Winners Without Losers: Why Americans Should Care More about Global Economic Policy
Winners Without Losers: Why Americans Should Care More about Global Economic Policy

Winners without Losers: Why Americans Should Care More about Global Economic Policy

Mar 17, 2008

Shining a spotlight on foreign trade policy as an agent for political change, Lincoln urges policymakers, the business community, and citizens to find a path to increased stability by forging stronger international economic ties.


DEVIN STEWART: I'm Devin Stewart from the Carnegie Council. Thank you for braving the storm outside and joining us to hear about quite a new book called Winners Without Losers: Why Americans Should Care More About Global Economic Policy, by Edward Lincoln.

Why should Americans care about economic policy? That's the question.

I believe that many of you would probably agree with the premise that in the past eight or so years, coincidentally—maybe not coincidentally—the military has been used as a primary tool, and perhaps overly used, as an agent of foreign policy. This is a fairly controversial item of a lot of debate in Washington right now. Things like soft power, the role of governance and corruption, image, and education—things that were big in the 1990s in the Clinton administration—seem to have fallen by the wayside in terms of the economic and the foreign policy toolkit that we use to engage the world with.

Another point is, America had spent so much time building these great institutions, like the United Nations and the IMF and the World Bank, and they were an extension and a very useful part of our foreign policy toolkit. It has been trendy to abandon them, and even dismiss them as being useless or out of date. This might also be to our detriment in the long term.

Finally—and this is another thing that Ed is going to talk about—a lot of the big-picture problems in the world are related to a very complicated, tangled web of economic development, corruption, education, and infrastructure—transportation, for example—access to energy, and probably, down the road, will also have to do with climate change. This is something we should probably also talk about. These are sometimes considered "soft" issues. Put together, all these "soft" issues amount to something quite big.

Finally, I would just like to bring up that there is this aspect of foreign policy studies: Which country is providing global public goods? Which country is providing legitimacy? Which country is providing security for the world? Which one is maintaining the integrity and health of our trading routes? Which one is a symbol of human rights and justice and fairness?

The common wisdom is that the United States is the exemplar in all these things. But if we ignore things that are considered soft issues, then we could risk losing that role in the world.

Edward Lincoln is the director of the Center for Japan-U.S. Business and Economic Studies and professor of economics at New York University Stern School of Business. Before joining NYU, Dr. Lincoln was senior fellow at the Council on Foreign Relations, and earlier, a senior fellow at the Brookings Institution. In the mid-1990s, he served as special economic adviser to Ambassador Mondale at the American Embassy in Tokyo.

It's a great privilege and pleasure to have Dr. Lincoln. We will follow up with comments by Sam Natapoff, whom I will introduce later.

I turn the floor to Dr. Lincoln. Thank you very much.

Edward Lincoln

Devin, thank you very much.

We should add that back when I was at the Brookings Institution, I was teaching part-time at the Johns Hopkins University School of Advanced International Studies, where Devin was one of my students. Was it 10 years ago?


EDWARD LINCOLN: It's a pleasure to see one's former students going on and doing useful things in life.

Let me start with a couple of comments about why I wrote this book.

I'm an economist by training, and also a Japan specialist by training. Every other book I have written has been about the Japanese economy, U.S.-Japan economic relations, or East Asia economic relations. So the topic of this book is a little outside my field, but it is something that I had wanted to write for a long time. It came from being a lonely economist in a sea of political scientists, both at work, at the Brookings Institution—I was in foreign policy studies, and most people there were not doing economic issues—I and one other person, Nick Lardy, working on the Chinese economy. That was it. Everybody else was doing nuclear weapons control or the problems in the Middle East and things like that.

But more specifically, I spent most of the 1980s and 1990s going to endless conferences about Japan or Northeast Asia in which I would once again be a lonely economist. I would write papers and do presentations trying to explain to people why economic issues were relevant to the so-called broader issues that were the subject of the conference—basically, war and peace in East Asia.

I would do my little presentation and then the other people would say, "Oh, thank you very much. Now let's go back to talking about the really important stuff. When are the North Koreans going to get nuclear weapons?" which then they did.

I have to admit that war and peace, life and death—these are heady issues. It's real easy to kind of get sucked into the immediate political, military issues related to them. Yet, as an economist, I had long believed—although, certainly, I don't believe in economic determinism—that economics matters for these big issues of life and death around the world. So maybe it was time for an economist to speak up and try to say a few things.

Granted, this has been done before. There is a whole theory called the liberal school in international relations. Guys like Joe Nye, Robert Keohane, Robert Gilpin, and Richard Rosecrance have written books on why increasing international economic connections should push the world in a more peaceful direction. But they tend to come at this from a political science standpoint. I thought maybe I could come at it a little differently, as an economist.

So that's really what motivated me to write this book.

I realized there was a danger in doing this. One of the very first things that one of my colleagues at the Council on Foreign Relations told me when I said I was doing this book was, "Oh, you have to go read Norman Angell," who was an Englishman who wrote a book in 1912 that was basically the same subject, which said, war has become useless and silly; we don't gain from it, and we can gain, in other ways, from non-military things. Political scientists have laughed at him ever since, because, of course, that was 1912. And what happened after that? Two world wars. So people say, "Oh, Norman Angell, he really got it wrong."

It turns out, he didn't. Some people say Norman Angell predicted that there would be no more wars, which he didn't. He simply said it was stupid. In fact, he wrote the book in part because he was trying to counteract the building tension that was going on between England and Germany right at that point in time. So I think the war was no surprise to him. He was just trying to get the point across that nobody was going to benefit from it, that that's not how we prosper in the world these days, which I think was actually a good insight.

So that was the motivation.

One comment on the title of this book, Winners Without Losers. We all know that's not true. We have losers. But my starting point was, wouldn't it be great if we had an idealistic goal of a world without losers and tried to kind of push policy in that direction? We are not going to entirely get rid of losers. Everybody wins and loses in the game of economics. But you don't need to have the losers lose as badly as some of them have lost over the past several decades.

Let me say some things about what the book actually tackles.

I wanted to get across the concept that the world we live in has been changing dramatically and fundamentally, in ways that we often don't recognize, with a focus on the years since World War II, just over 60 years—not a very long time. In fact, again, one of the reasons I wrote this book is that I am now 58, so we are talking about my lifetime. Let's talk about what has changed in the world in my lifetime. And it's pretty stunning.

Some of it, of course, goes back farther. Some of the fundamental things that have been percolating along go back, say, 200, 250 years. Those things that I emphasize are basically the creation of the institutional features of capitalism:

  • Property rights. Pretty stunning. We take property rights for granted. These were not well established, even in Europe, until, say, 250 years ago.

  • The joint stock company. The joint stock company was an incredible innovation that enabled small groups of entrepreneurs to raise cash to build a business beyond the scale that an individual and his family connections could ever dream of doing. This opened the way for much larger-scale business activity in the world.
  • Besides the joint stock company, modern finance in general. The first banks in New York were not chartered until the 1790s, at the end of the Revolutionary War—not at all a long time ago. Banking and then the establishment of other issues—a market for trading shares of stock, insurance markets—these have a history that only goes back a couple hundred years.
  • Finally, of course, the biggie, technological change. The Industrial Revolution, starting in the late 18th century in Britain, set off a pace of accelerated technological change. Economic historians can tell you that this was actually going along much longer. Even during the Middle Ages, there were important technological changes. But it accelerated as we come out of the 18th century into the 19th century and has continued along through today.

So we have those things in the background. That has been going on for a couple of hundred years.

Now we come to the period after the end of World War II. Here the big changes have involved a different kind of institutional change.

First of all, the collapse of imperialism. I think this was one of the most beneficial things to have happened in the world in a long time. Aside from the immoral concept that was behind imperialism, it was a way of organizing economic activity that was very exclusive. It's kind of like the European Union, except that the European Union is a bunch of equals getting together. You had the free flow of trade and investment within these empires, but not among them.

Furthermore, they were inherently conflictual, because the basic concept in imperialism was, I want to control access to the economic resources of this particular country or area that I am taking over, and by so doing, I am denying or impeding access to those economic resources to everybody else in the world.

If that is your guiding philosophy, and you have half a dozen big nations in the world all going out and trying to do this, and there is only a finite amount of territory in the world to be controlled, then you have immediately set up an environment in which those big powers are going to be in perpetual conflict with one another over the attempts to grab control over other territory.

With the collapse of imperialism, that whole rationale for armed conflict has disappeared.

Second, replacing imperialism, we had the establishment of a new set of multilateral institutions—very imperfect, and yet I think they are probably much more important in the world than we give them credit. These are basically the Bretton Woods institutions—the IMF, the World Bank, and the World Trade Organization. Even though these institutions, we can argue, are dominated by the big powers, they are an awful lot more democratic than imperialism. They have provided a sense of structure to the world in which countries can interact on a somewhat equal basis.

The third big change since the end of World War II was the collapse of communism and the spread of modified market-based economies. This, too, I think was really important. That we went through a period of almost a century, from the early 20th century to the late 20th century, in which there was a big conflict between communism and capitalism as an organizing principle—this was a motive for numerous revolutions and civil wars around the world. And it's gone. With it, the notion of a major alternative to capitalism has faded.

I'm a little cautious in using the word "capitalism," because what we have in our country today, and in all countries that have market economies—I actually prefer the term "market-based economies"—is a very modified version of what capitalism was as it was originally appearing a couple of hundred years ago, because societies, particularly democratic societies, recognized over the years that there was indeed a very dark underside to capitalism. It did increase income differentials, particularly in the early phases of capitalism. It created an urban underclass in places like England and France and the United States.

We needed to modify this. This was unacceptable in our societies. We have done some of that, to varying degrees. Different countries have gone to different lengths to deal with some of these issues.

It's this sort of more modified sense of capitalism that has been spreading around the world, which I think is important because it is the market-based economy, based on the principles of property rights, financial markets, the joint stock corporation, that has created much of the growth in the world over the past two centuries.

Finally, we have had just a continuation of technological change. We tend to think that maybe some of the real big things in the world happened some time ago. We have been flying airplanes now for 100 years. The railroads were invented back in the 19th century. The gasoline engine was invented in the late 19th century.

But think about some of the things that have happened just in the past 60 years—even less than that. The first time I ever made a telephone call from the United States to Japan was in the summer of 1970. I remember it vividly because I was calling my girlfriend.

It worked out, by the way. It was a good telephone call. We have been married now for 36 years.

So she's off in Japan; I'm in the United States. I really felt that I needed to talk to her.

You call the local operator and you say, "I want to place a call to Japan." The local operator transfers you to the international operator, probably in someplace like New York back then. The international operator gets the information, the country, the phone number, the name of the person you are trying to reach, and she says, "Hang up and I'll call you back."

So you hang up the phone and you wait and you wait and you wait. Fifteen minutes later, she calls back. At that point, she is talking to the operator in Tokyo. The operator in Tokyo is dialing the call, and the call goes through.

At that point, it was $10.00 for the first three minutes and $3.00 for each minute thereafter. My phone call cost me $40.00. I was a college student. I had a summer internship that was paying me $85.00 a week. So it was almost half of my weekly pay to make that phone call to Japan.

We now have in-laws in Japan. We have a calling plan with our long-distance provider, and I think we are paying 7 cents a minute. Of course, if you do email, the marginal cost is zero, because you simply pay a monthly fee to be connected to the Internet.

Anyway, that's one form of technical change.

One other example I will give you, since we are in New York, is containers. Containerization has dramatically driven a set of technological changes, driving down the cost of transportation. It's hard to believe that Manhattan was one of the leading ports in the United States until the 1950s. Look at photographs of Manhattan from 50 years ago. Around the Hudson, around the tip, up the East River is covered with docks. Can you imagine this, coming in and unloading a ship piece by piece and putting it into trucks, to be driven down New York City streets? Talk about a high-cost operation.

Then along come containers in the late 1950s and 1960s, and, of course, the whole operation moves across the river to Port Newark, which is now one of the largest ports in the United States. The speed and cost at which merchandise can be handled, taking it on and off of ships, has been dramatically reduced. I think, on average today, the transportation cost of imported products is now down to something like only 5 percent of the total retail value of things that you buy—a really minimal amount, less than half of what it was even 30 or 40 years ago.

These are certainly the big changes that have occurred postwar. As a result of this, we have seen in the half century from 1950 to 2000 a tripling of global GDP per capita. You are three times better off in terms of income, on average—everybody in the world—than you were in 1950. The circle of affluent nations has been expanding. Countries that have a GDP per capita of at least 50 percent the level of the United States—roughly $20,000 today—there were only six countries in the world with a GDP per capita of at least 50 percent the U.S. level in 1950; today it's up to 27 countries. As a share of global population, it has gone from 6 percent to 15 percent. It's still not high, but rising rather sharply.

International trade: The global exports have gone from 12 percent of global GDP in 1960 to 25 percent by 2000.

Foreign direct investment, the flow of investments overseas where the investor owns and operates the operation at the other end, has gone from roughly 2 percent of the total fixed capital formation in the world back in the 1970s to 10 to 12 percent of global capital formation in this decade.

Portfolio investment has also opened up. For the United States, in the 1960s and 1970s, the inflow or the outflow of portfolio capital was running about 0 to 1 percent of GDP. Now the inflow is running 5 to 6 percent of GDP and the outflow, 2 to 4 percent.

So all of these dimensions of connectedness among countries in the world, of affluence in the world, have been growing at what I think is a pretty stunning rate. The point of my book is to argue that not only is this an amazing story, but that this has implications for other things that are happening in the world.

For example, as we have grown and developed, as we built the mechanisms for market-based economies, we destroyed the linkage between affluence and land. I can't overemphasize that. Much of military conflict in the world, whether you call it religious conflict or something else, has been about the control of land, because land and the political control of land was how you got rich. Governments basically were rich people. The government existed in a lot of societies to support a lifestyle of the people who said, "This land belongs to us. You people out there don't own the land, but you're going to work the land and you're going to give me a percentage of the output from that land. What do I give you in return? Oh, protection against barbarians out there somewhere."

A lot of government around the world was really no more complicated than that, until we get into the 19th and 20th centuries.

So breaking that connection, creating an alternative where you can say nobody needs to control the land anymore to get rich, because you can have a corporation and it's the corporations that create the value— if you need access to resources in another country, we have a system of global trade. You can buy those resources at market-determined prices. You don't need to believe that you need to control the land to get access to those resources. That whole mentality about how to engage in an international world is gone—or should be gone. Some people don't seem to know that it's gone.

I spent a little bit of time thinking about motivations for individual behavior as well. Here, too, if you go back and look particularly at Western societies, but some Asian societies, like Japan, as well, being in the military was a very honorable thing to do and a profitable thing to do. If you don't actually control the land, you can at least go into somebody else's country and rip off the stuff that they have already produced.

Until the 19th century, for example, even, say, in the British Navy—certainly through the Napoleonic Wars—you gain by capturing enemy ships. In England there was a well-developed market and a court system. You capture a ship, you bring it into port—you don't want to sink it—and you sell the contents, and everybody on the ship, particularly the captain, gets a share of those proceeds.

In the United States, that continued through the Civil War. Navy captains and sailors in the U.S. Navy capturing blockade runners in the Confederacy were able to bring those ships back to the North, sell them, and make money off the proceeds.

That's gone. We don't do that anymore. At least for us, the military is not something you get into to be profitable.

Let's suppose you are a young, aggressive, type A personality. The military was the place to go, until recently. Today in the United States, you go to New York University and get an MBA and go work on Wall Street. You can make a hell of a lot more money than you can by being in the military, or even being a landowner. You don't get rich in the United States or other advanced countries these days by being a farmer. You can by being a landlord, I guess. Donald Trump has done all right. But I would throw that into the corporate category.

The final point on these consequences here is to say that this new governance system, as imperfect as it is in the world, has again been a mechanism that works against military conflict.

Just to give you a little example, the British in the Opium Wars. The Chinese didn't want to trade. They didn't seem to think that the Brits or anybody else had anything that they really wanted, because China was the center of the universe. The little gizmos and manufactured doodads that we had didn't seem to interest them. The one thing the British figured out that they could sell in China was opium. Of course, the Chinese government didn't think that was a great idea. So the British simply fought a war with them to open up the country to opium trade.

A little closer to the present: In 1902, we had a dispute with the Dominican Republic. Companies in the Dominican Republic had defaulted on loans from New York. What did we do? We sent in the American military and seized Dominican customs houses, and we collected the import duties until the loans were paid off.

That is stunning. Can you imagine doing that today? We don't do that today. We have the IMF. The IMF may be imperfect. Countries may complain that it is dominated by the big countries. But the IMF certainly doesn't send in soldiers to collect debts in developing countries. So we have at least come partway in the right direction.

I then go on in the book to explore what has happened to the United States, what has happened to Europe, what has happened in Asia, and then what has happened in parts of the world where there is not success. I don't want to go through all of those chapters, but let me pick out East Asia, because, again, it's the strength in my background.

I think East Asia is a wonderful illustration of the kinds of changes that have been going on in the world. Let's start with Japan.

Japan's modern development dates back to the 1860s. They have a big revolution in 1867. They create a new centralized government in 1868. they say, "By God, we're going to go out and grow and develop and be like those rich Western countries, because we want to protect ourselves. We need to have an army to protect ourselves against imperialism. In order to do that, we have to have a modern economy."

Then they kind of looked around and said, "Maybe we can do this, too. If the model of the world is imperialism, hey, why can't we do that?" And they went off doing that.

The final straw that impressed upon them the need to control territory in order to prosper was when we cut off the export of oil—I think it was in the summer of 1940—because Japan refused to pull its military forces out of China. The Japanese said, "We need oil for our trucks and tanks and ships. Where is the oil? Southeast Asia. Let's go take it." That basically was the point at which they began the planning that led to the Pacific War.

The war, of course, was a huge disaster for them. Imperialism did them no good. At the end of the war, they had several million people dead. All of their major cities had been burned to the ground. They had been attacked with nuclear weapons. The place was a disaster.

Out of that disaster they rebuilt. Not only did they rebuild—prior to World War II, they were kind of a mid-ranking country. They were kind of like Korea today in terms of income levels. After World War II, Japan rises up to become one of a handful of extremely affluent countries, at the same level as the European countries at the present time.

In doing so, they were unable to exercise military power to resolve problems and disputes or protect themselves or protect the sea lanes and all of this good stuff. They were willing to be 100 percent dependent on imports of oil. They have become extremely dependent upon imports of other kinds of basic raw materials—lumber, coal, lead, zinc, copper, even agriculture. We think of Japan as being rather protectionist in agriculture, but over the last 40 years, the share of agricultural products available in the country that were produced domestically has declined from 93 percent to 60 percent, and still dropping.

It takes a lot for a country that prior to the war had said, "We have to control territory," to open up and say, "Oh, this is okay." They have developed a whole series of mechanisms for coping with that dependence upon imports of basic materials.

They also are an example of how the new institutions work. Japan is a member, of course, of the WTO, the IMF. In the WTO, we have complained about Japan rather bitterly over much of the last 40 years—not now, but from the late 1960s through the mid-1990s, we had lots of trade disputes with Japan. But on both sides, our side and the Japanese side, never did we get to the point of saying, "Screw this; I'm dropping out of the WTO," because, particularly for the Japanese, membership and the legitimacy of membership in this organization was very important to them.

Furthermore, I think mutual economic gain between the United States and Japan helps to explain why our disputes over these many years never spun out of control.

Then there's China. China, I think, is one of the most amazing stories in Asia. Here we have a country that had this prolonged, painful, devastating revolution, civil war, from almost the beginning of the 20th century up until 1949. Along the way, they had to fight the Japanese, too. Finally, in 1949, the Communists come into control. They want to radically transform the economic model, which they do.

It doesn't work. It's a very insular model, particularly after they didn't get along too well with the Soviet Union, after the early 1960s.

So in the 1980s, they begin to change. They still have their Communist government, and we worry about that and don't really know what that means. But economically this has been phenomenal, for that country to open up to the extent that it has. International trade is now—both exports and imports are more than 40 percent of GDP. That's like South Korea or the European countries, not like the United States or Japan. This is a pretty open economy in terms of trade.

On direct investment, they welcomed these capitalist companies to come and invest in their country. So we now have the inflow of direct investment running at about 8 percent of fixed capital formation in China. That's pretty high.

So I'm just overwhelmed with this. With it came very high growth. We all know that for the last 25 years or so, coming up on 30 years, China has been growing at an average rate of almost 10 percent a year. This is like what Japan did from the early 1950s to the mid-1970s. This is a stunning growth rate.

As these changes have taken place, this means that China is now deeply embedded with the rest of the world. I have to believe (not being privy to these conversations) that when the political leadership in China sits down and has a debate over, "What are we going to do about the latest provocation from Taiwan?"—you have the president of Taiwan saying, "We want to be a legitimate independent country," which is the one thing that none of us will let them say. You have to believe that some people in that discussion, in the upper reaches of the political leadership, will say, "If we actually attack Taiwan, it's going to really screw up our economic relationship with the United States and Japan and Europe. You know what? That's going to cause the economy to go into recession. If the people aren't feeling good, they are not going to feel real good about the political leadership."

I think it has become at least a factor. I'm not saying they are not going to attack Taiwan. One can imagine scenarios in which that would happen. But I think it has become a fairly important factor in those deliberations.

A final part of East Asia that I talked about a bit is Southeast Asia. Here, too, I find the changes very surprising. Here we are dealing mostly with countries that had had an extremely bitter experience of imperialism. One can understand why, after getting out from under that yoke, they were not particularly interested in inviting companies from the imperialist West back into their countries. So they go, "No. We want to close off. We want to have import barriers. We want to have barriers on investment. Stay out."

It didn't work terribly well, and they, too, have opened up. So you have had a very rapid inflow of direct investment to most of these countries. Their growth rates have accelerated, particularly in the last 20 years. The willingness of these societies to open up and say, "We are no longer concerned that allowing a large inflow of foreign companies into our country compromises our sense of independence. It is not infringing upon our sovereignty. We can keep them under control"—and it has worked.

Again, there certainly have been problems along the way. We had the financial crisis of 1998 that many in Southeast Asia blamed on foreign investors. That's a different story that I don't want to get into at the moment. Let me just say that they have recovered from that blow, and I think we have all learned something about international financial markets from that.

So I see East Asia as a whole as kind of the poster child of the positive side of the changes that I wanted to talk about in this book.

But, in conclusion, I don't mean to sound Pollyannaish. I don't mean to say that everything is great and wonderful in the world and we don't have to worry about military conflict and, "Boy, this is great." There are a lot of things that aren't going well in the world. As Devin mentioned in his introduction, in the last seven years the United States has been particularly eager to use the actual use of military force to try to resolve problems around the world, with very mixed results.

We have extreme poverty in large parts of the world. We still have—whatever it is (I've forgotten the number)—in excess of 1 billion people, maybe 2 billion people, existing on a dollar a day. This is the definition of extreme poverty. We have countries that seem to have real trouble getting onto this rapid growth path that we have seen in East Asia.

We have international terrorism. We have religious extremism. We have lots of problems.

But it seems to me that as we address these problems, military solutions don't get us very far. They may be necessary in some cases. I think, for example, that, push come to shove, probably invading Afghanistan was okay. It was an extreme situation that needed to be dealt with. We did it. The follow-up has been rotten.

The rationale of invading Iraq was really not there, as far as I'm concerned, and here we are, stuck in a situation that is difficult to get out of.

So what do we need to do instead? I think we need to be moving away from our military-centric approach to the world. I think that it starts at home. If you want the United States to play a leadership role, that means we need a United States that continues to be a champion of openness, of being connected through trade, direct investment, portfolio investment. In order to do that, in order to underwrite political support for that in the United States, we need to have a society that keeps the U.S. economy growing and flexible, but also addresses the needs for those who are hurt in this process.

I think, for example, that the start for us playing a leadership role in the world begins with universal health care, portable pensions, attention to income disparity, and things like that. Why? Because you want people who lose their jobs in a flexible economy to at least have the support of continuing health care, at least be able to take the pension money they have built up with them in their 40l(k) plan or whatever they have.

So those are the kinds of things we need at home to underwrite our continued leadership in the world, so that we can continue to champion open trade policies and open investment policies.

Next, I think we need much more attention to the health and performance of the major multilateral economic institutions. I know there were a number of people over the last decade or so who have said the Bretton Woods institutions aren't working; we need to tear them apart and build up something new. I'm not convinced that it's that bad. You can argue that the IMF is an institution with no role to play in the world anymore. But if nothing else, at least it's a discussion place; it's an analytic place. They have meetings once a year. You get finance ministers together to talk. That's useful. Its role in bailing out countries that get into financial difficulty has been a little more mixed.

Personally, I would rather focus on keeping the IMF and tinker with it, and maybe tinker with the World Bank, tinker with the World Trade Organization, rather than engaging in wholesale creation of new institutions.

Finally, I think we need a much stronger focus in American policy on trying to draw poor countries onto the escalator of economic development. It's not an easy thing to do. We have been trying to do this for at least the last 50 years. We have had lots of failures along the way.

I have a colleague at NYU, Bill Easterly, who spent a number of years at the World Bank, and, man, this guy is really discouraged about all the things that have not gone right in economic development in the last 40 years.

But I don't think that we should say, "Oh, well, it doesn't work. The poor will always be with us. Nigeria will always be a mess. The Sudan will always be a mess." It doesn't have to be that way, in my opinion. I think that we really need to focus on it and, again, look beyond the immediate military issues of, say, trying to end the carnage in Darfur, to saying, once we have that stopped, what do we do next? What do we do to try to put Sudan onto a more successful development path and see to it that the proceeds are shared among the various ethnic and religious groups, so that they don't feel so disgruntled that they want to opt out and start killing other people?

Much of that is going to be a focus on Africa. Most of the poorest countries in the world, most of the countries that are failing to grow, are in sub-Saharan Africa. I would like, for example, to see the next administration in the United States say, "We are going to be the champions of African development. We are going to pull together other individual governments and engage the United Nations and the World Bank and the IMF," and say, "Let's all sit down and figure out what we can do together."

That's the kind of thing that I think American leadership in the world ought to be doing.

On that note, let me stop.

Sam Natapoff

DEVIN STEWART: Thank you very much, Ed.

We have Sam Natapoff, who has come up from the World Policy Institute. He directs the World Policy Institute's Global Economic Architecture Project. He has a broad background in several government-related institutions, government organizations, including nine government institutions in five countries. He received his Ph.D. from George Washington University.

He is going to comment on Ed's remarks. Then we will open it up.

Thank you very much.

First, I would like to thank Devin and the Carnegie Council for hosting this event. I know we at the World Policy Institute are very grateful. We have always enjoyed our collaboration with the Carnegie Council. We have really managed to have some very constructive events. Again, we are very grateful, and we are looking forward to doing more.

I, for one, very much enjoyed your talk, Professor Lincoln. As Henry VIII used to say to all his wives, "I won't keep you long." [Laughter]

I have spent, actually, most of the day reading this book. I learned a great deal. It just made me feel that I have to go back and read it again.

But one of the things that he focuses on is the difference between military policy and economic policy. I have some very brief comments, and then let's open the floor up for some questions.

As a political scientist, and one, perhaps, not in the greatest favor of the man on my right, I would like to talk about the differences between political science and economics when it comes to competition. One of the main differences is the way that economics and political science view competition and its outcomes.

In economics, competition within the market, under fair rules, supposedly reveals merit. In political science, it's a very different view. Essentially, it's seen much more as a thinly veiled attempt at dominance. So you have a very different consideration of the outcome.

In my opinion, and clearly that of Professor Lincoln, the nature of international competition is changing. Among developed nations, which he has been talking about this afternoon, military confrontation has fallen away a great deal and economic competition has risen a great deal. I would like to give you just a quick example of that.

The most recent significant military confrontation that has been seen is the 2003 Iraq War. But the disparity between the combatants was quite considerable. In 2003, the U.S. military budget was $276.7 billion. The Iraqi military budget was $1.3 billion. That's the military side.

On the economic side, within the last year, the United States has had some considerable difficulties and challenges with the Chinese government and the Chinese economy. However, when you look at the size of the two economies in purchasing-power parities, the U.S. economy is $13.9 trillion and the Chinese economy is $7 trillion.

As you can see, there is a very big difference in the international competitions that we are beginning to see on the economic side, where the parity seems to be greater, than there is on the military side, for the moment.

So economics has clearly become a key realm, where international competition between major countries is being resolved.

A few points:

First, Professor Lincoln in his book describes the rising importance of Japan and China as key economic actors. I couldn't agree more. In certain ways, I consider China as "Japan 2.0"—the major economy in Asia, driven by export-led growth, with increasing foreign exchange reserves, making a huge impact on the global economy, coupled with an unprecedented economy of scale.

A key difference is, of course, that China has considerable nuclear military capacity and Japan does not.

I had several other things that I was going to talk about, but since he covered them, half of my talk is gone.

But that will take me to my last point, pretty much, which is those terrible moments when war becomes economics by other means. The natures of war have changed over time. We have heard about wars over property. Then they have become primarily wars of succession, such as the Hundred Years' War, and then wars of ideology, such as the Crusades or the Thirty Years' War or, of course, the Cold War.

Finally, and more recently, we begin to see the revival of wars over commodities, such as the Iraq-Kuwait War.

Ironically, Russia lost a war of ideology, the Cold War, and now is, in some sense, winning an economic contest with the European Union by holding the EU hostage over its control over oil and natural gas.

This raises the question of the economics of supply and demand. Economics holds that if the supply of something valuable is limited, the price will go up. But if the supply in question is important enough in international politics, often it isn't resolved in the boardroom. Occasionally it's resolved on the battlefield. In these cases, countries have gone to war to control these commodities. So you could say that, as I said, war has been economics by other means.

There have been several specific cases. There have been wars over oil, natural gas, and one interesting one is wars over nutmeg. I bet most of you don't know why I talk about nutmeg. Four hundred years ago, a single bag of nutmeg could provide a life of prosperity for someone. You could only grow nutmeg in 10 islands around Indonesia. So in 1665-1666, the British and the Dutch fought these tremendous wars over control of these 10 islands. In 1667, they signed a treaty, the Treaty of Breda, where the British said, "Okay, you can have all 10 islands," and in return the British received control of a different island. We are sitting on that island. It's the island of Manhattan.

So there is a moment when you consider that wars over commodities 400 years ago were incredibly relevant, relatively relevant for the event we are having today. Also, to some extent, there are other wars of commodities continuing today—of course, Iraq, Kuwait, and the general region.

Finally, I would like to pick up a reference to Sir Norman Angell, whom we heard about a little earlier. He wrote The Great Illusion. After he wrote this book, he was elected to Parliament in Britain, in 1929. In 1933, he won the Nobel Prize. But the policy implications of his work were ignored by the government of the day.

I find it very ironic that someone could leave elected office, win the Nobel Prize, and at the same time, have his work be completely ignored by the government of the day. But I'm sure that will never happen again. [Laughter]

Thank you very much.

EDWARD LINCOLN: Sam mentioned our military budget, which reminds me of something that just occurred to me a couple of days ago. We have the president submitting his budget to Congress. The increase in the military budget is $38 billion. That, of course, does not include what will become special appropriations later on in the year for Iraq. A lot of the Iraq stuff is not in this military budget. Throw that in, and you are probably talking a $50 billion increase in the budget.

Japan's military budget—Japan is the third- or fourth-largest military power in the world. Even though they have a constitution that says they can't use it outside their own country, they spend roughly 1 percent of their GDP on the military. It's actually a pretty advanced military. Their budget is $50 billion.

So the increase in our budget is equal to the entire spending of one of the next-largest military powers in the world.

The nutmeg example—we have probably read the same book. There was a wonderful book written about the whole nutmeg situation about 10 years ago. It illustrated to me "old-think." This was the mentality that went into the creation of imperialism. You had Dutch and British entrepreneurs who both wanted to control the nutmeg trade. Both of them were able to enlist their governments and the military power of the governments to try to back up their effort to be the sole controller of this particular trade. That's the way we thought about things in the world. That's the way the Japanese thought about access to oil in the late 1930s.

That's not the way we should be thinking about it now. Yes, we still do seem to have occasional outbreaks of violence over control of commodities. It's not uncommon for people at discussions in Washington to say—kind of wink-wink, nod-nod—that's really what the invasion of Iraq was all about. If it was, that was really mistaken.

The Japanese, actually, had the right attitude. In 1990, at the time of the Gulf War, when Saddam Hussein invaded Kuwait, the initial Japanese government reaction was, who cares? They were really kind of taken aback when the H.W. Bush administration was outraged about this—This is a violation of international principle, one country invading another country. We're not going to let this stand."

The Japanese reaction had been, "So Saddam Hussein has more oil. So what? Japan is a big buyer. We have negotiating power in this game. The fact that he has acquired another nontrivial chunk of domestic oil production doesn't really matter that much in this bargaining game. We are confident that we can negotiate with him successfully, still." So they were really very puzzled.

So this notion that somehow we needed to go into Iraq to do something to stabilize oil supplies or make sure that he couldn't do whatever we thought—I don't even understand what they were thinking. But that whole mindset, that you can accomplish something usefully by using military power to do something about these kinds of resources, is outmoded.

On the Russian one, my guess is that the Russians made a big mistake when they, very temporarily, cut off the flow of natural gas to Western Europe because they were in a fight with the Ukraine. They were ticked off at the Ukraine, but the pipes go through the Ukraine to Western Europe, so by cutting off the gas to the Ukraine, they also cut off the continuation into Western Europe. It was probably a mistake.

What they have done is to motivate the Western European countries to say, "Russia is not a very reliable supplier. Let's do something else."

So in the short run, the Russians win, if they wanted to use this for political purposes. In the long run, not really. In fact, in the long run, probably, one of the more unfortunate positions to be in in the world is to be sitting on top of a huge amount of oil and gas. These are some of the most problematic countries in the world. They don't look poor, but they are in bad shape. The Russians are in danger of falling into that trap. We probably ought to worry about that.

Questions and Answers

DEVIN STEWART: We should probably open it up. But I would like to ask, one thing that everyone has sort of addressed, but not comprehensively or in a unified manner, which is one of the words in the very first part of your title, is "losers" of the global economy. Both of you have mentioned the origin of "losers." Perhaps this is something we should be mindful of—how losers appear on the horizon—and think about them as not only ethical duties to us, globally, but also risks to our security. Lots of times the ethical choice and the secure choice are the same.

I agree with Dr. Lincoln that a lot of conflict has been based primarily over land. Land is sometimes the first item in the production function. Your phrase, "War is economics by other means," is very apt there, I think. Thinking about natural resources also inside land—it's not that removed from land—the argument still stays.

What about the future of conflicts, going forward, in the climate of change—actually, climate change? If you actually have land eroding from the coasts and the losers cannot keep up technologically to defend themselves from water—even in my hometown in Rhode Island, the erosion on the beach has come up 20 feet or so in the past few years—will this create a new brand of loser that we have to think about?

Yes. Actually, I guess I'm less worried about the people who get inundated by water and more worried about the people who don't have water. That's probably the bigger impact on population. Bangladesh suffers if the water level in the ocean comes up, but I worry more about places where there may not be enough water—the southern edge of the Sahara, where the desert just seems to be advancing, the American West, which seems to be getting drier. We may have some very large dislocations of people, and there could be very large political implications to all of that.

I would like to jump in on that. At the end of your book, you talk about—when you talk about losers, there are two levels. There are domestic losers and there are international losers. Domestic losers in the United States: One in five children goes to bed hungry. One in seven children is homeless in the United States. They are losers. They will not get a stable home environment. They won't get to go to school. They will not be able to develop the skills required, the human capital required, to compete in this burgeoning global economy. These children are losers now, in the richest country in the history of the world.

That's the domestic side.

Then you move over to the international side. You can have countries that are, perhaps, providing raw materials for more developed nations.

But one thing I want to pick up on, Devin, because I think you put your finger on it, which is, the global economy is beginning to adjust itself to recognize the necessity of sustainable development. One of the issues is in Brazil. Brazil is now being given carbon credits to maintain the Amazon rainforest. Reforestation is a way for countries to gain credit in international institutions. They might have a coal plant for which they can't buy a carbon permit, in which case, if they reforest, they may be allowed to.

So the operationalization of the economics of sustainable development is beginning to move more quickly. Again, will it move quickly enough? If it doesn't, we will all be losers.

DEVIN STEWART: We would like to open it up. Comments or questions?

QUESTION: Dr. Lincoln, I'm going to start with an anecdote and then go to a question. Your phone story reminded me of something that I saw when I was growing up in Poland. This was not the 1970s; it was the 1980s. At that time it was still a communist country. To make a long-distance phone call, you needed to first call an operator and make an appointment with someone who would listen to your conversation. [Laughter]

EDWARD LINCOLN: What happened if no one was available?

QUESTIONER: You waited for weeks. A very similar system. You would wait by the phone, and if they called you and you weren't there, you missed your turn. You would have the phone ring a week later and they would say, "We have somebody ready for you now." You get on the phone. Someone, in fact, is listening, and if you say the wrong thing, you will just hear a click.

Since then, of course, Poland has moved from a statist economy, with zero growth and very equal poverty, to a very rapidly emerging economy, with 6, 7, 8 percent growth, but also greater disparity of income. But the openness, in general, has been very positive for Poland.

However, if you look at the priorities of this country, the first thing you will see is that they chose to enter NATO first and got into the EU second. Pretty much all the countries that have emerged from the Soviet bloc have followed the same pattern—NATO first, EU second.

I would like to posit that perhaps we take for granted the fact that security was first and economic development came second in the West. By the time that the Industrial Revolution hit and all the advances that you have mentioned started to take hold, there was already rule of law and a certain level of international security that the countries enjoyed.

This is not where Africa is right now. So while we can talk about developing their economies and spreading the wealth around, most of these countries still need security.

Just looking at what's going on in Afghanistan right now; many of the things that are being mentioned as turning the clock back on development are being caused by a recurrence of suicide bombings in Kabul.

Please, Sam.

SAM NATAPOFF: Let me address that very quickly. I'm going to embarrass myself and try my hand at some economics here. I'm going to, in a very minor way, address your question as game theory with different incentives. You are negotiating with two very different actors here. To get into NATO, you need American approval. To get into the European Union, on an economic level, you need to negotiate with the French.

The issue, then, becomes—and you will forgive me for putting it this way—we have a very good example of this with the case of Turkey, who is a member of NATO and is desperately trying to get into the European Union. The Americans have said—George Bush has said out loud, and that really helped—of course Turkey should join the European Union. The president of France expressed his displeasure, and Turkey still isn't a member of the European Union.

On the military side, on the security side, perhaps it's easier because your incentives are different. When it comes to economics, where you have to split up the pie in a slightly different way, perhaps that's why it's a little more difficult.

Ed, you talked a bit about the need to bolster institutions like portable pensions, health care, income disparities here in the United States to underwrite our openness with the world. Looking at soft power issues and something that I think you once called "sticky power"—

Not me, no. That was Walter [Russell] Mead.

Oh, Walter Mead. He speaks here often.

How about getting our role in the world underwritten by the populations outside the United States? How does being an ethical actor and exemplar, both at home and how we engage with other countries—Joe Nye's ideas that if you have legitimate policies and you have a really exceptional culture and so forth, people, particularly in democratic societies abroad, will agree with your foreign policies.

Do you talk about this? What do you think?

If you have smart policies. I think what we tend to go through periodically in the United States is—in terms of soft power, yes, I think over the last 50 years we have amassed a great deal of international reputation as a democracy that works, as an affluent country, as a place where there is real freedom of the press, real freedom of ideas. Then periodically we go off and we do something really stupid. Luckily, I think, for us, you get the rest of the world getting all agitated about our stupid policies, but with an underlying remainder of goodwill, so that when we finally snap back and say something more sensible, it's once again relatively easy for an American government to play a leadership role and get others to listen to our policies.

For example, we got started on climate change, which is something I really don't address in this book. But on climate change, you have a situation where we have not done anything very helpful on the international level in the last seven years. Hopefully, again, the rest of the world is waiting for the outcome of this election. I think, actually, whether it's a Republican or a Democrat who wins, there is going to be a change in how the next government addresses the international problem. How do we get countries to come together and agree to something that hopefully will be in time? It had better be.

I would like to pick up on this. I think it's particularly important, given where we are and the institution that we are speaking at.

After World War II, the United States enjoyed a reputation of its international activity based on its ethics, that it wasn't an imperial power. It didn't believe in occupying countries for economic exploitation. As a result, its activities could gain consent, and not simple acquiescence.

Robert Gilpin, a political scientist who attempted economics from time to time, talked about prestige, which was getting the value of going to war without actually going to war. It's the precursor to soft power.
It's really quite difficult to offer international economic leadership to other countries. You either have to make it in their interest or you have to pay for it all. The United States, for a long time, decided that it was going to pay for it all. That worked out fairly well.

The question is, in a time when the United States' relative advantage is much smaller and its prestige is lower, to what extent can the United States be persuasive? Leadership can be about domination or it can be about persuasion. Persuasion on an ethical level is far more efficacious and a lot less expensive.

I wondered if either of you could comment on the changing role of our military into a more soft power of aiding economics and working with other militaries in other countries, such as in Africa, as they are doing now with—is it the Africa Project Partnership?

EDWARD LINCOLN: Our military is doing that in Africa?

Yes. It's called Africa Partnership Station, I believe. Our military, Coast Guard and Navy, sailed from the coast of Spain several months ago—November, I believe—with the military and coast guards of Europe and NGOs, to put an end to smuggling along the coast of Africa.

EDWARD LINCOLN: Oh, okay. It was still a military kind of operation.

When you mentioned that—one of the more appalling things I read in the newspaper several years ago, which I stuck into my book, was in Iraq there was a story several years ago of a particular unit and the commander of that unit, who started a little local-scale thing that he called Operation Adam Smith. He was holding classes on how to start a business. I thought, "This is appalling, to have the military doing this." A guy is dressed in a military uniform and he's talking about economics. The two things just don't quite go together.

I think somebody should be there doing that work. I just don't think that the military is the appropriate group to be doing that. I would rather somebody else do it.

Emergency relief is different. When the tsunami hit in Southeast Asia, yes, the military has the manpower; it has the lift power to bring in food and water and things like that. Let them do it.

But when it comes to real economic issues, I would rather have people outside the military doing it. I just think it looks bad, if nothing else, to have the military getting into that area. These people basically aren't trained to do these things.


Leave them in their little niche and let somebody else do the other things. That would be my preference.

Just very briefly, imagine that you were running a country. Given your actions here today, I think you do a very good job. Thank you. There are several that need very good leaders. Imagine you want to get something done. You can turn to your public sector, which is relatively inefficient. Very nice people; you train them up as best you can. But you tell them to do something and they don't do it so well.

You turn to your military. You give them an order. Something happens. That is very persuasive.

Take the case of Iraq, just for the moment. I'm sure, for the people in the senior ranks of the Bush administration, it's very seductive to think, "Let's order these people to do these things, and hopefully it will just happen." Unfortunately, it doesn't seem to have happened exactly the way they wanted it to.

But in Iraq—the final point I will make—there is a very big difference between what the Americans are doing and what the British are doing. The British, with their legacy of imperialism, have a very different experience about going to a foreign country and interacting there. The British are, I believe, working hard to create social capital, in a way with which their history has given them experience. The United States, with much less imperial experience, has, in some ways, been much less successful as a result.

I wanted to ask a question about these developing-world economies. I look back historically and I think there are certain peoples of the world that are better entrepreneurs or business builders, or they seem to have been. The English seem to have been good at it. You go to some of the countries in Africa and it's a real hard slog, when you are working in microfinance, to have some of those people become entrepreneurial. Yet we are trying to do some of that in some of these developing countries.

I was just in Bangladesh, and I found that the people in Bangladesh had a whole other problem in becoming entrepreneurs. They were so full of national pride that they didn't want help from the outside. As much as you gave them, they said no. It's like a two-year-old wanting to do it themselves.

I was just questioning whether you felt that maybe it's not just a blanket thing in the developing countries to just say, if we just come up with the right combination, we will make entrepreneurs out of everybody and everybody will develop equally.

EDWARD LINCOLN: Sure. I wouldn't want to describe that as deep-seated genetic characteristics, which various people have done over the last couple hundred years. But I would say that at any point in time you get a great variety of historical experience, a previous level of development, that can affect the attitudes and abilities of the people.

You get a place, say, like Vietnam. They are doing really well. They are now one of the fastest-growing economies in Asia, partly because if you went back to 1940, before all their troubles began, my guess would be that they were far from the poorest of geographical areas in the world—certainly far ahead of, say, the Congo. In some of those parts of Africa, you were dealing with societies that, even before imperialism came in, were hardly out of the Stone Age. So there was more base work that needed to be done.

Even today, these tend to be some of the countries where literacy rates are still particularly low or medical issues are particularly egregious. In a number of countries, including Nigeria, there is an appallingly low percentage of children being inoculated against things like measles. Mortality rates for small children are still very high.

So in some countries you still have to get the health up, get the literacy rates up, get people into school, educate them, before they can even think about doing things like running a bank, whereas in other parts of the world all you have to do is tell them, "All right, the structure has changed. Go do it," as maybe in Bangladesh, and they are ready to go. They have the language, they have the literacy, they have maybe some experience somewhere in their background, and they can do it.

QUESTION: I think the elephant in the room is population growth. I don't think you can have development in all these poor countries without accelerating environmental degradation. The only way you are going to have sustainable development is if population is controlled. China is the only country in the world that has addressed this issue. No one else talks about it. It hasn't been talked about today.
Is this just an issue that is too hot politically?

EDWARD LINCOLN: Actually, no, that's not entirely correct. One of the very favorable trends in the world over the last couple of decades has been the drop of fertility rates.

QUESTIONER: In Europe, not in Africa or Asia.

EDWARD LINCOLN: Yes, including Africa.

QUESTIONER: The rate is going down, but the population—

Oh, yes. But with the exception of a handful of countries, the world fertility rate has gone from 5—that's an average of five children over the reproductive life of a woman—from five in 1965 down to about 2.6 by 2003. Two point six is still above the steady-state reproduction rate, which is about 2.1.

In the least developed countries, it has gone from 6.5 children down to 4.5 children.

So you are correct that in the poorest countries in the world, it's still pretty high. But it is coming down and has been coming down pretty steadily, starting about 1980.

These are the kinds of behavior patterns where you can't say, starting tomorrow, there will be only, as in China, one child per person. Even in China, it didn't work perfectly.


EDWARD LINCOLN: Sort of. They have another problem coming from depopulation in 15 more years. But it's difficult to do that. You tend to see these things drift up or drift down over a period of time. The decline for the least developed countries has been pretty steep and is going in the right direction. My guess is that it will continue to go in the right direction.

It is actually not the political hot-button issue that it was 30 years ago. Thirty years ago, this was something that a lot of people worried about, that there was just such explosive population growth, particularly in the developing world, that it was going to lead to not just poverty, but also political conflict and military conflict.

So I'm actually pretty encouraged by the trends that are going on.

DEVIN STEWART: Do you want to talk about Japan's demographic problem?

EDWARD LINCOLN: Japan, of course, is now, I think, the first country in the world to have an actual declining population. It started declining in, I think, 2006 and will continue to decline for the foreseeable future. There the fertility rate is 1.3.

It's about that low in Italy and Germany as well. The difference is, in Italy and Germany there is immigration. That is helping to prop up the total population. Japan has very little immigration, so their actual total population has been shrinking.

In fact, the developed world as a whole is actually a little bit below 2. It's a little bit below the steady-state reproduction rate.

DEVIN STEWART: I'm going to wrap up with one last question. In the news: the U.S. elections, Barack Obama, Hillary Clinton, John McCain, and subprime loans. Big things.

Are we going to see, "It's the economy, stupid" again? Are they going to read your book, which we have for sale in the back? Is economics going to come back into the debate and be the main pillar of policies for the next administration?

It might. I would actually be rather disappointed if the current state of the economy ends up becoming a big campaign issue, the way it did, say, in 1992. The reason I would be disappointed is that, as an economist, I can tell you that the current state of the U.S. economy—the subprime problem and its impact on the rest of the economy—is not the administration's fault. Therefore, to make that a political issue—"the Republicans have screwed it up", you had better vote for the Democrats"—that's wrong, as it largely was probably wrong in 1992 as well.

An administration has relatively little impact over the cyclical behavior of the economy. Certainly in this case, whether it was Republicans or Democrats in the White House, we would have had exactly the same subprime loan mess. I think everybody was mesmerized by the new potential for subprime loans.

By the way, there is nothing wrong, theoretically, with creating a market of subprime loans, so long as everybody understands what they are doing. It got mis-sold. The loans themselves were mis-sold to the purchasers of houses and then they were repackaged and mislabeled when they went through the financial sector. That can happen under any party.

So to make this a campaign issue and blame people for the current state of the economy I think would not be a good thing.

SAM NATAPOFF: I will take one crack at that. When it comes to this election, it's actually, I think, strikingly relevant to your book. John McCain is the candidate of military power. John McCain is the candidate of the surge. John McCain is the man who said, "I don't see any reason why we shouldn't have bases in Iraq for 100 years." That is military power. That's what we have been talking about today.

Hillary Clinton's campaign is also very clear. She is interested in the war in Iraq, in whatever way she has said that. But she has also said, "I'm worried about kitchen-table economics. It's about the pocketbook."

The Democrats will certainly run on their traditional issues of the economy. This election will be fought out either on military issues or economic issues. If it's about the economy, the Democrats will win. If it's about the military, the Republicans will win. If you want to know which side is going to win, the book is being sold right back there.

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