Research Paper: Development of Landlocked Countries

As the years pass by, societies are facing changing environment, different economic advances and technological improvements in all spheres of its life. But there are different societies, different countries with different backgrounds and geographical locations. Role of the geographical location in the economic development of the country is being very precisely analyzed during the last few decades, which showed the tight connection between those two notions, especially from the standpoint of the global distribution of the economic activity. Statistic shows that all countries that are developed are that of with the coastline, and those which are not developed enough are landlocked.

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Table 1. GDP per capita and its growth, 2001-2006

Average per capita income (2006 USD)
Income group 2001 2006 Increase Growth (%)
High income 32 800 35 700 2 900 1.7
Upper middle income 5 500 6 600 1 100 3.5
Lower middle income 1 500 2 100 600 6.9
Low income 500 670 170 4.8
Landlocked developing countries 760 970 210 5.3
Transit 1 500 2 000 500 4.2
World 6 700 7 400 700 1.9

Note: Data for LLCs exclude Afghanistan, Botswana, and Zambia. In 2005-2006 these countries had a very high portion of exports of just one commodity; Azerbaijan (76 percent) and Kazakhstan (69 percent) petroleum, Botswana (73 percent) precious stones, and Zambia (65 percent) copper (UNCTAD 2008).

Source: World Bank Development Data Platform.

But proximity to the sea, on practice, is not the only determinant of country’s economic development. There are at least five basic geographic factors that influence the development of the particular regions. They incorporate: proximity to the major markets, climatic effects on disease burdens and public health, access to sea-based trade, natural resources endowments (energy resources) and agricultural productivity (Smith 1981, 44).

In this paper I will explore whether landlocked countries develop more slowly than those with the coastline, explain what problems do landlocked countries face and investigate whether there are some advantaged for landlocked countries over coastline countries. I will also provide the detailed description of all the factors that contribute to the slower development of landlocked countries besides their access to the coastline- government, population, natural resources, etc.

A landlocked country is generally defined as the one that is enclosed by the land. It was so historically stipulated that being a landlocked country was not considered to be advantageous. It restricts the country from obtaining gains from the sea industries, as well as limits trade opportunities. There can be also the situation when the landlocked country is surrounded by the landlocked country also, and it is called doubly landlocked country. There are just two such countries in the world- Liechtenstein in

Central Europe and Uzbekistan in Central Asia.

Despite the technological advances in the transportation systems, landlocked countries continue to face problems with the access to the world trade markets (Todaro and Smith 2005, 66). As a result, countries without coastline are usually far behind maritime countries in the issues of the external trade and overall development. But there is another important aspect that is essential to every landlocked country- the dependence on transit neighbors. There can be four main types of such dependence for the landlocked country: dependence on the neighbor’s stability and peace, infrastructure, sound cross-border political relations, and administrative practices. That dependence lays the foundation for the new set of priorities and challenges for landlocked countries. According to the statistical data, nine of the twelve countries that have the lowest Human Development Index are far from the coastline, thirteen from them have the low level of human development, and no country (outside Europe) reported the high level of human development.

And then the question arises: why do landlocked countries have such constant problems? The simple answer would incorporate the trade difficulty, high transportation costs, inability to use the same benefits as coastline countries have, while competing at the world market. Landlocked countries on practice appear to have the little choice for choosing the way for the transit of their goods to the markets, and land transport prices can be the subject of the monopoly pricing. In such case everything depends upon the relationships with the country of transit and its literal favor.

One of the most outstanding exceptions among the landlocked countries remains Switzerland, which was constantly following export-oriented strategy, but adjusted high export transportation costs by exporting such high-value goods, as watches, clocks, scientific instruments, and specialized services, which are values all over the world- banking and insurance services. This is the example of the utilization of the comparative advantage, and in the long run, the situation of being the landlocked country creates challenges as well as opportunities to realize the inner potential of the country and find way to develop.
One of the several openings in the international cross-sectional analysis of economic growth rates is that the share of GDP trade, mediated through its affect on the share of investment, is said to be positively associated with the rate of economic growth. The following statement implies that whatever causative mechanisms are at work, the impacts of geographical disadvantage are most likely to work through decrease in the trade volume (Arvis et al. 2007, 17-20).

When some products cross the border, transaction expenses tied to customs and handling are inevitable. In other words, using the transportation professional terminology, there will be on-loading and offloading costs, and the most probably storage costs also. In such a manner, landlockedness of the trade country is to be thought of as increasing the price of imports, and decreasing exports net price of transport costs (which had to be paid by a price-taking seller to be able compete internationally with the countries that are not supposed to have such expenses). Therefore, landlocked countries suffer lower revenues in their trade terms and as a result get much less real income. The more the part of primary commodities in the export volume and of finished goods in the import volume, the more the terms-of-trade loss, due to the reason that transportation expenses are generally low per unit of value for primary goods and high per unit of value for manufactures. The terms-of-trade loss income effect is to decrease the imports volume. The substitution effect is to make consumers to switch from import goods to domestic ones, causing the decrease in exportable surplus as the opportunity cost of consuming of goods inside the country instead of exporting falls. Both the substitution and import effects diminish the total trade share (exports and imports) in GDP. Landlocked countries can import less (for instance, find the adequate import substitution goods) and export less (for instance, fail to utilize attractive export opportunities) than would be secured by comparative advantage with the exception of transportation expenses. It is however important to remember that in many situations the expenses that are the result of the fact that the country is landlocked will be less than tariffs of import and export taxes already established.

An alternative interpretation is that landlocked countries pay to the countries of transit an incoming goods tariff and tax on outbound goods. As a transportation monopolist, or the one that is in charge to dictate the tariffs, the transit country has literally no desire “to kill the goose which lays the golden eggs”; and as a result, it would rather charge transportation rates that mirror the price elasticity of supply and demand in the landlocked country. There can also another interpretation that says that when a country of transit restricts the transport supply to the landlocked country, the quotas established give rise to rents in the form of price adjustment and, the most probably, corruption. In the end, the landlocked country sensitivity to strategic disruption is that factor that is usually mentioned by many authors of the researches. Nevertheless, taking into consideration the analogy from empirical evidence on regard of the effect of retributory trade sanctions, the economic influence of trade disruption can be rather moderate.
The factor of uncertainty, along with usually tense political relations between landlocked countries and transit states, in the long run appears to be even more crucial than actual expenses: in actual fact, a study of the World Bank identified reliability of transit, not expenses, as the main criterion for project appraisal and design (World Bank 1994, 34-36).

Access to ports of landlocked countries is governed predominantly by bilateral treaties with countries of transit, most part of them have fixed terms, many are special with limited terms and some appear to be only small parts of larger treaties (Todaro and Smith 2005, 99-102). Delivery uncertainties can make potential customers cautious of signing long-term export contracts and prevent foreign firms from locating plants in landlocked countries. Nevertheless, rather small amount of landlocked countries are totally dependent on one country of transit, and what dependency relationships do exist can be significantly improved over time by launching integrated regional investment programs and negotiating alternative routes (Limao and Venables 2001, 451-455).

The difficulties in the economic development of landlocked countries were also attempted to be explained by the endogenous growth theory and the theory of new trade. In neoclassical theory, which is based on perfect competition and constant returns to scale, the revenues to trade are constant. When neoclassical theory proposes an explanation why landlocked countries may be at a disfavor in the short run, it offers few clarifications why this disadvantage can be irreducible in the long run. For instance, considering again the example with Switzerland that developed economic spheres that show outstanding results in spite of the fact that the country is landlocked. Put differently, alleviating the challenges associated with landlockedness may lead to a one-of improvement in the welfare level of the landlocked country, but it is not supposed to move the landlocked country to more rapid growth path.

But many scientists advance arguments that neoclassical theory greatly detracts the trade importance in a dynamic situation. In such case, the decreases in trade experienced by landlocked countries may serve as a substantial drag on economic growth. In “endogenous growth” models there are either rising returns to scale in definite sectors or exogenous factors to output in those sectors. Learning-by-doing and external factors to development and research are major topics in related literature, dedicated to endogenous growth theory. The channels of growth (human capital accumulation, provision of infrastructure, investment, technological innovation, and public goods) differentiate from model to model, as does the fundamental competitive mechanism (oligopoly or perfect competition). The general conclusion is, nevertheless, that poor primary conditions can ensnare countries in a low-level trap by restricting their economic growth opportunities. The door is widely opened to a series of “big push” public policy arrangements, including regional policy, industrial policy, trade policy, and provision of public and infrastructure support for formation of human capital, development, research, etc (Krugman 1987, 131-34).

The essential role of augmenting returns to scale provides a link between “endogenous growth” theory and “new trade theory”, the main point of which is that government should play an active role in trade, because the government is the main policy maker.

Trade can move growth rates by changing the output composition. Since the changing structure of output influences relative prices, comparative advantage is as a result endogenized. This impact is stressed if there are learning-by-doing external factors at the sector level, for example, if one sector learns from another. Being a landlocked country, by decreasing the trade volume, may restrict comparative advantage from evolving and thus capture landlocked countries in a low-level equilibrium snare. In the alternative, by decreasing exposure to foreign competition, being landlocked may suppress entrepreneurial talent growth and development.

Not just trade flows, but companies’ location decisions (that in the long run are determinants of trade flows) are determinative in a dynamic rising-returns-to-scale environment (Stone 2001, 78-80).
Agglomeration economies are economies that are external and which are effective either when a significant amount of companies in the same industry are located in close proximity to each other or when a significant amount of companies from different industries locate in the same city or region. Taking into consideration the latter case, the economies are referred to as urbanization economies. High-tech industries that are innovation-driven, which are reliant on a fluid market for workers of high specialization, information, and access to a secure, fast and sophisticated services sector, are highly reliant on agglomeration economies. In consequence of their geographical isolation, especially when there is no port city, landlocked countries may find it hard to attract companies in rapidly evolving, high-growth industries. And again, “big push” policy interventions must be secured in landlocked countries (Stone 2001, 120).

Conclusively, provision of infrastructure itself has great positive external economies. Accessibility of good transportation infrastructure strengthens the efficiency of all other inputs and enhances the return rate to formation of both human and physical capital. Contrariwise, the efficiency-increasing influence of transport investment is to some extent compensated when companies substitute away from traditional inputs to the benefit of the cheaper transportation (Stone 2001, 68-70).

There are also other contributing factors that are generally hard to quantify or even depict with precision, and they are bound to affect the development path of landlocked countries. Landlocked countries are twice sensitive to destruction in the form of natural disasters, political turmoil and violent international conflicts: once on their own account and once on account of the countries of transit. To such extent, landlocked countries may be equally ignored, once on account that they are landlocked, and again because their transit states on which they depend is underdeveloped itself. In regard the problem of strong conflict, landlocked countries by definition on practice have many borders, and one of the few rough stylized facts from quantitative international relations is that the scope of strong international conflict is positively correlated with number of international boundaries. In the similar way, one of the most powerful conclusions from the economic development record is that peace is a background for economic development.

Many borders, as well as the dependency relationship that exists between the country of transit and landlocked country, may harden brain drain and the literal pumpage of skilled labor. Or, efficiency gains that arise when labor is transferred from low-productivity to higher-productivity sectors will be predestinated if low productivity labor simply migrates to the countries of transit.

Let’s assume that landlockedness is definitely the real challenge for economic development, taking into consideration data on landlocked countries merchandise trade.

What the policy response might be in such case? According to neoclassical theory, the major rational explanation for intervention of the government is the distortions occurrence, of which the negative external effect to transit through monopolistic country of transit is a first-hand example. The suggestion to policy makers can be to impose a Pigovian tax on goods that are traded and devote the returns to the development of the alternative transportation routes (Mankiw 2001, 216). While the developing alternative transport routes cost is supposed to present a substantial primary deadweight cost, there is no reason in neoclassical theory why it would make obstacles to the development in the long run (Cabanius and Bouaphanh 2001, 13).

Very few landlocked countries have some competitive advantages in the field of high-tech industries for which active rising returns to scale emerge likely. There are also some exceptions with few European countries, like Hungary, the opportunity of developing comparative advantage in such sectors appears unlikely. Second, the active rising revenue argument intends that the domestic market is big enough that nascent industries, in case of strong protection, are able to produce enough to begin to realize economies of scale. Most landlocked countries, however, are comparatively small. While industrial structure is highly concentrated in most developing countries, it is market defects such as entry barriers and collusion which are responsible, not increasing returns to scale. It seems prudent that if the challenges of landlockedness result from transport, policy makers introduce transportation policy to address them. Transport infrastructure within landlocked countries is often of comparatively low quality, so domestic transport investment would be able, to some extent, get customers back to where they were without the issue of being landlocked. This is a second possible best result, but presents advancement nevertheless while eluding the dangers tacit in implementing trade and industrial policy to address what is generally speaking a transport challenge. At the end, the regional level is the most important: improvements in transit benefit of both landlocked countries and countries of transit, and the natural units for transportation policy interference are not the nation, but the region and the transport corridor.
So, to address the problems that restrict landlocked countries’ potential revenues from trade and therefore restrict the resource base for investments in human development, several major policy priorities can be outlined. First, landlocked developing countries have to place special emphasis upon the development of their internal transportation infrastructure. Trade is substantially influenced by transportation costs, so making investments in roads and railways— both maintenance and construction — are the most important issues for keeping these costs at the lower level.

Distance, Modal Choice and Transport Cost Different transportation modes have different cost functions. Road, rail and maritime transport have respectively a C1, C2 and C3 cost functions. While road has a lower cost function for short distances, its cost function climbs faster than rail and maritime cost functions. At a distance D1, it becomes more profitable to use railway transport than road transport while from a distance D2, maritime transport becomes more advantageous. Point D1 is generally located between 500 and 750 km of the point of departure while D2 is near 1,500 km. Second, regional infrastructure integration strategies are inevitable for the development of the active trade routes and market access expanding for landlocked developing countries. For example, such small economies as Rwanda and Burundi face huge obstacles in their attempts of international trade due to the poor rail and road infrastructure in Eastern Africa. Internal infrastructure investments in Rwanda and Burundi will bring restricted revenues if they are not supposed to be accompanied by the corresponding investments in Kenya, Uganda and Tanzania (Pod 1998, 76-81).

Export to GDP ratios reveal the progression of challenges countries face along the Northern Corridor: for Burundi, 6%; for Rwanda, 9%; for Uganda, 12%; and for Kenya, 26% (United Nations Development Programme 2003, 56).

In the same manner, infrastructure integration demands investments in building and maintaining effective maritime ports to be able to provide services for entire regions. Third, and closely connected with the previous issue, regional integration strategies need to be concentrated on administrative coordination. Even though members of COMESA (Common Market for Eastern and Southern Africa) and SADC (Southern African Development Community) have made substantial progress in this regard, many other regions still need investments for the standardization of border procedures and reduction of transportation costs incurred due to time non-conformities. Many countries are still able to take advantage from such administrative organization, as well as objective guarantees for landlocked countries’ constant access to transit routes (World Development Indicators 2002, 33-34).

Fourth, landlocked countries have a strong need to invest, where possible, in developing industries that are less influenced by transportation costs. This involves shifting away from basic commodities, which are subject to main fluctuations in price and low value to weight ratios, toward those with higher value or lower transportation costs in relation to goods value. Strategies can contain service industries development or the manufacturing sectors for export development (MacKellar, Worgotter and Worz 2000, 14).

Official development contribution and overall help strategies should acknowledge essential infrastructure needs of low-income landlocked countries and the requirement for increases in direct assistance to maintain large-scale investments in railways and roads. Such investments are supposed to comprise not only the up-front advances of the transport infrastructure, but maintenance and operations as well. As far as the landlocked developing countries traditionally suffer from a overall lack of resources and under-funded social sectors because of their common structural obstacles in trading with the international economy, they will typically demand even more external resource support than their maritime neighbors with low-income that also need to remain a priority for official development contribution flows.

In this section some statistical overview on regard landlocked countries and their economic development is presented. Landlocked countries concentration among the least prosperous nations of the world is astonishing. Sixty three out of one hundred fifty eight comparatively low- and middle-income countries, defined by the World Bank, are classified as having low income (40.0 percent), but twenty out of thirty low- and middle-income landlocked countries (66.6 percent) are classified as low-income. If the fifteen Newly Independent States (the former USSR republics and the Baltic countries) are eliminated, then the situation is the following: fifty eight out of one hundred forty three (40.6 percent) low- and middle-income countries are low-income, but sixteen out of twenty two low- and middle-income landlocked countries (72.7 percent) are low-income. At the end, and most astonishing fact of all, nine of the twenty poorest world countries are landlocked. Partially, this is for the reason that many landlocked countries are African, but even in this region, landlocked countries account for an incommensurable quantity of the poorest countries on this poorest continent.

Most LLDC have underdeveloped economic base with a poor performance of export, the main part if not all their exports consist of low-value bulky commodities. As for LLDC, half of them rely on one commodity for at least 50% of their general exports by value; two commodities account for at least three quarters of their export earnings; and three commodities yield at least 80% of their export earnings. Insurance, freight and other related expenses are therefore burdensome in relations to the exports low value. For countries that import oil like Zambia the situation is further worsened by the high fuel cost (petrol and diesel). Transport operators on the domestic market of Zambia, pay for higher fuel prices by as much as 50% than in other countries of the sub region (Gael Raballand et al, 2007).

As part of the USSR, the Central Asian and Eastern European republics were integrated into the centralized Soviet Union command economy. Their role in this system was predominantly to guarantee natural resources (particularly, metals and petroleum) and agricultural products (such as, grain and cotton) to the processing industries and basic markets that were situated upon the territories of today’s Russia and Ukraine. Correspondently, transportation corridors were developed in the times of the Soviet era basically for the connection of the individual republics with Russia and Ukraine, and not with their neighbors, which could serve as the countries of transit. As a result of this, Central Asian and Eastern European landlocked countries face three major transit challenges as a consequence of the USSR collapse. First of all, it should be mentioned that such transport corridors were built before present international borders were established. Significant domestic transportation arteries at present often pass through neighboring countries that can result in additional expenses and long delays. Some countries are now constructing expensive alternative routes to mitigate this challenge. Second, connections through Iran, China, and Afghanistan are restricted and not very well developed. The sequential subordination to Ukrainian and Russian transportation paths is said to be utilized by Russia and Ukraine for political benefit, seriously limiting the capability of landlocked countries to raise their gas and oil exports. Third, as government of the Soviet Union allocated specifically economic roles for each its region, it finally led to the little export diversification for a series of post-Soviet countries. Even though the Soviet Union initially invested lots of financial resources in this infrastructure, much of it had now declined due to lack of management and investments. These transport problems are redoubled with the many of the landlocked countries remoteness: several of the former Soviet states are over 3000 km from the nearest port.

Constant regional tensions further create obstacles for trade routes. Badly defined borders that may not have the reflection of political or ethnic differences can stimulate regional and domestic crises. Such tensions have prevented any cooperation on the regional level and have contributed to rough corruption. International cooperation challenges have restricted the potential of this region to serve as a regional crossroads (MacKellar, Worgotter and Worz 2000, 111-115).

Even though Moldova is geographically taken away from the former Central Asia Soviet economies, it faces similar problems.

Transit Routes of Moldova

It is only one hundred seventy km from the shore of the Black Sea — the shortest transport distance of all landlocked countries at the discussed territories — but also fights external and internal tensions. Not only is Moldova experiences harsh political tensions between Ukraine and Romania, but, with the eastern part of the country that is controlled by ethnic Ukrainians and Russians, and the west by ethnic Rumanians, Moldova also suffers from internal tensions on regard the separatist Transdniestr region. Moldova’s infrastructure is as a matter of fact still based on the former USSR networks to Russia, therefore restricting other trade routes. Unlike former Soviet republics and Moldova, Mongolia does not have such harsh cross-border and ethnic tensions. But it does, nevertheless, share the problem of remoteness with the capital city, Ulaanbaatar, which is situated at the distance about 1700 km from the nearest port. Mongolia also still struggles with its extremely low density of the population — the second lowest of all countries from the region of discussion— which further makes transportation opportunities more complicated. The country has just one major highway and relies primarily on railways for shipping its output. Infrastructure of the railway is in rather satisfactory condition but still it is problematic for trading with neighboring China with the world’s fastest growing economy, for the simple reason that two countries utilize different rail gauges and shipments have to be unloaded and reloaded at Zamyn Uud.

The geographical situation of the South Caucasus landlocked countries, Azerbaijan and Armenia, at the bridge of the traditional east–west Silk Route linking East Asia to Europe, holds big potential advantages for both countries. The planned recovery of the Silk Route as a network of main transport corridors could theoretically assist these countries become essential transit links between East and West.

Transit Routes in South Caucasus

So far, in their current situation, both Azerbaijan and Armenia suffer in the greatest extent as landlocked countries. Regional struggles, as well as boundary controversies over the Caspian Sea, ethnic fights and constant Russian alliances, have set certain obstacles to any serious attempts at regional integration. Actually, the controversy between Azerbaijan and Armenia over the Nagorno Karabakh region, a primary reason of the regional tensions, has resulted in the shut-down of both the Azerbaijan-Armenia and Armenia–Turkey borders.

Azerbaijan and Armenia have also suffered from surrounding civil disputes that have restricted the utilization of potential corridors. The Georgian civil war started in 1992, impeding the usage of the Georgian corridor and resulting in strongly tumbledown infrastructure on the route. In the similar way, the Chechen war has restricted trade to the north and allayed Azerbaijan relations with Russia.
Reflecting the poor political institutions of the region, corruption is reported to be widely spread and has become a serious concern for Azerbaijan and Armenia. Having the strong need to transport output across international borders where bribe paying is inevitable and everywhere, these landlocked economies suffer from internal corruption and as well as of their neighbors corruption.

Later, the situation became even more complicated as the ongoing disputes and political instability of the region have left the transport infrastructure in an awful state of destruction. The European Bank for Reconstruction and Development evaluated that about 40% of Armenian roads were in severe need of immediate repair in 1998, while 56% of Azerbaijan’s main road network has been portrayed as being in a weak state of maintenance. The infrastructure in neighboring Georgia is claimed to be in even worse state. Substantial investment is needed in order to restore the regional transit system (Synowitz 1998, 212; World Bank 2001, 13).

Both South American landlocked countries, Paraguay and Bolivia, suffer from weak domestic infrastructure, and unlike most African landlocked countries, which have the poorest economic situation of all, are bypassed with comparatively extensive and well-maintained transport corridors.

The weak conditions of operation and maintenance of domestic corridors, however, have precluded these countries from taking advantages from such strong external transit corridors. Paraguay’s railroad, for instance, is connected to the railways of Argentina, Brazil and Uruguay, and can play a main role in international transport, but has fallen into a state of dysfunction. Paraguay and Bolivia also both concern political problems to transit trade.

The South American landlocked countries have suffered from political struggles with their transit neighbors. In the recent past, for instance, the perspective and promising Bolivian plan that was aimed to double exports by exporting natural gas via Chilean ports has been delayed by constant domestic objections in Bolivia against the use of Chilean corridors. Such objection is predominantly a product of the constant and century-old conflicts between the two countries, which originated in the war of 1878–1883 when Bolivia lost control of the coastal province of Atacama (Stone 2001, 56).

What is positive in the situation is that Paraguay and Bolivia also have similar opportunities: both are principally located in the heart of South America, with the great potential to allow them to serve as the South American trade cross-roads, between MERCOSUR and the Andean Community. This central situation could permit them to serve as regional bases for new technologies less dependent on transport costs, such as telecommunications. Paraguay and Bolivia also have all possibilities to be main regional energy centers because they both have substantial reserves. Bolivia recently disclosed significant reserves of natural oil and gas and Paraguay has the potential to be a main exporter of hydroelectric power. For the reason that these discussed sectors are not basically dependent on rail and road infrastructure, it will be possible to develop and take advantage from them even before domestic transport infrastructure is elevated to an essentially higher stage. They are able to use in the full extent the potential due to poor transportation.

Landlocked countries face many challenges. They have limited world trade opportunities and have to establish friendly relationships with neighboring countries, which could be potentially their transit states. So, they are having trade difficulties, experience high transportation costs, and they are unable to use the same benefits as coastline countries have, while competing at the world market. Landlocked countries on practice appear to have almost no choice for choosing the way for the transit of their output to the markets, and land transportation prices can be the subject of the monopoly pricing. In such case everything depends upon the relationships with the country of transit and how kind the government of the transit state would be. There can be four main types of such dependence for the landlocked country: dependence on the neighbor’s stability and peace, infrastructure, sound cross-border political relations, and administrative practices. That dependence lays the foundation for the new set of priorities and challenges for landlocked countries.

As of 2008, forty four landlocked countries are reported to be in the world, two of which are doubly locked. They are all experiencing almost the same problems (with the several exceptions, like Hungary, Switzerland, Liechtenstein, etc.), but have different backgrounds of those challenges.


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