Information about Western Hemisphere Hemisferio Occidental
Journal Issue

Panama: Selected Issues and Statistical Appendix

International Monetary Fund
Published Date:
January 2006
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Information about Western Hemisphere Hemisferio Occidental
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Panama: Basic Data

I. Social and Demographic Indicators
Area (sq. km)75,517Access to safe water (2000)
Arable land (percent of land area)7.4Percent of population
Population (2004 estimates)Urban99.0
Total (millions)3.2Rural79.0
Annual rate of growth (percent a year, 2004 est.)1.8
Density (per sq. km.)42Education
GDP per capita (U.S. dollars, 2003)Net enrollment rates
PPP terms6,475Primary education (2001)99.0
Secondary education (2001)62.4
Population characteristics (2004 estimates)Tertiary education (1994–97)27.0
Life expectancy at birth (years)74.7Adult literacy rate (2002)92.3
Crude birth rate (per thousand)22.7
Crude death rate (per thousand)5.1Distribution of labor force, in percent (2003)
Infant mortality (per thousand live births)20.6Agriculture and mining21.0
Manufacturing and construction15.9
Income distribution (2000)Services63.0
Percent of income received:
By highest 20 percent of households60.3
By lowest 20 percent of households2.4GDP (2004 estimate)US$13.8 billion
Sources: Office of the Comptroller General; World Bank, World Development Indicators 2004; and Fund staff estimates.

In percent of stock of liabilities to the private sector at the beginning of year.

Balance of Canal Authority, after transfers of Canal tolls and distribution of profits to the government.

II. Economic Indicators 2000–04
(Percent change)
National accounts and prices
GDP at constant 1996 market prices2.
Agriculture and mining7.
Manufacturing and construction-4.5-11.4-
Consumer price index (end-of-period)
Monetary 1/
Net domestic assets6.47.40.4-2.96.1
Credit to the public sector (net)-0.4-
Credit to the private sector6.79.9-
Liabilities to the private sector8.
REER, 12-month percent change (depreciation -)-0.7-1.4-0.1-6.5-0.7
(In percent of GDP)
Investment and saving
Gross domestic investment24.619.418.021.522.0
Of which: private sector20.715.313.716.317.8
Gross national savings18.717.917.518.320.3
Of which: private saving14.816.216.217.319.4
External current account-5.9-1.5-0.5-3.2-1.7
Nonfinancial public sector
Revenue and grants24.823.822.922.421.3
Primary balance-
Overall balance, excluding Canal Authority-5.2-2.3-3.3-4.7-5.0
Canal Authority 2/
Overall balance, including Canal Authority-4.1-1.8-2.7-3.7-3.3
Gross public debt66.571.169.867.371.8
Panama: Basic Data
(In millions of balboas)
Balance of payments
Trade balance-1,142.9-696.2-1,035.1-1,092.0-1,033.3
Exports, f.o.b.1,0471,0799709991,126
Imports, f.o.b.-2,705-2,304-2,352-2,396-2,650
Colon Free Zone (net)515529346306491
Services (net)8548999811,2631,421
Of which: NFPS interest-366-415-449-474-530
Current account-689-174-61-408-237
Capital and financial account balance203890367163409
Overall balance-9141662-149-375
Stock of net international reserves7071,1161,1711,013633
IMF data (as of January 31, 2005)
Membership status:Article VIII
Intervention currency and rateB 1.00 per U.S. dollar
QuotaSDR 206.6 million
Fund holdings of local currencySDR 218.08 million
(as percent of quota)105.6 percent
Outstanding purchases and loansSDR 23.33 million
Extended arrangementsSDR 23.33 million
SDR department
Net cumulative allocationSDR 26.32 million
Holdings0.56 million
Sources: Office of the Comptroller General; World Bank, World Development Indicators 2004; and Fund staff estimates.

In percent of stock of liabilities to the private sector at the beginning of year.

Balance of Canal Authority, after transfers of Canal tolls and distribution of profits to the government.

Sources: Office of the Comptroller General; World Bank, World Development Indicators 2004; and Fund staff estimates.

In percent of stock of liabilities to the private sector at the beginning of year.

Balance of Canal Authority, after transfers of Canal tolls and distribution of profits to the government.

I. The Fight against corruption as a strategy for growth1

A. Introduction

1. The Torrijos administration has given high priority to the fight against corruption. At the same time, the administration is developing a strategy to enhance growth and competitiveness in the Panamanian economy. This paper argues that fighting against corruption is, indeed, key to raising the country’s growth potential.

2. The organization of the paper is as follows: Section B describes the nature and extent of corruption in Panama; Section C assesses the impact of corruption on growth; Section D outlines anti-corruption strategies recommended by the World Bank; Section E reviews the administration’s initial actions and future plans to combat corruption; and the final section concludes.

B. The Nature and Extent of Corruption in Panama

3. Panama is perceived as being more corrupt than many of the other emerging market countries in Latin America.2 Two of the more prominent composite corruption indices, the Corruption Perception Index3 from Transparency International, and the Control of Corruption Index,4 created by Kaufmann, Kraay, and Zoido-Lobatón (1999) of the World Bank, agree in their main messages: Chile, Uruguay, and Costa Rica are perceived as the least corrupt of the countries in our sample, whereas Panama, Mexico, and Colombia are perceived as the most corrupt countries of the sample.56 Although ordering across indices is not robust, the main message is clear: Panama underperforms many of its neighbors regarding perceptions of good governance (Figures 1 and 2).

Figure 1Corruption Perception Index, 2004 1/

Source: Transparency International (2004).

1/ Line segment indicates size of standard deviation; see text footnotes 3 and 6.

Figure 2Control of Corruption Index, 2002 1/

Source: Kaufmann and others (2003).

1/ Line segment indicates size of standard errors; see text footnotes 4 and 6.

4. Corruption is perceived as a widespread phenomenon that has affected both private and public sectors in Panama at various levels of decision-making. The World Economic Forum publishes indicators that provide a more disaggregated view of the nature of corruption in Panama.7 Corruption in the public sector is perceived as ranging from the individual bureaucrat (tax collection, export and import licensing, access to public utilities) to the high-level politician (public contracts, government policymaking), and it may also affect judges (judicial decisions).

5. The most prevalent type of corruption in Panama appears to be political, as opposed to bureaucratic, corruption. This “grand” form of corruption, as Kaufmann (2003) classifies it, seems to correspond to what survey respondents perceive to be more serious: people strongly distrust politicians and believe that the diversion of public funds because of corruption is somewhat common. In addition, people believe that powerful interests “capture the state” and condition its actions through political donations, even when the donations are legal (Table 1).

Table 1The Nature of Corruption in Panama, 2003
IndicatorRank 1/ScoreMean 2/Relative Performance 3/
Irregular payments in… 4/
…loan applications604.6 (1.7)4.994
…exports and imports654.0 (1.9)4.785
…public utilities654.5 (1.9)5.090
…tax collection674.2 (1.9)4.888
…public contracts703.2 (1.9)3.982
…judicial decisions803.3 (1.7)4.573
…government policymaking883.0 (1.7)4.271
Diversion of public funds due to corruption 4/742.7 (1.5)3.773
Public trust in financial honesty of politicians 5/911.5 (0.7)2.756
Influence of legal political donations on specific public policy outcomes 4/962.6 (1.2)3.868
Sources: World Economic Forum (2004); and Fund staff calculations.

Ranking of point estimates. Sample includes 102 countries.

Mean of point estimates across 102 countries of the sample.

Ratio of score to mean in percentage points.

1=common; 7=never occurs. Standard deviation in parentheses.

1= very low; 7=very high. Standard deviation in parentheses.

Sources: World Economic Forum (2004); and Fund staff calculations.

Ranking of point estimates. Sample includes 102 countries.

Mean of point estimates across 102 countries of the sample.

Ratio of score to mean in percentage points.

1=common; 7=never occurs. Standard deviation in parentheses.

1= very low; 7=very high. Standard deviation in parentheses.

C. Why Does Corruption Matter?

6. Why should Panama care about corruption? Apart from moral, ethical, political, and redistributive issues, which are pertinent but are beyond the scope of this paper, Panama should care about corruption for at least two other reasons that bear on economic performance:

  • corruption reduces total investment (Knack and Keefer, 1995; Mauro, 1995) and foreign direct investment (FDI) (Smarzynska and Wei, 2000; Wei, 2000); and
  • corruption induces the misallocation of resources. On the one hand, in an environment in which rent seeking proves to be lucrative, the most talented individuals may engage in rent-seeking activities in preference to productive activities (Murphy and others, 1991). On the other hand, corruption also affects the composition of government expenditures; in particular, cross-country studies show that it tends to lower government spending on education as a proportion of GDP (Mauro, 1998).

Corruption hampers growth through both of these channels by reducing the amount of physical and human capital available for economic growth.

7. Even though Panama currently attracts substantial FDI,8 corruption may prove an obstacle to a medium-term growth strategy based on foreign investment. One important component of the medium-term strategy of Panama is the prospect of a free-trade agreement with the United States. The Panamanian authorities believe that such an agreement would make U.S. firms more likely to establish operations in Panama. At the same time, Panama is developing special economic zones with the objective of attracting foreign investors. However, if corruption persists, the gains from this FDI-based strategy may fall short of their potential. For example, Wei (2000, p. 5) estimates that “[an] increase in corruption from the Singapore to the Mexico level [corresponding to Panama’s level in statistical terms] has the same negative effect on inward foreign investment as raising the [marginal effective] tax rate [on foreign corporations] by over fifty percentage points.”9 Moreover, UNCTAD (2004) reports that most FDI to Panama has its origin in the United States and, as Wei (2000) showed, American investors are sensitive to corruption in the host country. A reduction in corruption may make Panama an even more attractive place for foreign investors, thus contributing to the success of the authorities’ medium-term growth strategy.

D. Anti-Corruption Strategies10

8. This section reviews suggestions and examples of success in the implementation of anti-corruption strategies. In recent years, there has been a change in the conventional wisdom on strategies to fight corruption. In the mid-1990s, the best means of tackling corruption were believed to be the reform of public sector management and institutional reforms in the judiciary and legal fields. However, recent evidence suggests that these reforms, while effective against bureaucratic corruption, are not sufficient to curb political corruption and state capture.11

Conventional View on the Fight Against Corruption

9. Public sector reforms have a key role to play in the fight against bureaucratic corruption. According to Gray and Kaufmann (1998, p. 9), though much of the success toward controlling corruption is credited to anti-corruption councils, “the broader economic and institutional reforms that have taken place simultaneously” are the true ingredients for success. Botswana and Uganda are examples of success. Botswana reformed its public sector management practices (and, at the same time, created an anti-corruption institution). Uganda adopted a broader set of policies, deregulating the economy, appointing an inspector general to investigate and prosecute corruption cases, launching a campaign against corruption, and implementing a civil service reform.

10. Institutional anchors may be important catalysts for institutional reforms. External anchors, in particular, seem to have been especially important for some countries. In the World Economic Outlook of April 2003, IMF staff points to the role of the European Union as an external anchor for the transition economies of Eastern and Central Europe, and the impact of NAFTA on the institutional reforms of Mexico. Berglöf and Roland (1997, p. 3) find that the EU serves, indeed, as “an ‘outside anchor’ to the reform process in many, if not all, of [the European transition] countries: domestic political battles become subordinated to the overriding goal of membership.” The IMF survey also refers to Whalley (1998), who argues that NAFTA served as a commitment device for further economic reforms.12 These institutional reforms may reduce corruption insofar as they promote deregulation, market and trade liberalization, and a more transparent and efficient public sector, thus reducing rent-seeking opportunities.

New View on the Fight Against Corruption

11. After several years of implementation of institutional reforms, corruption did not change substantially in many of the countries in question. Though there are some examples of success, they seem sparse in relation to the institutional reforms that took place. In fact, reviewing trends in corruption as reported by firms in the Global Competitiveness Report’s yearly survey, one may conclude that there have been no major improvements since 1997 (slight improvements in Eastern Europe and Former Soviet Union) and that Latin America saw a deterioration.13 One reason may be that countries implemented anti-corruption policies that were not well-targeted to tackle the type of corruption that was most prevalent in these countries.

12. Political corruption and state capture have not been at the core of traditional anti-corruption strategies. The conventional fight against corruption focused on strategies better suited to combating bureaucratic corruption. However, evidence suggests that these strategies were not enough to curb political corruption. According to Kaufmann (2003, p. 32) “to attain concrete progress, it may be important to move away from an excessive focus on traditional public sector management and orthodox judicial/legal measures.”

13. Transparency plays a pivotal role in the fight against high-level corruption and state capture. Transparency “refers to the key characteristics of an effective flow of information […] to all relevant stakeholders”: access, timeliness, comprehensiveness, relevance, quality, and reliability (Kaufmann 2003, p. 20). Transparency is important in the fight against corruption because it facilitates effective external accountability. At the public level, transparency implies, among other things, disclosure of budgetary procedures, budgetary data and other economic statistics, as well as public information about parliamentary votes and the assets and income of public office holders. Developments in information technology have made the dissemination of public information easier than ever: governments may now adopt e-government tools by, for example, disclosing information via internet (e-data) or making procurement web-based (e-procurement).

Common View on the Fight Against Corruption

14. Political will, civil society involvement, measurement, information gathering, and dissemination are important elements of any anti-corruption strategy, whether it focuses on bureaucratic or political corruption. Political leadership is needed to launch reforms that address vested interests, whether in the public service or the private sector. Civil society participation raises awareness of corruption and softens resistance to the necessary reforms. Measurement and diagnostic surveys of corruption as well as of the effects of reforms are essential for the design of an effective anti-corruption strategy. Information gathering and rapid dissemination may help to measure objectives, improve services and to reduce bribery, as happened in Bangalore, India, when users of local public services evaluated them with scorecards (Kaufmann, 1998).

E. Torrijos Administration’s Anti-Corruption Measures

15. The Torrijos administration declared “zero-tolerance” of corruption. Mr. Torrijos ran for election on the promise to curb corruption in Panama. The Panamanian administration has expressed a political will to fight corruption and determination to set a good example from the top. Symbolically, the first measure of the Torrijos presidency was to abolish a controversial decree for applying the Law on Transparency; the decree was perceived by several elements of the society as against the spirit of the law (Box 1). In addition, the administration created the Consejo Nacional de Transparencia contra la Corrupción (Anti-Corruption Council).

16. Political corruption seems to be the most prevalent type of corruption in Panama and, therefore, the primary target of an anti-corruption strategy. In this light, the administration’s focus on transparency seems to reflect the right assessment of the nature of corruption in Panama and of the ways to fight it. To advance the initiative on transparency, the authorities requested a fiscal module of the Report on Standards and Codes (ROSC),14 looking at open budget processes and availability of information.

17. However, the administration should not disregard the fight against other forms of corruption. As the results of the survey suggest, corruption is widespread, and though it is perceived to be more serious among politicians and high-rank public officials, it also may affect the judiciary and the government bureaucracy. The Panamanian authorities could draw on cases of success like those of Botswana, Uganda, and Bangalore, India for the design of institutional reforms. From the surveys, one concludes that judicial reform appears to be critically important. Currently, a strategic plan for the judicial branch supported by the Inter-American Development Bank, USAID, and AECI, Spain’s international cooperation agency is underway. Among other objectives, this strategic plan aims to strengthen the financial and budgetary autonomy of the judicial branch and to promote citizen participation, alternative dispute resolution, and communication.

18. Institutional anchors may also be effective tools in the fight against corruption. The most obvious of these institutional anchors is the prospective free-trade agreement between Panama and the United States. Such an agreement would signify a commitment device to institutional changes; that is, it would promote an institutional environment favorable to foreign investors, much in the same way as NAFTA worked for Mexico. Less discussed is the possibility of using a well-functioning public institution as an anchor. In the Panamanian case, an obvious candidate would be Autoridad del Canal de Panamá (Panama Canal Authority, PCA). For example, in the case of public procurement practices, the PCA would be a useful example: it has an e-procurement website with on line tenders, a bid calendar, and the names of successful bidders for contracts and those suspended or debarred from receiving contracts.

19. The appointment of the Anti-Corruption Council makes a political statement, but does not by itself signal a radical change in the fight against corruption.15 It is premature to judge the effectiveness of the actions of the Anti-Corruption Council. However, this organ appears to lack the financial, operational, and political independence that would make it an effective institution in the fight against corruption (Box 2). Although it has the support of the President, the Anti-Corruption Council may need a strengthening of technical and human resources to carry out its activities effectively; otherwise, it may be overly dependent upon the goodwill of other public institutions to obtain the required specialized staff to conduct its investigations.

F. Conclusions

20. Corruption is an impediment to growth. Corruption deters investment, both foreign and domestic, and misallocates resources, both private and public, contributing to lower the growth rate of an economy. In Panama, corruption is perceived as being high and widespread. A substantial reduction in corruption has the potential to raise Panama’s growth rate and would be crucial to the implementation of a growth strategy based on attracting foreign investment.

21. The Torrijos administration has sent clear signals that it intends to move forward with its anti-corruption agenda. The emphasis the administration gives to transparency appears appropriate in view of the type of corruption believed to prevail in Panama (political corruption). However, corruption is seen to be widespread in the Panamanian society and not only limited to political circles. Therefore, the administration should consider approaches that have proved successful in tackling other types of corruption (namely, bureaucratic and judicial) elsewhere. Emphasis on transparency is adequate but by itself it is not a panacea against all types of corruption.

22. Therefore, a more integrated approach to the fight against corruption may be necessary. The administration and, in particular, the Anti-Corruption Council, could benefit from technical assistance to assess corruption in Panama and to design appropriate strategies to combat it.

Box 1Law on Transparency and its Regulatory Decree

On January 22, 2002, the official gazette published Law 6, establishing rules for the improvement of transparency in public management and granting individuals right of access to all information possessed by public institutions (except information classified as confidential or of limited access). Below follows a summary of some of its most important dispositions:

  • (Article 2) Everyone has the right to request publicly available information without having to present justification or motivation for doing so.
  • (Article 3) Everyone has the right to access personal information in the possession of public institutions and to correct or eliminate any material that is irrelevant, inaccurate, incomplete or outdated.
  • (Article 4) Gaining access to information entails no cost except that of the reproduction. Public institutions will provide the technical means for reproduction.
  • (Article 8) Public institutions have the obligation to provide information to anyone who requests it, except when information is confidential or of limited access.
  • (Article 9) Public institutions must make publicly available (press and internet) information concerning its structure, procedures and the conduct of policies and activities.
  • (Article 11) All interested persons have access to all information concerning public servants, officials and public office holders, and their activities (for example, hiring, appointment, travel costs, travel allowances, etc.), independently of the rank of the public servant, official or public office holder.
  • (Articles 13 to 16) Chapter IV of the Law makes clear the conditions under which information can be classified as confidential or of limited access.
  • (Articles 17 to 19) Chapter V of the Law describes the procedure of habeas data, the judicial process by which citizens can enforce their right to have access to publicly available information in the possession of public institutions.

The people and groups who supported this law saw in it the means for increasing transparency and accountability in the public service and, ultimately, an instrument in the fight against corruption.

On May 21, 2002, the official gazette published Executive Decree 124, which regulated Law 6, described above. The most polemic articles of the decree issued by President Mireya Moscoso’s Administration were the following:

  • (Article 8) For the effects of Article 11 of Law 6 of January 22, 2002, the interested person is the one who has direct relation to the information requested.
  • (Article 10) The classification of information as being of limited access is determined by the public official responsible for the public institution or the public servant in whom she delegates this ability.

The people and institutions who opposed the decree saw in these two articles a violation of both the letter and the spirit of the initial law. Article 8 of the decree went forward to define who is an interested person (narrowing the scope of Article 2 of Law 6); Article 10 of the decree attributed a degree of discretion to the public servant not recognized in Law 6 (Articles 13–16). Overall, those opposing the decree saw it as an additional barrier to the free access to information and, therefore, as a setback in the fight against corruption.

On September 2, 2004, President Martín Torrijos voided Decree 124 of 2002.

Box 2The Anti-Corruption Council

On October 28, 2004, the official gazette published Executive Decree 179, establishing the Consejo Nacional de Transparencia contra la Corrupción (Anti-Corruption Council). A summary of the main dispositions of the decree follows.

The Anti-Corruption Council is an advisory council that reports to the President without executive powers. The main objective of the council is to ensure a transparent and efficient public administration. The council consists of:

  • the Minister of the Presidency;
  • the Solicitor General (Procurador General de la Nación);
  • the Administrative Procurator (Procuradora de la Administración);
  • the Comptroller General;
  • the Ombudsperson (Defensor del Pueblo);
  • and six representatives of different civil society organizations.

The Anti-Corruption Council should meet regularly, and its meetings are to be presided by the Minister of the Presidency and, in his absence, by the Executive Secretary of the Council. The Executive Secretary is nominated by the President. The Executive Secretary reports to the Minister of the Presidency and is responsible for the operational and administrative work of the council.

Among the functions of the Anti-Corruption Council, the following are the most relevant:

  • to present legislative and administrative proposals to the President to fight corruption through a transparent public administration;
  • to promote educational campaigns against corruption;
  • to examine and to provide advice to public and private entities on practices that may contribute for corruption acts and on the means to prevent such acts;
  • to receive reports and suggestions from citizens and civil society organizations, and to direct them to the entities involved; and
  • to request to all public entities’ reports on measures to fight corruption.

The Anti-Corruption Council is also responsible for the approval and dissemination of a Uniform Ethics Code for the Public Sector (already approved and published as Executive Decree 246 on December 15, 2004).

All officials in the Central Government and autonomous or semi-autonomous public institutions are obligate to cooperate with the Anti-Corruption Council whenever this council requires relevant information from them.

The most important functions of Executive Secretary are the following:

  • to develop administrative investigations on facts that may constitute acts of corruption;
  • to ask other public institutions for specialized staff whenever that is necessary for the success of an investigation; and
  • to present formal complains to the responsible authorities whenever a corruption act is found.

The President is committed, through the Ministry of Economy and Finance, to ensuring that the financial resources required for the council’s operations are provided in the annual budget of the Republic.

This decree voided Executive Decree 99 of September 13, 1999, which created the Dirección Nacional contra la Corrupción (National Bureau against Corruption) in the Ministry of Economy and Finance.


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Prepared by André Faria (WHD).


Excluding oil-rich countries Ecuador and Venezuela.


The Corruption Perception Index uses a homogeneous definition of the extent of corruption: it reflects both the frequency and the total value of bribes paid. This index uses data from up to 18 different surveys from 12 institutions and it varies from zero (high perceived corruption) to 10 (low perceived corruption). For Panama, the Corruption Perception Index uses seven surveys from five different institutions.


The Control of Corruption Index measures perceptions of corruption, where corruption is the exercise of public power for private gain. This index uses up to twelve sources and, with 99 percent probability, the sample ranges between -2.5 (high perceived corruption) and 2.5 (low perceived corruption). For Panama, the Corruption Perception Index uses seven surveys from five different institutions.


The sample includes Brazil, Chile, Colombia, Costa Rica, Mexico, Panama, and Uruguay.


Since the indices generate point estimates that are subject to errors, any ranking is imprecise. Point estimate rankings are used for illustrative purposes only, and the standard errors also are presented in the figures.


Each year, the World Economic Forum conducts an Executive Opinion Survey and combines the answers with some objective data to generate its well-known Global Competitiveness Index. The aim of this index is to evaluate the potential for achieving sustained economic growth.


According to UNCTAD (2004), Panama’s ability to attract FDI is exactly proportional to its relative size in the world economy (with an inward FDI performance index equal to 1, defined as the ratio of a country’s share in global FDI inflows to its share in global GDP).


This also suggests that a substantial decrease in corruption together with a modest increase in corporate tax income may simultaneously increase the inflow of FDI and raise fiscal revenues.


This section relies heavily on the studies by World Bank staff, in particular, Daniel Kaufmann and his coauthors.


According to Helmann and others (2000, p. 2), “state capture is defined as shaping the formation of the basic rules of the game (i.e., laws, regulations, and decrees) through illicit and nontransparent private payments to public officials.”


The World Bank’s World Development Report 2002 notes that competition is a “transmission mechanism.” In Mexico, after NAFTA opened the banking sector to foreign competition, domestic banks pressured the domestic regulators to improve prudential regulations.


See Figure 3a in Kaufmann (2003).


A fiscal ROSC assesses whether countries observe the Code of Good Practices on Fiscal Transparency, which was approved by the Executive Board on March 23, 2001.


It is worth noting that one of the first acts of the Moscoso administration also was to create an anti-corruption bureau (Dirección Nacional contra la Corrupción), without apparent positive results.

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