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Journal number 1 ∘ Ramaz Abesadze


The concepts of "the consolidated economy" and "economic regress" introduced for the first time in economic literature are examined in the article.

The essence of these concepts is revealed and sources of economic regress are established. Function of the state as "helmsman" of economy is defined.

Keywords: Consolidated Economy, Economic Regress, Socialization of economy, economic developmend


In market economy together with processes of economic development processes of reverse motion can proceed, i.e. regress, which during the certain period of time cannot be shown and even can promote economic growth.

Regressive processes can be shown in the long-term period of time and become the reason of deep crisis. Proceeding from it, each government should observe closely these processes and take the appropriate measures for their suppression.

Consolidated Economy

The development of economic history shows that economy becomes dependent on more factors influencing it.For instance, if traditional economy was mostly influenced by natural factors (drought, flood, storm etc.), modern economy is very sensitive and strongly reacts not only on the changes of factors directly impacting the economy (technologies, capital, labor, forms of property, institutions etc.), but on the changes in external factors (social sphere, culture, education, art, sport, government policy etc.).Therefore, proceeding from the interests of economic development, a certain consolidation of these factors is required to direct economic system to stable development path and on this basis to steady economic growth. Such economic system might be called a consolidated economic system or simply consolidated economy.

Consolidated economy is such an economy, when the unity of factors influencing it promotes economic development, i.e. the transition to qualitatively new, more improved condition.

Consolidated economy is an economy oriented on multifactor economic development, based on market economy, the high quality ofconsolidation of which is guaranteed by government.The role of stateis especially great in such economy, since the economy is verysensitive towards the factors influencing it and it is necessary not only to regulate the economy itself, but to implement such internal and foreign policies that will increase the quality of economic consolidation. The implementation of economic and other factors independently, may result in very significant negative outcomes for the economy.

Whether the economy is consolidated or not, does not depend on the quality of development of market economy.Consolidated and nonconsolidatedmay be the economy of developed as well as of undeveloped countries. It mainly depends on the realization by the government of the function of “helmsman” ofeconomy,if there does not exist strong influence of independent external negative factor.

Such a role of government does not exclude at all the liberalization of economy; on the contrary, it must rely just upon the requirements of liberal economy.

Economic Regress

Certainly, it is practically impossible to reach such an ideal situation when all factors are directed at economic development. Therefore, in economy there simultaneously exists positive as well as negative influence of factors impacting it. When the positive influence exceeds we have the economic development process in place, otherwise the economy regresses process occurs, which from the qualitative point of view emerges as process opposite to development.Such an economy is not consolidated because general action of factors influencing economy provokes the transition of economy to qualitatively lower state.

Economic regress is the transition of economy to a new, qualitatively lower state.

Each action directed against the requirements of consolidated economy reveals negative processes. It may be connected even with the breakdown, characteristic to market economy.

Here is the question- is economic regress and economic crisis one and the same phenomenon?Economic crisis among the system elements is the means of decision of very strained contradictions. It is the result of economic regress followed by economic development. So the crisis is the healing process of sick (regressive) economy (sometimes at the expense of great victim). During economic regress contradictions are not often seen, on the contrary it may seem as a positive phenomenon followed by economic growth. This is stipulated by the fact that (as in the case of economic development and economic growth) economic regress and economic decline at certain period of time may not coincide. But if economic regress is not eradicated it will grow into crises some time or other, which may be followed by the change of economic system. Economic crisis is an evident reflection of economic regress, where prerequisites of economic development are born temporarily strengthening the crisis, but in the end the processes of economic development help economy to get out of crisis and to incept economic upraise. Hence, economic regress stipulates economic crisis; but economic regress may not grow into economic crisis if adequate measures are taken in time.

Economic development makes progressive changes in economic system whileeconomic regress – negative. From historical point of view economic development tendency is constant,whereas economic regress is temporal. Regress quality and its duration depend on regress type, factors causing it, state system, and efficiency of state regulation of economy.Whendiscussing the relations between economic regress and economic growth the following cases may appear:

  1. Economic regress is followed by economic growth. Mainly it is the result of prolongation of crisis(internal and external wars, social tension, incapable government etc.). Then the state takes into its own hands the reins of government enabling it to overcome social contradictions and reach a high rate of economic growth. But, at the same time economic regress gains strength and, finally, the transition to market system occurs again in evolutionary or revolutionary way. Practice shows that proceeding from circumstances economic regress may seem reasonable for a certain time. But if the reasons causing the regress are not eradicated, economic growth shall be slowed and ended in crisis.
  2. Economic regress may result the slowing down of economic growth rates and finally economic decline.For example, radical deterioration of political and criminal situation is followed by the decrease of investments and, consequently, of growth rates, and finally without taking adequate measures economic crisis shall occur.
  3. Economicregress does not exert any influence upon economic growth (or is not evidently seen) for a certain period of time, but gradually are creating conditions, first, for the decrease of growth rates and then for economic decline and crisis. For example,the growth of external and internal debts and their inexpedient use finally stipulates the cut down of investments and other negative phenomena.Noneconomic interference of government in business may not be followed by momentary negative results as well, but it will gradually become the basis for many negative processes (irrational distribution of resources, corruption, nepotism etc.) and an obstacle for economic development.

The sources of economicregress

May exist the opinion that economic regress is caused by intermittence in the realization of innovations in economy, mentioned by Schumpeter and indicated by the existence of middle-term cycle (V. Golderen, K.Zhugliar, S. Kuzhnetsov, J. Kitchin) and long-term cycle (N. Kondratiev).These cycles have nothing to do with economic regress. It is connected with interrupted character of economic development. Naturally, innovations in any sector are not everlasting. They get old for a period of time and comes the period of economic growth slowdown. By common efforts of producers, scientists and government, the economy replies by new innovations again and a new cycle begins. To our opinion there does not exist a real basis for their regular recurrence. In the conditions of innovative economy the duration of such cycles gradually decreases. In Middle-term and long-term cycles takes place not economic recession, but innovation obsolescence causing the slow down of growth rates and just in this process emerge positive qualitative changes (economic development) giving the results in the following half of the cycle and growth rates begin to increase again.

Economic regress if not eradicated in time is followed by recession, decrease and crisis for a period of time.

Thus, economic regress takes place when there existdifferent reasons originating it, connected with the processes in economy and society and market failures as well as with the mistakes made by government voluntarily or not. Different sources of regress are as follows:

Heavy social conditions.When government is unable to create adequate conditions of life for the population, establish order, create prerequisites of stable economic growth. To find the way out of such situation will be possible by coming of new forces in government, taking all reins of government and quickly achieving a significant success.

This may be implemented in the conditions of restriction of market economy or formally without the change in market.

First version was realized in the Soviet Union followed by swift economic growth at first, but in economy was laid a negative charge; finally it resulted the transition to market economy again. To our opinion latest developments in the Soviet Union would be different in timely transition.

1. Was there market or not in the Soviet Union? To say that in socialism there does not exist market at all is not correct. When there exists commodity circulation there exists a market as well; but in the Soviet Union it was functioning in a very restricted form. In such cases many market functions were taken upon by government, supported by market demands though in the conditions of great restriction. In spite of obstacles, resources flew to those spheres where the demand was greater. Prices were ascertained by government relying to a certain degree on the law of demand and supply.Private property was prohibited but still existed in the form of personal property and in a shade economy.Though enterprises were in public property, governing groups considered them as their own, as a result of this they drew illegal income owing to their “production” activity. It means that in enterprises there existed a group of employed operators representing at a certain degree the qualities of businessmen [Papava Vl., 2002]. Their activity was connected with positive changes in economy, a certain progress (technological improvement, weakening of ruling bureaucracy,creation of prerequisites for the transition to market economy, improvement of informal institutions etc.).Collective property and the creation of free farm market are also the examples of market existence.

It should also be noted that till 1927 in the Soviet Union there existed private property (according to new economic policy) and, then, till 1956 functioned industrial sector of completely different trend (food industry, metal-working industry, jeweler’s art, chemical industry) of “trading cooperation”, workshops and enterprises, playing a significant role in the economy of the Soviet Union. In industrial sector there were functioning design offices, experimental laboratories, scientific-research institutes, non-governmental pension system, lending money etc*.The government, evidently, understood negative results of economic regress and promoted the development of private sector and the strengthening of industrial activity. It not the ruin, but the strengthening of industrial sector in 1956, the economy of the Soviet Union would be rapidly developed.

It may be said that the economy of the Soviet Union was an extremely restricted market economy (certainly, not up-to-date) that’s why it was called non market-command - administrative economy.

What were the main shortcomings of command-administrative economic system hampering the further development of economy? The answer is given in the works of famous researchers[Kornai J., 1990; Hayek F.1991; Mises E.L., 1993]of these problems, the main idea of which is as follows:

  1. 1.     When state replaces the market mechanism in implementation of economic function, thecentre is obliged to process a great deal of information to give orders to each economic agent. But none of the organizations even with unique possibilities can do it without losses, because the environments of functioning of economy are permanently changing and the same is with factors influencing it. As a result, plans are not fulfilled and chaos begins, alsolimited economic resources are also used inefficiently, but market economy settles this problem almost automatically.
  2. 2.     In planned economy transaction expendituresnecessary to pay for a huge bureaucratic machinery toset and implement the targets are also huge.
  3. 3.     Because of the prohibition of private property, the business creativeness of people was almost totally ignored, but some people managed to reveal their abilities in shade economy, the struggle against which requires great expenditures as well.
  4. 4.     The logic of economic development in such conditions lead us to totalitarism i.e. to such a system where all sectors of human activity are controlled by government that is also connected with the growth of transaction expenditures. In such circumstances because of low level of wages gradually arises and develops corruption becoming a certain standing rule and somehow tradition for the society as a whole.There is formed so-called “bureaucratic”, or “administrative” market, where not only material wealth but “power” and “subordination”, “rules and their breach” etc. are sold. Such relations formed in the society during years were followed by the creation of adequate traditions and  unwritten law influencing human behavior.
  5. 5.     Such a style of management gives rise to perpetual deficiency both for producers and consumers followed by the dictation of production over consumers. Appear queues, “from under counter products” etc.
  6. 6.     The government exposes strict regulation on each enterprise and at the same time care for them. Actually every enterprise experiences the shortage of resources, but can work in the conditions of losses, it will never collapse because government will undoubtedly help and save the situation. This results the production quality deterioration, but in spite of this people tired of queues buy everything.
  7. 7.     Perpetual demand surplus over supply causes monetary growth and its multiple surpluses in comparison with mass of commodities. As a result of such disbalance inflation processes are restrained owing to fixed prices. We face hidden inflation expressed in queues, coupons and other forms of scare goods distribution.
  8. 8.     In the period of centralized planned economic structure,the state takes comparatively insignificant part in international economic relations that causes the origin of so-called “black market” of foreign currency. It becomes clear, how great are the losses connected with the isolation of the country from world economic processes.
  9. 9.     On the one hand, close dependence of each man on government and on the other hand government care on people gives birth to infantilism and incapacity, to the creation of a type of man looking for commands and care,etc.

In Germany the restriction of market economy was realized otherwise. Hard economic and social situation, economic crisis of 1928 provoked the victory of Hitler. Classical market economy was unable to find a way out without the strengthening of government role in economy. In Italy it was caused by the defeat in World War I, the loss of colonies and international restrictions; economic and social crisis; inability of government to overcome the crisis. Here economy developed on the basis of private property and private enterprise but this was subordinated to the requirements of government. Each sphere of economy was controlled by government. Private property was also restricted [Berend Tibor Ivan., 2005; Stanley G. A., 1995].Firms belonged neither private not state property because of their restricted activity.

The change of market economy by force or the transplantation of other economic system.

Since the establishment of Soviet regime Russia annexed the countries being in its empire and socialist system was built; as a result of which market economy was strongly restricted in these countries. Such a situation wasin many other countries in post war years.

Wrong economic policy. It may be exposed differently:

Socialization of economy. In mixed economy the state role in economy increases and sometimes turns into socialization of economy, followed by the concentration of power in the hands of state restricting economic freedom and representing the source of many negative phenomena.Finally, we get economic regress, followed by economic crisis. The reasons of this we may search in economic paralogism (transition to wrong measures by means of unvoluntary wrong logic) [Papava G., 2011], in the mentality of those who came into power and the society as a whole, in the influence of interests groups, in the weakness of democracy[Balcerowicz L., 2005].

We must not mix economic freedom with political, so long as autocracy may exist in the country, but at the same time there may exist full economic freedom (e.g. Singapore and Taiwan, South Korea at that time). There is expressed an opinion that democracy must be obliged to capitalism (freedom in economy) and not vice versa[Balcerowicz L., 2005;Friedman M.., 2006; Schumpeter J. 1949]. At a certain extent, it is true because capitalism was followed by democracy since without economic freedom democracy can not be achieved, but without democracy itself, economic freedom may not exist or may not be maintained for a long time.

Wrong tax policy. Non-optional size of taxes decreases the investments, hampers technological improvement, the realization of innovations i.e., economic growth or decreases budgetary incomes that impedes the government to carry out its duty also followed by the decrease of economic growth rates.

Isolation from the outer world, realization of strict protective policy. Such policy is followed by investment restriction, underdevelopment of technologies, reduction of innovations, of  decline competitiveness.

Imperfect institutions hamper the functioning of economic system, gives rise to many negative phenomena: shade economy, nepotism, corruption, etatism etc.

To wrong economic policy of government also belong: populistic promises of politicians in the period of elections; wrong anti-monopolistic policy; inefficient government interference in business; private property confiscation; wrong agrarian, monetary and budgetary policy, etc.

Globalization.As it has been mentioned, globalization must be realized justly,otherwise it will have great negative impact on economy: restrict national production, slow down technological progress, decrease human capital, squander natural resources etc. Besides, globalprocesses of negative character are also negatively reflected on national economy etc.

Market economy failures. The problems of market economy failures are widely discussed in economic literature. We may only add that if these problems are not eradicated in time, there will appear regressive problems in economy. For example, if property and inequality of income distribution problems are not solved in time, it may be followed by the exacerbation of social and criminogenic situation; unpredictability of ecological requirements _ worsening of natural resources, physical and human capital, decline in the realization of goods etc.

Chaotic character of economy. It is the most invisible source of economic regress, complete avoidance of which is impossible. The identification of regress caused by chaos is difficult not only in pre-crises period, but in crisis and post-crisis periods as well (in economic theory are well-known many reasons of great economic depression and other crisis).There are manyeconomic agents in market economy, the activity of which is entirely free within the limits of “rules of game” introduced by government. Though market economy is managed by different laws stabilizing it for a certain period of time, the activity of each agent and their aggregated action do not always coincide with the requirements of economic stabilization. There are many examples of chaotic state, but at the same time chaotic market gives the opportunity to use market mechanism. Hence, the aim of government must be not the eradication of chaos, but the understanding its negative influence and ensuring their avoidance or quick overcoming of its negative results without much losses.

The change of natural environments. Is the decline caused by the change of natural environments the source of economic regress? (draught, flood, non-productivity,  exhaustion of resource, supplies, etc.). At a certain extent it is, heving economic recession or quantitative changes in this case, it turns into negative qualitative changes. For example, unemployment and poverty increase  reducing national human capital and causing social tension, etc.

Wrong foreign policy. Policy that is directed at confrontation with neighboring especially with great states.

Besides, the source of economic regress may be: underdevelopment of technologies, production methods and forms; social tension, strained of criminogenic situation, high level of inflation, unemployment and poverty; rapid and significant changes in exchange rates; underdevelopment of market infrastructure; money emission; budget deficit; great public and foreign debts, overpopulation etc.

State as "helmsman" of economy

Here we will not concern known economic functions of the state.We will point only to what role the state must play in acceleration of economic development and elimination of economic regress or fast crossing of its results.For achievement of this purpose the state will have to carry out as well noneconomic functions as  the formation of the consolidated economy, i.e. the economy focused on development, requires consideration not only economic factors.Economic (and social), and domestic and foreign policy of the state should be aimed at it.

Formation and preservation of the consolidated economy, i.e. the economic system focused on development, first of all, depends on creation of the harmonious economic system founded on a market mechanism.The state should provide the following for this purpose: freedom of enterprise, domination of a private property and its inviolability, transformation of business to the sphere of creative activity,finances, development of science, coordination of the scientific and technical potential existing in the state and private sectors.The state has to give preference to innovative tools among instruments of state regulation.In case of need, innovative regulation of economy will give the chance not to move economy on Phillips's curve, and at the same time to reduce rates of unemployment and inflations.When carrying out domestic policy, the state activity must be directed on formation of moral society, development of culture, arts and sport, on improvement of a criminogenic situation, on strengthening of judicial authority and civil society.The foreign policy of the state has to be aimed at providing the use of positive results of globalization and elimination of its negative results.

The state should pursue the policy contributing to national production as a result of which national production will become competitive in comparison with cheap, but low-quality import production.The correct state policy must provide establishment of the market principles in practice, thus has to cross any manifestations of the negative phenomena, including paternalism, etatism, nepotism and corruption.

In economy the system of determinants, which has to correspond to sources of their origin, can be used for an assessment of emergence of regressive processes. For example, it is necessary to establish shortcomings of institutes, etc., for identification of institutional regress.

Thus, for preservation of the consolidated economy the state must not only carry out its direct regulation, but also direct it, direct the process of its development taking into account all factors influencing it, i.e. the state has to carry out a role of "helmsman" of economy.For this purpose, it comprehensively has to try to get rid of economic regress, being guided by data of the daily analysis of the corresponding determinants. Scientists and highly skilled personnel should be involved in the process of analysis. The main thing is the care not only of economic development, but also of disposal of economic regress as not always both of these processes are mutually exclusive.Otherwise there will be considerable failures in economic development.

Reasons of detection ofeconomic regress in economy of Georgia

Georgia, which could have both objective and subjective reasons [eg:.AbesadzeR., 2011; Abesadze R..; Asatiani R., 2014; Beridze T…; Berulava G., 2011; Burduli V., 2012; Chikava  L, 2013 ; Chitanava N., 1999; Meskhia I., 1996; 1999; Papava V., 2005; Papava V., 2013; Papava G.., 2009;  Silagadze A., 2013; Tsereteli G.,2003], can also be an example of reproduction of regressive processes, together with other countries.

From the objective reasons we can name:

  1. Implementation of transformation still unfamiliar for world history.Walking on the unknown road naturally caused many difficulties.
  2. Destruction of old economic relations and lack of the new.
  3. Complications connected with fight for simultaneous transition to a new economic syst­em and restoration of statehood.
  4. Difficult geopolitical arrangement of the country.
  5. In certain cases, competent councils of international organization are insufficient.

For example, despite the achieved success of IMF in Georgia, nevertheless the mistakes of political, methodical, methodological, tactical character and mistakes caused by confusion, the standard approach, realized by ignoring of unjustified actions of the Georgian party, abuse of authority and others were made2.

From subjective reasons the mistakes made during reforms should be allocated, that consists, generally in the following:

  1. Wrong domestic and foreign policy pursued by the state at the initial stage. As a result of wrong domestic policy society was divided into two parts (that still proceeds).As a result of wrong foreign policy we faced one of the strongest states of the world.Both of these mistakes led the country to civil collision, violation of territorial integrity and extraordinary tension of a criminogenic situation.Economy appeared in hands of separate criminal groups.
  2. For a long time carrying out inefficient measures of fight against criminal elements owing to what the heavy criminogenic situation proceeded also in the next years.
  3. Non-complexity and non-systematic economic reforms. Economic reforms were carried out separately from each other.They had no complex, consecutive character and uniform methodology3. The state had no strategy of carrying out the scientific proved reforms.Efforts were not made for a choice of model of economic reforms, as reforms began directly (by the Russian option). The main accent was made on macroeconomic and financial stabilization whereas at the initial stage the country had neither microeconomics, nor finance because of what carrying out of real reorganizations was impossible.
  4. Incorrect perception and carrying out liberal policy. During the whole post-communist period there is a refusal of state regulation of economy because of carrying out liberal policy, which actually was not implemented as business suffered from noneconomic intervention from the state until the last period. Originally racket revealed at all levels, at the end, generally during functioning. Really, if even the liberal policy was carried out, carrying out protectionist policy in some doses (to what all states of the world addressed and now address in case of need) would be necessary not to destruct national production that would lead us to an underdevelopment of certain spheres of economy and to formation of defective market economy.
  5. Choice of an incorrect way of carrying out reforms.Transformational processes in Georgia began so hard that carrying out a shock therapy became obligatory, but preliminary preparation was necessary for this purpose. On the one hand, the first and most important mistake was that Georgia remained in a ruble zone that, naturally, did not give the chance of carrying out own monetary policy. Despite it, Georgia chose a way of transition to market economy of the country having a monetary and credit system - "shock therapy". Realization of a method of "shock therapy" requires purposeful use of the state monetary and credit and budgetary institutes. In the conditions of absence of such institutes full use of a method of "shock therapy" is impossible and any attempt is doomed to a failure. And so occurred, the shock therapy failed at us. Only 2 demands of “shock therapy” from 13 were implemented [Papava Vl., 2002].
  6. After entering of transitional currency - the coupon, carrying out an incorrect monetary policy. (Completely unjustified monetary and budgetary issue, use of the foreign credits not to destination) led to strong depreciation of the coupon - a hyperinflation.
  7. After successful 1995-1997 years, again incorrect carrying out reforms. Ineffriency of state regulation functions. As a result, corruption level has raised, the racket of businesshas been strengthened, there was a financial, budgetary and energy crisis, the criminogenic situation became aggravated, etc.
  8. Inefficient use of important international aid (that also characterizes all transformational period).
  9. Defective compliance of forms and methods of economic regulation with market requirements.
  10. Carelessness in relation to small business. Today there is no the infrastructure supporting small business in Georgia that disturbs a full employment and formation of the strong middle level of population.
  11. Negligence of rural problems within several years (because of what rural economy, actually, is on the verge of destruction).
  12. War with Russia. We could not avoid war with Russia, which did a lot of harm to economy of Georgia. Besides losses of territories, they were followed by delay of economic development, reduction of investments, pure economic damage.
  13. Mistakes made during privatization.
  14. Informal enter of age restrictions for workers in public services. Release from works of the persons having not retirement age was followed by the artificial growth of number of unemployed in the country.
  15. Infringement of the principle of inviolability of a private property  (being cornerstone of market economy).
  16. Actual cancellation of the andmonopolishc law. As a result, the competition level decreased that is a disturbing signal for the subsequent development of market economy.
  17. Growth of social tension in society both between separate sectors of society, and between the most part of society and the government.
  18. Growth of an inequality of income. That also increases social tension.

As a result, today we have the defective, deformed economy with undeveloped infrastructure, backward production and agriculture, low level of small business, weak middle level of society, negative trade balance, etc.

Elimination of the regressive tendencies existing in economy of Georgia and exit to the correct way should not happen by inertia in the future. The main attention has to be shifted towards economic development. It will occur in the country by means of construction of new, that is, innovative economy.


Development of economic history shows that the economy becomes dependent more and more onfactors influencing it. Therefore, proceeding from interests of economic development, a certain consolidation of these factors is required for the purpose of constant aspiration of economic system to economic development and, on this basis, to economic growth. It is possible to call such economic system "consolidated economic system" or simply "consolidated economy". Consolidated economy is such economy, economic development of which is promoted by the unity of factors influencing it and which means transition to qualitatively new more perfect state of economy.

Economic regress is transition of economy to new, qualitatively lower level. Such economy is not consolidated.

Discussing interrelation between economic regress and economic growth the following cases can take place: economic regress is preceded by economic growth; economic regress can cause delay of rates of economic growth and, finally - economic recession; during certain time economic regress has no obvious influence on economic growth, but conditions are gradually created at first for reduction of economic growth, and then - for economic recession and crisis. For preservation of consolidated economy, the state has to not only carry out its direct regulation, but also direct it, direct process of its development taking into consideration all factors influencing it, i.e. state has to carry out a role of "helmsman" of economy. For this purpose, it has to try comprehensively to get rid of economic regress, being guided by data of daily analysis of corresponding determinants.

Economic regress is happened when there are different reasons of its emergence, connected as well with economy and the processes in society and market difficulties, as with any and involuntary mistakes made by the government.

There are some sources of economic regress: hard social conditions; violent change of market economy or transplantation of other economic system;wrong economic policy; socialization of economy; wrong tax policy; isolation from outside world, carrying out strict protectionist policy;imperfect institutions; globalization; failures of market economy; chaotic character of economy; change of natural resources; wrong foreign policy, etc.

For an assessment of emergence of regressive processes, the system of determinants can be used, which should correspond to sources of their origin.

Georgia which had both objective and subjective reasons, which are in detail considered in the article, can also be an example of reproduction of regressive processes, together with other countries.


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