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The social cost of economic reform

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by Uditha Devapriya

“Their morals, their code; it’s a bad joke. Dropped at the first sign of trouble. They’re only as good as the world allows them to be. You’ll see. I’ll show you. When the chips are down these, uh, civilised people? They’ll eat each other.” ― The Joker, “The Dark Knight”

It’s a sign of the times that Sri Lankans are less worried about the pandemic than the economic fallout. While news outlets were full of reports on COVID-19 measures this time last year, now they are busy making predictions about the economy.

In this they are reflecting the concerns of the people. Back then the call of the hour was to enforce lockdowns; now the prospect of a virus frightens them, not so much over the risk of contracting it as the knock-on effects on their jobs, businesses, and lives.

Certainly, much has happened in these last six months which pales almost everything that have taken place over the previous nine. It is not a coincidence that we’ve fared the worst during the third quarter, with the economy contracting by 1.5 percent. What with inflation, food and fuel shortages, and power cuts, we’ve got too much to worry about.

Perhaps that is why news of the Omicron variant did not seem to worry people as much as news of the Kent and Delta variants did. How can it, when gas shortages have given way to the prospect of exploding gas cylinders? How can it, when fertiliser bans have opened the country to the possibility of a food crisis? How can it, when Fitch keeps to its time-honoured tradition of rating us down, bringing us closer to bankruptcy?

Arguably the most interesting development to come out of all this is the fiery debates that have ensued about what the State should do now. These are split between those who think that it is not doing as much as it should and those who believe its role must be reduced. For the latter the State remains ineffective, and it should thus play a smaller role.

That the pandemic and the crisis point at the ineffective nature of the government confirms liberal narratives about the dangers of political power and the need to strap in the Executive Presidency. And yet, there is a contradiction here. While many economic liberals urging the government to let the proverbial free market decide, argue that the pandemic weakened the State, many political liberals contend that it actually strengthened it.

However, while some may see a contradiction here, I do not. Under the strain of a systemic crisis, it is possible for an authoritarian regime to also be fragile. Thus, while the government gives the impression of being strong, behind the facade the unity that once underpinned it is fast unravelling. That its cracks took a little over two years to show should confirm that even the 20th Amendment hasn’t pacified the regime’s security complex.

The pressures of the pandemic, therefore, have weakened the State while also reinforcing a false sense of security. We are seeing these developments more in the government’s foreign policy volte-faces than in domestic politics: from snubbing Japan and India, it is now turning to them, no doubt to get much needed dollars wherever it can. Such reversals of fortune are ironic, and would be amusing if they weren’t so tragicomic.

What is more intriguing is that a regime that came to power promising to never sell assets, lease lands, or go to the IMF, has owing to external conditions gone back on what it pledged and imposed austerity measures. Though far from the neoliberal paradigms recommended by SJB MPs, the SLPP has enforced austerity and made it a part of life. This explains Mr Basil Rajapaksa’s declaration that no one will be hired to the public sector the next year, and that further restrictions will have to be imposed on imports, especially of luxuries.

These have already generated much unrest, though Sri Lankans are a resilient lot and they are, to borrow a Sinhala saying, “biting their teeth” (dath miti kanawa). Elsewhere we have seen full-scale riots rather than the peaceful protests we have been seeing here until now. To be sure, the latter have far exceeded in strength and size what we saw in the yahapalana era, given that even those generally opposed to strikes and protests have throw in their lot with demonstrators: the suburban middle-class, no less than the rural peasantry.

And yet, despite the time-bomb that’s ticking louder and louder, these campaigns have been relatively peaceful. What explains this contradiction, between the crisis and the nature of the protests it has unleashed? I am no social scientist, but I suggest that the reason has to do with our public services: in particular, our schools and our hospitals.

Despite the severe constraints the pandemic has imposed on them, our public services continue to function as they were meant to, keeping the less well off content, particularly through the provision of education and healthcare. One cannot discount the armed forces here: as an economic analyst pointed out to me, though it attracts much censure Sri Lanka’s military plays an unappreciated role in cushioning unemployment in villages, unemployment that may otherwise have spiralled out of control and fuelled disenchantment.

That is as much a tribute to Sri Lankans as to the welfare system in place from the later days of colonial rule. Far from yielding to systemic pressures, our public services are coping well. It is true that government hospitals are nowhere near the state-of-the-art institutions you get in the private sector. But public hospitals are run on the basis of equity, not profit. One can say the same of our schools and universities: while much needs to be reformed, these have ensured access for everyone. This is a point that gets lost in political debates, but one which Sri Lanka’s much maligned student activists underscore frequently.

In Christopher Nolan’s The Dark Night, the Joker likens madness to “a little gravity… all it takes is a little push.” Dayan Jayatilleka has related the story of Dudley Senanayake telling the UNP’s rank-and-file that he did not wish to reduce spending on welfare today only to increase spending on defence tomorrow. Senanayake would have learnt his lesson during the hartal of 1953, a lesson learnt more gravely by J. R. Jayewardene, whose regime didn’t just smash workers’ strikes but also deployed firepower against rights activists, a point the likes of Ratnajeevan Hoole have noted in their accounts of that period.

The UNP’s sense of hubris did not survive for long. Over the next decade, the Jayewardene regime realised that liberalisation had to be accompanied by a cushioning of the social and political costs of dismantling the welfare state. It also came to realise that all it took to pitch the country down an abyss was just “a little push.” Under Ranasinghe Premadasa, the UNP implemented policies that were more aware of the need for equity, though the UNP which came to power after his assassination eventually abandoned them.

The point I am trying to make here is that the thin line dividing Sri Lankan society from anarchy is its public services. It is these services that keep Sri Lankans connected to the State, that have so far prevented the State from losing control. Any party that tinkers with them will not just lose the confidence of the people, but also turn them away from more democratic forms of dissent, perhaps towards a third insurrection.

Political parties can ignore the costs of “letting go” of the public sector only at the risk of electoral marginalisation, which may be why the SJB, certain MPs of which are known for their advocacy of public sector pruning, has not gained the popular support the JVP has gained. We are seeing a seething wave of discontent from public sector workers, including teachers, nurses, railway workers, and CEB employees. Can a party strategising or banking on such discontent really afford to cut their numbers down?

I really don’t know whether advocates of reform are aware of this. But the line they and their allies draw, between economic reform and the social repercussions of such reform, is to me a patently artificial one, which does not stand up to reality. Like ostriches basking in the sand, they seem to think politics and economics occupy separate domains. They do not, as even a cursory evaluation of the 1980s should make clear.

2021 was a year to forget, more than 2020. I do not look forward to 2022, but if I do, it is because of my hope that, come what may, our public services and welfare state will not be pruned radically in the interests of “economic restructuring.” Sri Lanka being Asia’s oldest democracy has much to do with these services, in particular healthcare and education. To reduce them today in the hopes of more growth tomorrow would be inadvisable.

To be sure, the country’s political class deserves as much censure as they are going to get for putting us through this quagmire. But that does not mean ordinary people have to pay the price for the sins of others. I hope we won’t see them being forced to, because I do not want to live through the convulsions which are sure to follow such a policy.

The writer can be reached at udakdev1@gmail.com



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Politics

Foreign exchange, foreign policy, and economic roundtables

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by Uditha Devapriya

Sri Lanka’s Central Bank will be settling a USD 500 million bond the day after tomorrow. Earlier this month, Ajith Nivard Cabraal tweeted that the Bank had set aside the required amount from its foreign reserves, reiterating the country’s commitment to honouring its debt obligations. Perhaps in response to this development, bondholders appear to have regained confidence about our prospects: latest figures show that bond market prices are converging with face value, though this may well be a temporary gain.

The January 18 settlement is the first of two that will have to be made to our International Sovereign Bond (ISB) holders this year. The second, amounting to USD one billion, is due on July 25. The Central Bank’s strategy is one of doubling down on these debt obligations while renegotiating loans from other governments. This strategy isn’t as muddled up as it is made to be by its critics: unlike governments, ISB holders don’t negotiate, and if they are asked to, it’s usually on the eve of a default or severe economic crisis.

In strategising a way out, then, the Central Bank has identified its priorities: it will pay up on its ISB commitments and devote foreign exchange to little else.

It’s difficult to predict how that will affect our foreign relations in the longer term. The country is presently governed by a party that promised never to sell or lease out its assets. Yet, today, officials are travelling everywhere, negotiating with this government and that, hoping for more lifelines. We have clearly exhausted other options: we can’t raise anything from bond auctions, and we are rejecting the IMF line. Since governments are easier to talk with, we are hence talking with as many of them as possible. It’s doubtful whether this is the only option available, but it’s probably the best shot we can give.

In giving that shot, however, are we exposing ourselves to the pressures of regional and extra-regional power pressures? Consider the countries we have gone to so far: Oman, China, and India. Negotiations with India have been successful, with Foreign Minister S. Jaishankar stating that Delhi is ready to stand with Sri Lanka. Though his government has remained quiet over requests for credit lines, these may well come our way.

On the other hand, Beijing has responded to Gotabaya Rajapaksa’s call to Foreign Minister Wang Yi to restructure its debts, with Cabraal declaring that a new loan is on the blocks. As for Oman, though negotiations have stalled over requests to explore the Mannar Oil Basin in return for interest-free credit, this too is a window that remains open.

These developments are, all things considered, intriguing. In the face of the worst global health crisis in over a century, our foreign policy has taken a massive beating. The fertiliser imbroglio with China and the withdrawal of Chinese projects from the North over alleged Indian pressure, as well as the visit of the Chinese Ambassador to the North, are cases in point here. All these point to an increasingly complicated foreign policy front. The question is, will the country’s foreign exchange problems complicate it even more?

Perhaps more so than the 1970s, when it faced a severe balance of payments crisis, Sri Lanka is gradually giving way to a foreign policy dictated by depleting foreign reserves. The administration’s dismissal of W. D. Lakshman and appointment of Cabraal, in that regard, accompanied a shift of focus, during the fourth quarter of last year, to the country’s foreign exchange situation. This has spilled over to our external relations.

Here the Central Bank has had to reckon with a contradiction: between its insistence on not going to the IMF and its assurances about meeting ISB obligations. Though it’s debatable whether the Bank has addressed, let alone resolved, that contradiction, it’s clearly making use of Sri Lanka’s foreign policy to pay bondholders their due.

For their part, economic experts have shifted in their response to what the government is doing. While earlier they warned about impending defaults, now many of them have turned to questioning the current policy of repaying bondholders no matter what.

Nishan de Mel of Verité Research, for instance, points out correctly that defaulting is not the same thing as declaring bankruptcy. Suggesting that the former is preferable, he contends that the government should do what it can to renegotiate its debts. On the other hand, as Dushni Weerakoon of the IPS rightly observes, restructuring debt may be easy for a country with a reputation for defaults, like Ecuador, but it is unviable, lengthy, and costly, at least in the short and medium term, for a country like Sri Lanka.

What of the IMF line? It’s obvious that Sri Lanka can no longer negotiate for more breathing space from the IMF without conditionalities being imposed on it. The only way it can obtain such space, in other words, is by succumbing to those conditionalities.

Now, defenders of the IMF line may argue, justifiably, that there’s no give without take, and that if we go to that body we will have to eat humble pie, gratefully. But the question to ask here is, who are we asking to take on these burdens? Who are we asking to endure more of the same? Have IMF advocates considered these problems?

The IMF is not a charity: it has provided financial assistance to almost 90 countries on condition that fiscal discipline be enforced in the long term. If we go down that road, we will need to give back something, like public sector retrenchment and fuel price formulas. These have generated enough backlashes elsewhere. Are we ready to risk them here?

So long as the government fears an uprising from the people, it will not choose the IMF line. To say this is not to defend the powers that be. They have contributed to the mess we are in. But to admit to that is not to deny that, whatever that mess may be, to opt for structural adjustment, when social pressures are peaking, would be politically inadvisable.

That is why Basil Rajapaksa’s billion rupee economic relief package, tabled earlier this month despite much criticism, is intriguing: among other things, it promises a LKR 5,000 allowance to 1.5 million government workers, pensioners, and disabled soldiers. Its underlying thrust is not less money, but more: not spending cuts, but spending hikes.

The urban and suburban middle-classes have responded to the package with characteristic ambivalence. While demanding for relief from the government, they are also questioning the efficacy of printing money. What they have failed to realise is that that printing money is the only resort the government has to grant the kind of relief being demanded. It’s a classic either/or scenario: you get the relief with printed money, or you don’t.

Though economists don’t spell it out exactly in these terms, they do observe that printing money can only lead to greater inflation, implying that the only alternative is to stop doing so. But what are the socio-political costs of such measures? What are the knock-on effects they will have on economic relief for the masses? To ask these questions is not to split hairs, but to raise valid concerns that have not been addressed by the other side.

That is not to say that the government’s measures have been farsighted. They have not. Though Modern Monetary Theory (MMT) policies, which the regime is advocating, may get us space in the short term, it is not the type of reform we should be enacting in the longer term. The policies we need require radical reform and radical action. However viable it may be, printing money should not be considered a substitute for such reform.

To suggest one option, one of Sri Lanka’s most brilliant economists, Howard Nicholas, has advised that we industrialise, noting that the historical record has been better for countries which opted to do so. The example of Vietnam shows how even a sector like textiles can be used to propel industrialisation. That is an example Sri Lanka under Ranasinghe Premadasa followed, at least according to Dr Nicholas, but it is one we have since abandoned, in favour of orthodox prescriptions of fiscal consolidation and untrammelled privatisation.

Sri Lanka needs to consider these options without caving into stopgap measures and orthodox alternatives. How do we do that? As Dayan Jayatilleka suggested some time ago, we should convene an economic roundtable. Such a roundtable will likely prevent economic discussions from becoming a monopoly of elites, thereby helping the government, and the opposition, to align the interests of the economy with the interests of the masses.

This has been a long time coming. Both the government and the opposition have tended to view economic priorities as distinct from other socio-political concerns. Yet the two remain very much interlinked. In that sense, caving into economic orthodoxy while ignoring social reality would be detrimental to the future of the country and the plight of its people. To this end, we need to think of alternatives, and fast. But have we, and are we?

The writer can be reached at udakdev1@gmail.com

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Lanka has always supported the one-China policy unconditionally – Dr Kohona

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CGTN interview with Lankan ambassador to China

2022 marks the 65th anniversary of diplomatic relations between China and Sri Lanka. To know more about the development of that relationship, CGTN reporter Su Yuting sat down with Sri Lanka’s Ambassador to China Palitha Kohona.

Kohona said the relationship between China and Sri Lanka is very warm and is built on a solid foundation, adding that it is a relationship that has lasted over 2,000 years. Sri Lanka and China have moved closer to each other in recent times, and the two countries have supported each other at multilateral fora on many occasions.

Sri Lanka was one of the first countries to recognize the newly established People’s Republic of China and the two countries established diplomatic relations in 1957.

“Sri Lanka has always supported the one-China policy unconditionally and was a vocal advocate of China’s readmission to the United Nations. So, it could be said that the relationship between two countries is on a very solid foundation,” said the ambassador.

CGTN: Sri Lanka is one of the important countries along the route of the Belt and Road Initiative. What are your expectations for future cooperation in this regard?

Kohona: Sri Lanka has warmly welcomed the Belt and Road Initiative (BRI). It has also benefited from BRI-related investments. The Colombo Port City and the Hambantota Port with its adjoining industrial zone resulted from the Belt and Road Initiative. We are now seeking more investments from China, for the Colombo Port City and the Hambantota Port area. These investments should be a catalyst for businesses from other countries and regions for the Colombo Port City and the Hambantota Port. The BRI is expected to result in $4-8 trillion of investments. Some countries and regions are already doing extremely well economically as a result of the BRI investments. For example, African countries. Sri Lanka looks forward to more BRI-related investments. With judicious management of such investments, Sri Lanka should also be able to share in the future of common prosperity envisaged under the BRI.

CGTN: Sri Lanka is one of the five countries Chinese Foreign Minister Wang Yi is visiting at the start of the year. What’s the significance of this trip and what outcomes do you expect from it?

Kohona: Foreign Minister Wang Yi’s visit is the first visit undertaken this year. This by itself is significant. We believe that he will discuss a range of matters of mutual interest. China has been extremely helpful to Sri Lanka in managing its current financial difficulties. It is expected that during the visit, the parties will discuss enhancing Chinese investments in Sri Lanka and encouraging a larger number of Chinese tourists to visit Sri Lanka once the pandemic-related restrictions are relaxed. Sri Lanka is hoping that China and Sri Lanka would be able to create a bubble for Chinese tourists to visit Sri Lanka. Furthermore, we hope that more Sri Lankan products, agricultural, fisheries and industrial (goods) would be able to gain access to China’s lucrative market.

CGTN: How has China contributed to Sri Lanka’s fight against COVID-19?

Kohona: China has been the main supplier of vaccines to Sri Lanka. Three million doses were gifted to Sri Lanka by China and 24 million were supplied commercially. Sri Lanka is currently managing the COVID-19 pandemic reasonably well. It is largely due to the use of the Chinese Sinopharm (vaccine) that Sri Lanka has been able to achieve this level of success in managing the pandemic. We are currently talking to Sinopharm about the possibility of establishing a vaccine plant in Sri Lanka. We Sri Lankans will remember the Chinese generosity for many years to come.

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The international plot to force Sri Lanka into the USA’s trap is thickening

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by PROF.TISSA VITARANA

With the dawn of the Year 2022 I wish you all happiness, good health, and fulfillment of your needs and targets. But I cannot wish you prosperity, because only the rich are enjoying that privilege. The maximum tax on the rich including multi billionaires still remains at 14%. The average maximum in Europe is 40% while that in Scandinavian country is over 50%. Thus it is clear that the burden of the present economic crisis is being placed on all the people including the poor, but not on the rich.

The economic crisis according to MRI reports has forced over 50% of family incomes to drop below the poverty line. The malnutrition rate has gone up to 18.3% (which means that one in five children under five years of age will be thin, stunted and mentally deficient, while the others too will be adversely affected to various degrees). While hunger and starvation is the immediate impact, the future generations too will suffer badly. Therefore my wish for the New Year is that the Government will identify all those who are hungry and ensure that these families get free dry rations to prevent the spectre of starvation. This must be the priority. Highways and some development projects can wait.

This was the change that the people expected after this new Government was put into power with a huge majority, in Parliament. Daily the people are getting more and more angry in the face of their plight due to the steeply rising price of goods and gross mismanagement of the economy. While we welcome the package of relief measures provided by the Finance Minister to usher in the New Year, we regret that it has been given only to a small section of the population (for instance the government servants, but here too it is not clear even whether this will be confined to permanent employees alone or whether it will be inclusive of all temporary employees as well).

This type of uncertainty also applies to other recipients of the package. The large majority of the people employed in the private sector are not benefited. Even the Samurdhi recipients who are really the needy group are only getting an increase of Rs.1,000/-. Sixty percent of the employees are in the informal sector and they too are left out. Majority of those working in the plantation sector are yet to receive the Rs.1,000/- pay rise, thus flouting agreements arrived between the Government and the companies, together with the unions. But the basic cause of the economic difficulties faced by the people, the steep rise in the prices of all goods including essentials, has not been addressed.

The international plot that I referred to in an earlier article seems to be getting implemented with the rapid explosion of the forex (dollar) crisis. The Foreign Reserve has fallen to USD 1.6 billion from its normal value of around USD eight billion. The import through Letters of Credit (LCs) has now become impossible, specially after Fitch Rating dowgraded us to CC. This low rating has convinced the world that we are a poor risk country for Foreign Direct Investments (FDI). There is even a danger that there may be a shortage of essentials, like medicines and food items.

The poor state of the country and the people which is due to the economic crisis and the pandemic, is exerting a huge pressure on the economy and its hope of revival. The pressure to return to the post 1977 neoliberal policies which led to our economy facing the danger of an American takeover with its conversion into a military base during the period of the Yahapalanaya Government rule has now emerged with greater force. The dollar crisis and the collapse of the economy is forcing Sri Lanka to go on bended knee to the IMF and accept their neoliberal terms. In this context the present Government which resisted going to the IMF as well as the pressure to sign the disastrous MCC and SOFA agreements may be forced to give in. This must not be allowed to happen.

During the most severe economic crisis that occurred in 1972-73 the above problems which are mainly due to the uncontrolled profiteering by unscrupulous traders and others such as big mill owners was tackled by the SLFP/LSSP/CP coalition by expanding and strengthening the cooperative movement. Direct dealings between the producer via multi-purpose cooperatives, inclusive of the small farmers, and the consumers, through the consumer cooperatives minimized profiteering by the middleman. This not only ensured low prices to the consumer, specially of essentials, but also a fair farm gate price to the cultivator.

The LSSP again appeals to the Government to revive the cooperative movement and other Government agencies like the Marketing Department and Paddy Marketing Board. The other major factor responsible for the price rise is the problem of inflation. Inflation which had increased to 9.9% in November 2021 rose steeply in one month to 12.1% in December. This is largely due to the printing of currency notes which has reached massive proportions. For instance in October 2021 the Central Bank printed Rs.130 Billion (equal to USD 65,000,000 ) but this is only the tip of the iceberg. From December 2019 to August 2021 Sri Lanka’s debt increased by Rs.2.8 Trillion – a massive 42%. The claim that this was to maintain a low interest rate is advanced but whether it is correct is questionable. If correct it may help the entrepreneur but it is a severe blow to those who depend on interest from their saving deposits to survive, like government pensioners and other retired persons in the private sector.

Another factor is the drop in the availability of vegetables, fruits and rice mainly due to the lack of chemical inputs. The latter will really be an important factor after the February/March harvest. Which is likely to be, according to some estimate, 30% below the normal average. But the price of vegetables and fruits which are generally harvested at two monthly intervals has been badly affected by the lack of chemical fertilizers and other inputs. This in turn has led to the middleman seeking to retain his profits in the context of the drop in the supply of vegetables and fruits. There is a chain of exploitation by traders which spreads from the farmer to the Dambulla market, then the Manning market and from there to the economic zones and finally to the boutiques.

During the 1970’s crisis this chain of exploitation was eliminated through the Marketing Department, which should be restored and strengthened.

The gradual shift to organic agriculture is both the short term and the long term answer. This process requires time and a planned scientific approach. The seed varieties which were suitable for chemical agriculture must be replaced by indigenous natural varieties improved through further research. It is necessary to ensure that all the inputs like Nitrogen, Phosphate, Potassium, Calcium and Magnesium etc. are freely available for organic farming. Nano particles with 43% Nitrogen have been developed by the SLINTEC Nano Technology Centre. Pilot studies have been successful with both rice and tea.

The large scale production requires considerable investment and a private-public partnership should be achieved. The phosphorous should be converted into triple phosphate by establishing a long felt need – a sulphuric acid plant which must be set up soon. This would also lead to the chemical industrialization of the country. Potassium can be a local product at village level as well as provided by a larger scale industry utilizing plantain trees and leaves once the fruits are plucked. The promotion of the poultry industry will increase production of egg shells which could be the source of Calcium. Few items like Magnesium may need to be imported. Once these inputs are available organic farming can take off with practically no dependence on imports.

While the above measures should help Sri Lanka attain self-sufficiency in food a major weakness is the lack of industrial development. Well before States like Andra Pradesh in India captured the digital software market, Sri Lanka had the opportunity to go ahead of India, but this opportunity was unfortunately missed (a loss of USD 7-8 Billion) due to bureaucratic bungling. Nevertheless local players like Virtusa and HCL Technologies have grown and could be followed by others. The Vidatha movement which I happened to initiate can be developed to a greater extent to provide the science and technology required by the SME sector.

I am happy to learn, that beside finding a wide local market, over a thousand products are now being exported. The hi-tech institutes like SLINTEC and SLIBTEC which I initiated as centers of research and development have unfortunately veered towards playing an educational role. It is important that they should be the source of research for hi-tech industries that can effectively compete in foreign markets. In this way Sri Lanka can become not only self-sufficient in agriculture for food, as well as a centre for commercial agriculture, but it can also become a developed economy with greatly expanded export capability. This is the way out of the present “sinister” crisis which threatens our future. We can remain a truly independent sovereign nation which is no longer a poor country, but become a developed industrialized nation.

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