| Background |
Background: The following comments are based on study of the subject
since the 1980s including authorship of a report, Towards a Strategy for
Technological Development in Queensland, Premier's Department 1983,
(unpublished) - which described the need for something like a 'Smart State'
program, and how it might be achieved. It remains up-to-date and relevant
(unfortunately) because, despite a massive escalation in political rhetoric and
public spending, Queensland has made little practical progress in the interim.
The author's career experience also included a period as Director of Technology
Policy in the Queensland Premier's Department
|
| Overview +
|
Overview
The Smart State programs have been only one example of the
lack of practical realism in Queensland's public policies. In particular
Smart State:
- concentrates on the wrong target by emphasis
on increasing 'smart' inputs (eg research and education) to an economy which
suffers from a systemic inability to use them productively;
- tries to enhance 'commercialization' by focusing
on government funded research, rather than on enhancing the capabilities of
the economic system as a whole;
- must eventually encountered financial constraints
because strengthening the tax base, by creating a more productive economy, is
vital to Queensland's medium and long term public financing but is not being achieved because of
Smart State's weaknesses .
More practical and effective alternatives are
available.
|
| Policy Weakness |
General Policy Weaknesses
Queensland has traditionally suffered from a lack of public or private
institutions able to develop sound strategies for the development of a
productive modern economy.
Evidence that there is a general problem is outlined in
Queensland's Economic Strategy,
which also suggested the nature and weaknesses of traditional strategies and
recent populist alternatives; and the need to do better in future.
A traditional
emphasis on simply exploiting natural resources arguably both caused (and resulted
from) this lack of capable economic institutions (see
Queensland's Weak
Parliament). The effect of Queensland's rich natural resources
was to strengthen the position of 'elites' who provide poor
economic leadership (see
Resource
Curse Hypothesis). This chronic problem was both illustrated and exacerbated
by poorly conceived and incompetently managed
Public Service 'reform' in the 1990s (eg see Towards Good Government
in Queensland, and
The Growing
Case for a Professional Public Service).
The poverty of policy inputs to the political process was highlighted in an article
about Queensland's political Opposition in mid 2001 (Koch T. 'Politics of
despair', Courier Mail, 28//7/01). However the need for a serious effort to provide raw material for relevant
public policy was also illustrated by the Opposition's call at that time for state spending on research facilities under
the Smart State program to be spread around the regions more (see Franklin M. and
O'Malley B., 'Horan seeks regional stake in Smart State, Courier Mail, 13/7/01).
Such an Opposition proposal missed the point that Smart State
has been only a
'pretend' program which gained political applause from benefited interest
groups at public expense - without ensuring that members of those interest
groups became more economically effective by being better able to meet their
customers' demands. Thus spreading
the program around more couldn't do anyone any real good.
|
| Wrong
Target |
Smart State ... Aiming at the Wrong Target
Smart State differs in detail (but not in substance) from
similar programs which have been deployed in other states and nationally (eg
consider the federal government's 'Backing Australia's Ability' agenda and the
federal oppositions' Clever Country' proposals). However the net effect is that
Australia's innovation-capability ranking seems to be declining rapidly [1].
Similarly business spending on R&D (except in manufacturing) has declined
somewhat [1],
and has been falling behind growth of the economy [1]
Why it matters: Innovation involves the practical
implementation of new technologies. An account of the economic significance of
this was presented in a 1998
proposal to the Institution of Engineers (Qld). In particular this referred
to:
-
how technological change creates new products and improves
efficiency, and thus has the potential to dramatically increase demand (and job
creation);
-
the very important role which innovation plays in theories
of economic growth because of its potential contribution to raising
productivity. The latter may usefully be considered to involve the economic
value-added from any given inputs of labour and capital;
-
the vital importance of having competitive advantages (eg
derived from technological innovation or other sources) if value-added /
productivity is to be high in a competitive environment - and the transitory
nature of any such advantages (as competitors catch up) which makes it
essential to continuously create new sources of advantage.
The practical significance of this can be illustrated by
the contribution to Australia's prosperity traditionally associated with the
wool industry (ie which Australia had a world-beating performance as an
innovator until 1904), and the reverses which that industry suffered with the
invention of synthetics in the second half of the 20th century [1]
One observer described Smart State as funding 'research into biotechnology
and information technology to attract or create spin off businesses' (Franklin
M., 'Toothy optimist flogging a dead horse on jobs', Courier Mail, 23/6/01).
Though it is more than this, the quickest way to see why it must be
inadequate is to recognize that the Smart State strategy has mainly provided increased
'smart' inputs (eg research and education) to an economic system that remains
unable to use them profitably. Thus those expensive inputs are most likely to merely contribute to the
offshore commercialization of local technology and to a brain drain.
Queensland’s / Australia’s traditional problem in
succeeding with innovation was not any shortage of publicly funded education or
basic research (though politically-driven reorganization and funding cuts have
partly disabled Australia's tertiary education and basic research systems over
the years).
In particular Queensland has never had any lack of technological opportunities which
could have provided the basis for 'Smart' industries. For example
an informal survey by the author of innovative activities in Queensland in
1985 (based on peer review) revealed:
- hundreds of interesting technical options on which it appeared that
industrial opportunities might have been based;
- a general lack of awareness within the community of the existence of
these opportunities and what would be required to exploit them; and that.
- most of those involved in attempting innovative activities were from
outside the state.
Thus the main problem was (and remains) in the massive gap
in the capabilities and organization within the market economy (ie private
sector) to make a commercial success of innovation (eg problems in access to
financing skills, and in the lack of a pool of people with experience of
turning innovation into successful enterprises). All research during the 1980s revealed that
nationwide a similar lack of competency and
organization to commercially exploit available opportunities was the main
constraint.
The areas where government is spending most money under
Smart State will do virtually nothing to overcome the most critical constraint
(though it may have some marginal benefit).
Political 'Push' on Economic Inputs can Achieve Little
Smart State has parallels with the Commonwealth Government's
Backing
Australia's Ability strategy, the federal Opposition's one-time Knowledge Nation
and numerous efforts by other states to invest in various
research facilities. All such efforts are mostly about spending
public money to boost educational and basic research - which are INPUTS into
the economy.
An aside:
Smart State and Knowledge Nation also involved some silly
efforts to 'pick OUTPUT winners' such as biotechnology and IT -
which ignores the fact that 'winners' ultimately depend on unpredictable
consumer preferences and the unknowable capabilities of enterprises.
However as mentioned above (and further detailed below) the problem in
developing technology-based industries lies mainly in the lack of
capabilities and effective systems WITHIN the market economy to commercialize
the products of research or creativity. These primary weaknesses are
(largely) outside the sphere of direct government control,
and involve complex, rapidly changing issues that an elected government and
its agencies can never really understand.
That there is a problem in top-level competencies in Australian organizations
is clearly indicated by:
- the difficulty that expatriate Australians, with skills
gained through international experience, reportedly have in gaining employment
here - because their abilities are often seen as a threat by their potential
bosses [1];
- the fact that the significance of Australian innovations tends only to
be recognized overseas [1];
- the perceived inability of management in most businesses to develop or
implement major strategic initiatives [1]
Furthermore innovations and innovation-commercialization
capabilities WITHIN the economic system must work as an integrated whole if they are to be economically productive and
sustainable.
It is thus dangerous to treat indicators
of economic capabilities as simple economic inputs which could be
provided by government.
For example an Innovating Capacity Index has been devised which
(reasonably) includes: R&D activity, number of scientists; per capita GDP; but
total expenditure on secondary and tertiary education; university R&D [1].
However while such factors may be useful indicators they are not in themselves
sufficient causes - and can only be relevant if they are
present as part of an effectively functioning economic system. If provided as
economic 'inputs' (which is how they will tend to
be treated by government programs) rather than being developed as components of
an integrated, functioning innovation system, their presence could easily be irrelevant to innovation
capacity.
A particularly important issue in the integration of an innovation system (if
it is to be economically productive) is that it be strongly market oriented.
This is most likely where the system is created through OUTPUT 'pull' (ie
customer demand in the market)
Telling it like it is: "Debate about innovation
in Australia would be more sensible if biotechnology were taken down from its
pedestal. Think about industries such as surf-wear, fast ferries, animation,
mining software, contract engineering or wine. In each, Australia is winning in
export markets because of the application of knowledge. In none of these has
government incentive played more than a peripheral role ... all of them have
been driven by market demand. The extraordinary diagram of the
knowledge nation ... was similar to one presented at the Innovation Summit by
the Business Council of Australia and the Department of Industry last year. They
show government at the top, lots of circles for producing knowledge like the
universities, the CSIRO and manufacturing industry .... and no mention
whatsoever of market demand" (Uren D. 'Market demand, not science, drives
innovation' Australian, 7-8/7/01)
A practical example of the problems that emerge when
political 'push' is applied to economic inputs is
Queensland's Biotechnology Bubble.
Other indicators that the innovation system
is poorly integrated in practice include:
Methods whereby innovation-commercialization
capabilities
can be developed WITHIN the economic system are available (see
below). However they cannot be improved by political 'push' on market INPUTS such
as basic research and education. All the latter can achieve in isolation is
to waste taxpayers' money and to increase everyone's frustration, the presumed
brain
drain, and the offshore commercialization
of Australian technology.
It is not valid (as the Treasury has tried to do to explain away evidence
of defective economic strategies) to draw the conclusion that because there is a
correlation between a low level of Year 12 completion in Queensland and the
state's lower per capita state product [1],
that merely increasing Year 12 completion rates would overcome the latter problem.
While there is undoubtedly an association between higher levels of (say)
education and high community incomes (eg see
The Agenda), it
does not follow that
higher levels of spending on (say) education will in itself cause increased
economic production. It may simply lead to:
- a community with an over-inflated opinion of its own worth - as appears
to have been a major factor in Argentina's economic problems (See
Latin America)
- a brain drain because of the absence of suitable job opportunities (as
has been the experience of Queensland and numerous third world countries who
were persuaded to follow 'missing factor' theories of economic development);
- under-employment of ever more highly qualified individuals as appears to have been
Australia's experience over several years.
Example: That strengthening the 'supply' side of
the labour market, while essential, is not likely to be enough on its own
is supported by a Dusseldorp Skills Forum's study, Australia's Young
Adults: The Deepening Divide (1999). It found that: '..... during the
1990s there has been a ..... trend towards lower skill jobs for young
adult(s) .... and ..... a clear shift ..... towards employment in jobs
that require only elementary or intermediate skills. ..... These findings
..... contrast with the central policy emphasis of the past 15 years ....
(which sought to) to enhance ..... skills and maximize employability'.
Moreover, it has been noted that Australia is an exception amongst OECD countries in that
addition of an extra year's study has not resulted in any improvement in
per capita GDP [1].
This reflects the fact that Australia's economy generally (like
Queensland's) is systemically ill-equipped to make productive use of
additional 'smart' inputs.
|
| Commercial Weakness |
... Technical Weaknesses in Developing Commercial Competencies
Technical defects in
the Smart State approach to developing commercial competencies to exploit
'smarter' economic inputs were first apparent in
Innovation: Queensland's Future, a document produced
by the Department of State Development in association with the 1999-2000 state
budget. Though it included a long overdue recognition of the importance
of innovation to Queensland's ability to profit from, rather than be the victim
of economic change, it's obvious defects
included:
In practice there have been serious problems in efforts to develop commercial
capabilities.
Example 1 - government as venture capitalist:
In Queensland's
2000-01 budget a $100m Research Facilities Fund was established to provide
expensive research facilities and equipment - funds which would be recouped in
later years through taking a government interest in any resulting intellectual
property. Government denied that this involved 'picking winners' because (a)
an expert panel would make decisions and (b) funds would only be provided to
broad areas (O.Malley B. 'Smart money seeks share of biotech boom's spoils', Courier
Mail, 20/6/01). This move was seen as highly desirable by scientists
( O.Malley B. 'Scientists welcome research package', Courier Mail, 20/6/01)
However the way to guarantee that the products of research institutions are
hard to commercialise is for the administrators in those institutions to take
an interest in the intellectual property. The involvement of (risk averse and
commercially unaware) government agencies as
part owner of intellectual property would be an even worse constraint. The
only constructive way for government to gain a return from research facilities
it funds is through general growth of the economy - and increasing taxes [eg
see 1].
By 2004 Queensland's government had a three stage program for providing
venture capital [1].
A major component of this involves a $100 Biotechnology Venture Capital fund through QIC. This is a silly proposal because the idea of venture capital
is to provide both capital AND commercialization skills which young
technology-intensive companies lack - and there is no reason to suspect
that the QIC will be able to provide those hard-to-acquire skills either,
as they are well outside its traditional areas of operations. Furthermore
public accountability makes commercial success by any institution very
difficult.
Consider: an ex Chairman of the QIC has suggested that ill-informed government
interference has impeded QIC's ability to produce financial returns
(Emerson S. 'Beattie's Budget hits deficit', A, 18/6/02).
Based on publicly available sources, it seems that all that this involved was government backing
for the
Auditor General's in objecting to the Chairman's entertainment
expenses (Owen R. and McCullough J 'Treasurer returns Kennedy's QIC blows', CM,
19/6/02). However, being subjected to audit according to Public Service
standards is often said to make it impossible to compete properly -
because the requirement in the public service is to avoid risk by
mechanically following rules,
while the strategy of business (which is subject to competition and so
can't avoid risk) has to be to manage risk - and this can't be a
simple mechanical operation. As government 'businesses' can never
have the
flexibility to do what is needed to manage risk, they can seldom
produce commercial successes.
Example 2 - government 'assistance' to entrepreneurs is the opposite
of developing the economy:
In November 2001 a technically-innovative entrepreneur praised the start-up
assistance that was being provided by Queensland's Department of State
Development. It was said to be better than would be available in (say) Europe
and was enabling his firm to gain success.
See [1]
for outline of start-up assistance that was available in 2004.
However giving a few firms 'hot-house' success (and giving political
'brownie points'
to the Minister and the Department) is quite different to developing the
economy
(see comments in
Queensland's Economic Strategy).
Government 'assistance' to individual firms is the opposite of, and
often a serious obstacle to, economic development. Developing the ability of
business and the community to smoothly provide the support which enabled such
a firm to succeed would create a reproducible process which launch 20
entrepreneurs for every one that can be grown under 'hot-house' conditions.
And artificial support only works until there is a really difficult
competitive challenge. When that occurs 'hot-house' successes will find that
they have no strong support and will thus either fail or be taken over.
Similarly when
looking at commercialization of
knowledge,
it can be noted that the Knowledge Nation taskforce assumed that this would flow from
incentives for entrepreneurs and scientists (Boyd T. 'Beazley's
incentives will be hard to sell', Financial Review, 3/7/01). However commercialization
capabilities require learning / re-organizing within the market economy - and no
amount of 'incentives' will compensate for the absence of relevant
knowledge and institutional capability.
Example 3: Intellectual Property (IP) Principles
Queensland Public Sector Intellectual Property Principles were
released (in 2003?) by Department of Innovation and Information Economy, 2003?)
Précis: Only when IP is identified can it be developed and protected.
The Department of Innovation and Information economy has developed Public
Sector IP Principles. There is considerable IP in public sector - eg archival
management system developed by DIIE - which is licensed to a company in
exchange for royalty payment. Management of IP can increase revenue, make
service delivery more efficient, create opportunities for local industry. The
Financial Management Practice Manual codifies agencies obligations for public
property and assets - but there has been no guidance on IP assets. Queensland
Public Sector IP Principles include (a) general policy principles, (b)
management policy principles and (c) commercialization policy principles. Under
this: agencies must manage own IP; commercialization should be ancillary to
agency's core business; and ongoing operations should not be compromised by
commercialization. Document also details (a) definitions and interpretation (b)
general policy principles (c) management principles and (d) commercialization
principles
The problem is is that government can not effectively commercialize anything
(including IP) because the goals and accountabilities of government agencies
are politically-oriented rather than customer-oriented. This is clear in the IP
principles which provide (appropriately) that government mission is to take
precedence over IP commercialization. While this is appropriate, it means that
a commercial-dead-weight is attached to any IP which government agencies owns
and seeks to encourage others to commercialize. Thus from an economic viewpoint
the benefits of that IP are minimized.
Superior IP policy principles could be something like:
"In conducting their required functions, government agencies should:
- seek innovative options which improve the character or efficiency of
their operations;
- recognize that this will at times result in the creation of commercially
valuable IP;
- ensure that IP accumulates within entities which are able to effectively
make commercial gains from exploiting it in other applications, and that the
opportunity to acquire such IP is recognized by and available to all entities
competing for government contracts; and
- rely on increased economic growth to generate financial returns to
government through the taxation system (in a similar way to that in which
returns from funding of basic research are gained)."
As argued in The Economic
Futility of Backing Australia's Ability 2 far more is likely to be
achieved in developing an embryonic innovation system by starting at the market
end (ie with 'market pull' on modest innovations made available to customers of
established firms and industries, rather than 'advanced technology push', as
this would give
the business community the opportunity to crawl before it is expected to run).
In particular it is noted that an observer with business experience described
efforts to promote the commercialization of R&D as an 'ideological frolic'
and suggested that it was likely to be far more useful to develop
innovation capabilities in existing industries which have real markets, brands
and distribution networks [1]
|
| Financial Limits |
.. Financial Limitations
A practical
problem for Smart State is that, while economic theory correctly identifies the economic
spill-overs which justify public investment in education and basic research (ie
fact that public benefits are not reflected in the private benefits of any
particular individuals), the
States who are now competing to provide research facilities and incentives
suffer from the same problem because their tax bases are too narrow to enable them (as compared with the Commonwealth) to
capture the revenues from a more productive knowledge-based economy.
This is particularly significant for Queensland given its
potentially perilous financial
predicament when current economic / property boom subsides (see Queensland's
Challenge, February 2001), symptoms of which have been further revealed in
subsequent state
budgets (see
About Queensland's
Budgets).
|
| Evaluation |
Evaluation
Partly because of those financial constraints it is (in 2003) becoming
critical that Smart State succeed in enhancing the Queensland economy - and
thus in upgrading the state's tax base. And, in fact, Smart State is being
claimed to have accelerated productivity growth in Queensland's economy [1].
Unfortunately, while the latter would be a most appropriate goal, the
evidence appears suspect primarily because the effect of substantial devaluation of the $A against the $US in which most commodity
exports are priced on creating the impression of rapid economic and
productivity growth (which will be particularly significant in Queensland's more
export oriented economy) does not seem to have been considered - see
Does Productivity Growth Confirm Smart State?.
It appears that Queensland's government may have fallen into the the most
basic trap in the development of its Smart State agenda - ie it seems to have
consulted with various interest groups, and they knowing what they would be
likely to be doing in a 'smarter' economy, asked government to pay them to do
it. The result seems to have been the creation of expensive business and
technological 'welfare' programs rather than an integrated innovation
capability within Queensland's economy as a whole.
Fortunately there have been indications (in 2003) that the Smart State programs are being seen
to require review [1,
2,
3].
And in June 2004 it was announced that, rather than merely funding
biotechnology research institutions, government would stimulate a
multi-disciplinary approach which required different institutions to work
together [1]. However if such
such interaction occurs in a government-driven framework (as seems to be
intended) then it will be politically-focused and lack the motivation and
flexibility required for commercial success. Such interaction needs to occur
within a market framework (ie be driven by entrepreneurship) - but this can not
occur because Smart State did nothing to develop the market-focused
innovation-commercialization capabilities which would have to control the
interaction to produce economically-useful outcomes.
In November 2004, it was apparently recognized that heavy investment in
biotechnology to create a critical mass of technical skills was not producing
commercial gains - so it was suggested that scientists needed to develop their
ideas much further [1]. This
is, of course, precisely the reverse of what is required as success is only
likely when business becomes positioned to use the products of science, rather
than when science pretends to be business.
In April 2005 it was announced that:
- a new version of Smart State would be
launched involving large investments to support both new and existing
industries [1]. [It was not
however clear that this would achieve anything more than past efforts].
- phase 2 of Smart State would involve initiatives linked to education,
training and R&D [1,
2].
[However the education and training initiatives appeared routine (ie the
sorts of changes that would have been likely no matter what), while
additional R&D support will do nothing to enhance Queensland's chronic
systemic inability to use 'smart' inputs productively. Overall the Smart
State extension seems unlikely to make any
difference to Queensland's economic status].
In June 2005 the establishment of a new leaders / experts groups was
announced [1] to provide government with advice about
(for example) how to overcome obstacles to achieving Smart State goals. The
options outlined in this document were then formally
submitted for that group's consideration.
|
| Alternative |
A Practical Alternative Development of market-focused
innovation-commercialization capabilities (which have a
systemic character in that they require complementary arrangements in many
different types of organizations) should
be possible through appropriate strategic
management.
Developing
a Regional Industry Cluster suggests a practical method, which:
- builds on real-world initiative as well as analysis to discover
unforeseen opportunities;
- prevents outcomes from being determined by political lobbying;
- has the potential, experiments show, to increase rather than merely
redistribute wealth;
- would require adjustment for developing innovation-commercialization capabilities.
Defects
in Economic Tactics, Strategy and Outcomes outlines corresponding
theory about the contribution of such systemic change to economic
competitiveness and productivity.
An arrangement to 'bootstrap' higher-level innovation- commercialization
capabilities in Queensland was developed by the Institution of Engineers
(Queensland) in an
indicative 1999 proposal for an Engineering
Enterprise Development Centre.
Revised August 2003
|
| A:
Submission |
Attachment A: Overcoming impediments to achieving
Smart State goals Submission emailed 11/7/05
Professor Peter Andrews
Queensland Chief Scientist
I should like to make a formal submission to the expert / leaders group which
I understand (from a recent media report) has been established to chart future
initiatives and advise Queensland's new Smart State Council, which also
includes various state government ministers.
My interpretation of a recent article referring
to this matter: A group of 19 leaders in science, technology, medical
research, education and capital raising has been formed to chart the future
direction of Smart State initiatives. This group would be led by chief
scientist (Peter Andrews) and meet four times annually. It will form the
standing committee of larger group (Smart State Council) whose role will be
to provide strategic advice to government to guide and accelerate Smart
Queensland policy. The Council, which will meet twice per year, will be
chaired by the premier and include: Treasurer (Mackenroth); Education
Minister (Bligh); Employment, Training and IR Minister (Barton) and State
Development and Innovation Minister (McGrady). The goal of the new bodies is
to set new trends and create new jobs. They need to be Smart State
futurists, examining worldwide trends to ensure that Queenslanders can
benefit. Members were selected for their commitment to Smart State concepts,
their ability to think strategically, their professional success and their
knowledge / experience. They would advise government on: opportunities for
developing knowledge based industries; important domestic and international
developments in science, technology, engineering and skills formation;
measures to overcome impediments to achieving Smart State goals. It will be
innovators and those who quickly take up new technology who will create the
jobs of the future (Livingstone T. 'Science chiefs to plan tech future',
Courier Mail, 22/6/05).
I would like to endorse the goals that this group has been set. They seem
vitally important in order, for example, to:
- ensure future community prosperity - because of the central role which
knowledge plays in sustainable economic growth and in the competitiveness of
higher value-added industries;
- reverse the stagnation of Australia's exports (especially of higher
value-added goods and services) which has occurred in recent years; and
- overcome the supply constraints which have been seen by the Reserve Bank
to require interest rates to be raised to constrain demand and prevent
further escalation of the imbalance between the value of demand and
production which is reflected in Australia's large (approaching 7% of GDP)
current account deficit.
I should also like to submit that the key to overcoming obstacles to Smart
State goals is to shift the strategic focus towards the creation of basic
innovation systems within the mainstream economy to meet demand in existing
markets or new global niches. This implies a strong focus on developing
commercial capabilities, and a limited initial focus on identifying leading
edge trends in education and R&D.
Potentially-valuable innovative ideas have always been widely available in
Queensland. The primary obstacle to achieving Smart State goals has been the
lack of commercial competencies and organization to profit from them, rather
than the absence of high quality education or R&D. Once such innovation systems
exist, then demand for, and the economic benefits of, high quality education
and R&D will be dramatically increased.
Methods that could be used to create effectively functioning innovation
systems are suggested in A Commentary on Smart State.
The need to adopt what could be called a 'market-pull' strategy is argued in
The Economic Futility of Backing
Australia's Ability 2. It suggests that such an approach would provide
more energy and a more realistic sense of direction than the 'technology-push'
strategy which has achieved little over the past 20 years. The latter document
also comments on the need for a change in leadership style, if efforts to
develop better real-world innovation capabilities (which is one of Smart
State's core goals) are not to continue to be frustrated.
The above comments are based on a study of this subject for over 20 years,
the authorship in 1983 of a major report to the Queensland Government on how
something like the goals of Smart State might be achieved, a brief period as
Queensland's Director of Technology Policy and long study of worldwide
experience and theory concerning economic development generally.
Regards
John Craig
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