete results while cooperating with developing countries, other donor countries and international organizations.

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