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Investment Policy Blog

The investment and development community faces complex questions concerning the future direction of the international investment agreement (IIA) regime. Indeed, the debate has moved on and it’s no longer a question whether or not to reform. The pressing need for systematic reform of the IIA regime is evident across different countries and various stakeholder groups.

Today’s debate has to deliver answers on “what to reform, how and to what extent”. Taking stock of IIA reform is a first step towards this goal, and subsequently the reason for UNCTAD’s Expert Meeting on this topic.

The UNCTAD Expert Meeting on “Taking Stock of IIA Reform” will give the investment and development community an opportunity to share experiences on country and stakeholder approaches to IIA reform. More than 40 high-level experts will speak at the event on 16 March and many more will attend the discussions in person in Geneva or via webinar. Even if they cannot travel to Geneva, all stakeholders can have a voice – be it governments, intergovernmental organizations, the private sector, civil society or academia.

In terms of substance, the main objective of the meeting is to discuss:

The discussions will help to identify lessons learned, best practices and the way forward.

A preliminary stocktaking of IIA reform prior to the Expert Meeting suggests that efforts towards a more sustainable-development-friendly IIA regime are already happening at all levels of governance. In the run-up to Expert Meeting, UNCTAD published an IIA Issues Note on "Taking stock of IIA Reform". It documents the following reform efforts at various levels:

National

At least 110 countries have reviewed their national and/or international investment policies since the launch of UNCTAD's Investment Policy Framework. Many of those reviews resulted in the development of an IIA model in line with the new generation of investment policymaking.

Bilateral

There is a clear shift in drafting practice. Recently signed IIAs contain a number of policy options that preserve countries’ right to regulate or are otherwise conducive to sustainable development.

Regional

Megaregionals or regional IIA models include reform-oriented policy options. Some inputs into megaregional negotiations break new ground with respect to reform of IIAs and investment dispute settlement.

Multilateral

A number of multilateral forums touch upon issues related to IIA reform. For example, UNCITRAL (on transparency in ISDS), the Working Group on the issue of human rights and transnational corporations (TNCs) and other business enterprises, the Annual Forum on Business and Human Rights (on human rights and investment policymaking) or the Third International Conference on Financing for Development (on the ability to pursue public policy objectives).

IIA reform was also a prominent issue at UNCTAD’s World Investment Forum in 2014 and the Investment Commission session in 2015. Both will continue to provide a global platform for engaging policymakers and the investment and development community at large.

UNCTAD's latest IIA Issues Note illustrates the multiplicity of reform actions at the national, bilateral, regional and multilateral level (see chart 1).

IIA reform is a formidable challenge. Significant progress has been made, but much remains to be done. Comprehensive reform requires a two-pronged approach: modernizing existing treaties and treaty models and formulating new ones. Only a common approach at all levels will deliver an IIA regime in which stability, clarity and predictability help achieve the objectives of all stakeholders: effectively harnessing international investment relations for the pursuit of sustainable development.

The IIA Issues Note provides guidance for IIA reform in the form of a “Roadmap for IIA Reform”, which also serves as a discussion basis for the Expert Meeting (see chart 2). The Note suggests that IIA reform should address five main challenges, take place at four levels of policymaking and be directed by Six Guidelines.

UNCTAD has been advocating for IIA reform since 2010 and stands ready to continue providing the investment and development community with the necessary backstopping in this regard. Benefiting from 20 years of experience with its Work Programme on IIAs, UNCTAD is a global center for research and policy analysis, technical assistance, policy development and intergovernmental consensus-building in this area.

The IIA Conference at the 2016 World Investment Forum, scheduled for 19 July 2016 in Nairobi, Kenya, will be the next UNCTAD multi-stakeholder conference after the UNCTAD Expert Meeting in March. Expert Meeting participants will also chart the way forward towards the WIF IIA Conference, sharing ideas for possible discussion topics, themes and outcomes of the IIA Conference.

IIA reform is being undertaken at all levels of policymaking and it is time to identify possible answers to the challenges ahead. Join the debate to find out what is happening and how to make IIA reform work.

We look forward to hearing your views on how to help shape a sustainable-development-friendly international investment framework.

Further reading

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Archive
14 comments
Michael Ewing-Chow [ National University of Singapore ] Posted on 11 March 2016, at 9:43 AM

The first thing is to be clear about the specific Development Strategy and then what steps need to be taken to achieve it. If for example, a country is perceived by investors to have a very restrictive investment climate, then figuring out which sectors should be liberalised and what guarantees should be given to investors about the continued openness of those sectors will be the crucial step for investment promotion. If investors are concerned about the rule of law in a country then perhaps investor protection is also important. If the problem is that other agencies in a country are not coordinated in their approach to investment then commitments on investment facilitation such as investment contact points, reduction of red tape and improvement of approval processes will be another issue to address. Finally, if there are concerns that certain public policy issues must be addressed, then clarity about those issues and how they interact with the Development Strategy will be essential. Once it is clear what is the desired outcome then it is easier to understand how an IIA should be tailored to further development. Of course this is predicated on whether a specific country has the bargaining power to tailor the IIA to fit its interests though generally from my experience important issues can be addressed even by smaller economies in big multilateral negotiations if those countries take the effort to educate their negotiation partners about their concerns.

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Heinz Tuselmann [ Manchester Metropolitan University ] Posted on 16 March 2016, at 9:13 AM

I think Michael picks up some important issues, some of which I picked up in my paper for this Meeting and my blog below: Making the most of FDI for industrial upgrading and development:'Harnessing IIA policy-space through evidence based lessons for ‘new’ industrial policy'. In particular Michael rightly reminds that there needs to be greater clarity of desired outcomes before embarking looking at tailoring IIA reform to further development. I would add that there is also a need for robust quantitative micro-level evidence at the level of investing TNC and their subsidiaries in the host countries. In other words, policies and IIA reforms need to be informed by the complex internationalisation processes within TNCs, TNC objectives and strategies, as well as emerging needs of TNCs.

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Junianto James Losari [ Centre for International Law - National University of Singapore ] Posted on 11 March 2016, at 10:41 AM

Through my recent conversation with some government officials of a country who are in charge of investment policies, I also noticed that they were not clear of the country's development strategy. Consequently, this affected their investment policies as well as the formulation of their model IIA. Some of the reform proposals in the model IIA were unclear and unusual. When asked further about the objective of such clauses, no clear answer was provided, but there was an indication of protectionism motive which seemed to go against the policies in other ministries in the country. For example, the country proposes that the future commitments for liberalisation of sectors (pre-establishment) will be based on the competitive advantage of the negotiating partner's investors, simply put, they want to have a restricted positive list for liberalisation commitments. This is problematic because the IIA may become prevent potential FDI inflows in various other potential sectors besides the ones included at the time of negotiation. Furthermore, there is no certainty that the negotiating partner will agree to this proposal.

In order to be clear about its development strategy, I think it will be useful for governments to obtain feedback from the existing and potential foreign investors, including various business associations. This can help governments to understand better some of the points that Michael stated, e.g. sectors to be liberalised, type of protection, or better investment facilitation provisions. Subsequently, they can find ways to address these issues in their IIAs.

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Heinz Tuselmann [ Manchester Metropolitan University ] Posted on 14 March 2016, at 12:32 PM

An important common tenet of the blogs of UNCTAD’s Joerg Weber http://investmentpolicyhub.unctad.org/Blog/Index/52 and ElisabethTuerk http://investmentpolicyhub.unctad.org/Blog/Index/46 on IIA reforms is on policy options that preserve countries regulatory space, and evidence based lessons to be learned for the way forward in reforming IIA regimes at various levels. In this light, we argue in our paper (which will be made available at http://unctad-worldinvestmentforum.org/switzerland2014/follow-up-event-unctad-expert-meeting/), that if FDI has a role to play in sustainable economic development and industrial upgrading in low and lower-middle income countries, the discussions in the Meeting may need to go beyond ‘preservation’ of policy-space in IIA reforms towards ‘enhancing’ policy-space. Moreover, in light of GVCs and increased diversification and integration within TNCs, addressing IIA reforms in relation to regional economic integration areas seem important, not least in light of actual and potential uneven development induced by regional economic integration. Also, endeavours towards multilateral IIA frameworks need to be informed by, and learn lessons from previous initiatives at this level.

This seems to be particular important for developing countries where so-called ‘TNC assisted development strategies’, in terms of FDI and participation in global value chains (GVCs) has a role to play in sustainable economic development and industrial up-grading. Importantly, this entails inter alia the development and upgrading of existing FDI towards more higher value added (HVA) operations (and associated potential productivity, productive capacity building, up-skilling, etc. benefits) and local firms moving up in GVCs.

However, our extensive evidence in developed countries, based on large-scale representative firm level data surveys shows, that even in developed countries, strategic subsidiary development towards more HVA and FDI upgrading is less pronounced than generally assumed. Moreover, we found little evidence that a large number of subsidiaries have increased HVA, deepened local linkages and embeddedness, or experienced an upgrade in their strategic decision making autonomy over recent years. This is despite the case that the majority of foreign-owned subsidiaries are relatively mature. Thus, it will be a tall order for developing countries to pursue such ‘high road’ approach. Yet, where such FDI upgrading occurred, our evidence suggests that it can create win-win situations. On the one hand, it contributes to higher productivity, more skilled job creation and increase in export intensity, whilst at the same time leading to good subsidiary performance and positive contribution to the overall competitiveness of the TNC. In terms of policy implications in relation to FDI upgrading, it seems paramount for policy makers to have a good understanding of the complex internationalisation processes of TNCs and TNC objectives.

Based on the experiences in developed countries, our results provide an evidence base and pointers for a more pro-active and targeted ‘new industrial policy’ for low and lower middle income countries. This would occupy some middle ground between the so-called ‘market friendly’ and ‘promotional’ industrial policy approaches, in a way that is not only conducive to build and reinforce productive capacity building in host countries, but also policies to channel FDI into key areas of productive capacity building and promote the development of HVA of existing FDI in order for FDI to contribute to sustainable economic development and industrial upgrading. Central to such ‘new’ industrial policy approach is that emphasis on the part of government intervention should be focussed and targeted on support for new activities in the economy, which offer the opportunity for industrial upgrading within and across sectors, rather than focussing exclusively on specific industries. In addition, such policies also require a realistic appraisal of the potential to cultivate, develop and sustain requisite asset bases. Yet, ‘new’ industrial policy in which governments can actively promote HVA through capacity building and policies to promote learning seem crucial for FDI upgrading and movement of domestic firms to higher valued added aspects of GVCs.

There is policy space to pursue such ‘new’ industrial policy approach within existing IIAs. Yet, to maximise the potential of a targeted, activity based and broad sector type ‘new’ industrial policy, a broadening of policy-space may be conducive. In other words, reforms to existing investment agreements in order better exploit their under-utilized investment promotion and facilitation functions seem important to support the ‘new’ industrial policy’ in promoting FDI upgrading and moving up GVCs; in addition to providing sufficient policy-space for governments in the design and implementation of ‘new’ industrial policy. Yet, as shown by our evidence, for such policy to work it has to be informed by the complex internationalisation processes within TNCs, overall TNC strategy and objectives and the emerging needs of TNCs. This underscores not only the importance of regional trade and investment agreements in light of the importance of GVCs and international dispersion and integration of TNC value added activity, but also the need for integration of trade and investment policies, and trade and investment agreements. Regarding regional level IIAs associated with regional integration areas, there is a need for IIAs to better support pan-regional projects and regional policy co-ordination, including in the ‘new’ industrial policy spheres, in order to minimize uneven development within the region (e.g. in the SADC region). Initiatives to develop multilateral IIA frameworks, and especially those that are supportive for ‘new’ industrial policy to harness the potential productive capacity building and industrial upgrading propensities of FDI, need to learn from experiences of previous unsuccessful endeavours, such as the OECD’s Multilateral Agreement on Investment (MAI).

The advocated ‘new’ industrial policy and related IIA reforms, providing for an enhanced policy space to pursue a ‘high road’ approach to make FDI work better for economic development and industrial upgrading, is neither cost or risk free, and requires a long-term horizon, but has the potential for creating win-win situations for both host countries and investors. Although it is demanding and a tall order, especially for low and lower income countries, it may at least highlight a prospective route to move beyond low value added and/or natural resource exploiting FDI and low valued (and footloose) participation in GVCs. Reforms of IIAs at various levels have an important underpinning part to play in this process. Here, UNCTAD’s co-ordination and facilitation roles and its expertise in the IIA area, as well as its initiatives in reforming IIAs, have an important role to play.

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Tüselmann, H. and Buzdugan, S.R. (2016). Making the most of FDI for industrial upgrading and development:Harnessing IIA policy-space through evidence based lessons for ‘new’ industrial policy. Paper for UNCTAD Multi-Year Expert Meeting on Investment, Innovation and Entrepreneurship for Productive Capacity Building and Sustainable Development: Taking Stock of IIA Reforms, UNCTAD, Geneva, 16 March 2016

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Michael Ewing-Chow [ National University of Singapore ] Posted on 16 March 2016, at 5:32 AM

Thanks Prof Tuselmann for this. I fully agree that the main thing for HVA strategies is to have a long-term horizon and within that horizon to have a step by step strategy for how reforms, investor confidence building and domestic infrastructure (both hard and soft) should be carried out. One difficulty with that is however that many countries face political changes and with that often changes in policy and even civil servants. One way to deal with this is to institute processes where the government of the day obtains feedback from investors and other stakeholders in a dynamic process to constantly refine investment policy.

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José Gustavo Prieto Posted on 14 March 2016, at 4:49 PM

Thanks Joerg for the interesting post! It flags up essential issues in the road to the expert meeting this week.

Arguably, the biggest challenge of the reform (or area) represent the systemic inconsistency of the regime. It is still puzzling how to find a proper balance in the four mentioned levels, when there are doubts about the impact of the so called ‘megaregionals’ on the system as a whole. For instance, some days ago It was released the new text of the legal review of CETA, conducted by the Canadian Government and the European Commission, where among other things, it introduced the idea of a permanent court that was first included in the EU's approach expressed in the TTIP proposal. If several regional permanent courts start to co-exist not only with each other (e.g. EU-Vietnam FTA), but also with the current system of investment arbitration, new issues of possible fragmentation and legitimacy of investment governance have to be analyzed.

Therefore, the IIA reform is a unique opportunity for States to coordinate and undertake decisions at all levels, and to act together in front of challenges such as the further fragmentation of authority in the investment regime.

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Samira Sulejmanovic [ Ministry of Foreign Trade and Economic Relations of BIH ] Posted on 28 March 2016, at 3:14 PM

I fully agree! In fact, based on available information on different actions taken by countries in IIAs reform, I am quite confident that results of such fragmented and non-coordinated reform will be the next major challenge for all of us. It is a pity that countries still do not pay necessary attention to necessity of coordinated and multilateral action.

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Ely Caetano Xavier Junior [ Universidade Federal Rural do Rio de Janeiro ] Posted on 15 March 2016, at 3:48 AM

Reforming IIAs on national level depends not only on the development of new model treaties but also on the implementation on the mechanisms created by such treaties. Brazil has signed some Cooperation and Facilitation of Investment Agreements (CFIA) during 2015 and has tried to escape from the traditional ISDS mechanism, which was once rejected by its Congress. One of the main features of the new model treaty is to foster investment facilitation, rather than the protection of foreign investors, as an attempt to preserve the public policy space.

Therefore, the new treaty model includes a prevention of disputes mechanism, which relies upon a two-tier structure: the national Focal Point (‘ombudsman’) and the Joint Committee. This structure is supposed not only to enhance transparency of national investment regime but also to prevent, manage and resolve disputes from foreign investors and their home States.

The Focal Point is the first level of the structure and should enhance both investment facilitation and prevention of disputes. Considering that recently signed CFIAs have already been sent to the Congress. a further necessary step in the development of the alternative model is to define the national regulation of focal points.

Bringing together researchers and students from four higher-education institutions, our project intends to build a dialogue with government and other stakeholders of IIA reform so as to develop a regulation for the national Focal Point, which should address complaints by investors and their home States; take efficient action to prevent disputes and resolve complaints; and to require changes in national investment legislation or procedures.

First of all, we have designed a structure of regulation for the so-called (according to the Brazil-Angola CFIA, for instance) terms of reference of the Focal Point. The terms of reference should comprise four chapters. In the first chapter, the terms of reference will establish the agency that will act as Focal Point, determining its structure and functions. The second chapter of the terms of reference shall regulate the role of the Focal Point as a national authority to implement the recommendations of the Joint Committee. The third chapter of the terms of reference deal with the direct cooperation and exchange of information between the parties. The fourth chapter of the terms of reference will regulate the prevention of disputes mechanism, comprising both the claims filed and requests made by foreign investors and their governments against Brazilian agencies and public authorities and the claims from national investors, whose claims and requests have not been solved or responded by foreign Focal Points.


By now, we have concentrated on the procedure for claims filed and requests of information made by foreign investors or their home State. Our suggestions shared with the UNCTAD and all IIA Experts are open for further discussions.

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Begaiym Esenkulova [ American University of Central Asia ] Posted on 16 March 2016, at 2:56 AM

Thank you for the excellent blog! I agree that at present the question is indeed not about whether to reform the IIA regime or not, but about how to do it efficiently. In this regard, WIR 2015 is instrumental in providing a great variety of comprehensive policy options for countries.

A number of states have developed their own model BITs that address sustainable development concerns. This is a great step forward in the path to harnessing IIAs for sustainable development. Yet, in practice the greatest challenge is the existence of thousands of old generation IIAs that are still in force. Hence, for the reform to be effective we need to reform the already existing IIAs which is definitely challenging especially due to the bilateral nature of most IIAs. Is the time ripe for a new generation investment convention at the multilateral level in order to address the current fragmentation of IIAs and have a common approach to reforming investment policymaking for sustainable development? It would be interesting to hear opinions on this question during the Expert Meeting.

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Heinz Tuselmann [ Manchester Metropolitan University ] Posted on 16 March 2016, at 11:25 AM

An impressive number of experts are in attendance. James Zhan gave an excellent overview of the "state of play". I am looking forward to a fruitful meeting with innovative ways forward in reforming IIAs.

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Heinz Tuselmann [ Manchester Metropolitan University ] Posted on 16 March 2016, at 1:20 PM

A number of experts have addressed the importance of the investment promotion and facilitation function of IIAs. However, IIAs rarely include proactive investment promotion and faciliation provisions.In that respect,IIAs also lack provisions to ensure a certain quality of FDI in terms of sustainable economic development and industrial up-grading. Here, important seem to be the attration of, and development of existing FDI towards more higher value added ones and those contributing to requisiste productive capacity building. UNCTAD's 2015 WIRS contains a number of policy options but does not envisage these to be binding committments. Thus, the Meeting could perhaps address in light of this, if IIA reforms need to go beyond "preservation" of governments regulatory and policy space in IIA reforms and move towards "enhanced" or "widenened" policy space to support and underpin new and emerging policies, such as an activity based "new" industrial policy to fill the gap in IIAs regards investment promotion and facilitation gearded at FDI upgrading for sustainable development and industrial up-grading? In other words how can developing countries in particular making the most of FDI for industrial upgrading and development by harnessing IIA policy-space for proactive "new" policies (e.g. "new" industrial policy)that supports upgrading and development?

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Samira Sulejmanovic [ Ministry of Foreign Trade and Economic Relations of BIH ] Posted on 28 March 2016, at 3:36 PM

In his introductory statement Mr. Zhan mentioned another took UNCTAD has been working on, i.e. Investment Facilitation and Promotion: A Global Action Menu" - UNCTAD Discussion Note. It is actually dealing with this "weak" segment of investment promotion and provide a set of different actions that countries can take. So, it is not all in "protection" of investment that has the "attraction" element. I think many countries should think of designing their own set of actions based on the menu offered.

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Antonietta Di Blase [ RomaTre ] Posted on 16 March 2016, at 4:08 PM

ROMATRE UNIVERSITY
ANTONIETTA DI BLASE
Thank You for admitting to participate to the webinar. I have the feeling that UNCTAD is involved not only in the work of facilitating the reforming of IIAs, but also in a process of codification of common international principles relating to investment. In fact, customary international law can undergo a meaningful development thanks to a process of revision of agreements, besides the contribution of the case law resulting from dispute settlement practice. The involvement of UNCTAD is a guarantee that a strategy of greater convergence towards common standards may make it easier to reach a shared interpretation of rules. For instance, besides non-discrimination, another principle could be the principle of prior, free and informed consent in case an investment impinges on the local interests of people living in the host State.
In invited Prof. Pia Acconci (Associate Professor in the University of Teramo) and Dr. Elettra Ferri (Ph.D. candidate) to join in a comment in the blog:
PIA ACCONCI
To reconcile economic interests and non-investment concerns related to sustainable development through a revision of the balance of interests typical of international investment treaties, new proposals for negotiations of a multilateral treaty or a coherent network of regional investment agreements would be desirable. That appears to be an idea of the EU Commission based on a ‘new deal’ in international investment law through multilateralism and improvements of the current legal framework. Besides the settlement of investor-State disputes, the definition of controversial typical treaty clauses, such as those on the relevant concept of investment and the fair and equitable treatment standard, might be revised in this connection.
ELETTRA FERRI
In natural resources’ investment sector, sustainable development objectives could be achieved also by building a constructive stakeholder relationship, including by fostering the proactive role of Home States of investors. Home States can have an interest in promoting rights-supportive outward investment, also due to their commitments under ‘Sustainable Development Goals’.
Home States could subordinate their financial and diplomatic support of outward investors on compliance with human-rights related standard or process. Or, they could require investors to undertake human rights impact assessment in order to receive benefits of any kind in return. Home States could also establish disclosure requirement to investors, in order to stimulate responsible and sustainable operations.

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Sarah Rauber [ University of St. Gallen ] Posted on 22 March 2016, at 4:50 PM

A short entry on the investment policy framework and the importance of promoting the public debate in this particular field – since in the end: Investment policy concerns us all.

We had the great privilege and honour to come visit the UNCTAD this March during our end-of-studies excursion – organised through our Master Programme in Law and Economics at the University of St. Gallen: what an insightful and interesting visit! Many of us came to realise how little we actually knew about the system of investment policy and its recent developments, the crucial role «investments» played in the course of history and still play today.

As students of Law and Economics, due to our educational background, we are inter alia particularly interested in how regulation influences behaviour of single individuals, how regulation affects society as a whole and how to promote societal acceptance of the rules implemented.

Now to develop an efficient and effective reform of investment policy we would like to highlight three key aspects:
i. To reach the results desired – potentially several different «modes of regulation» will have to be applied: the various modes complementing each other, aiming to develop an integral investment framework.
ii. To reach the results desired – the dynamic assessment is to be stressed: a society’s interest in and perception of investments might change, a highly complex question and a highly politicised issue. We need to better understand the underlying questions and rationales before attempting codification.
iii. To reach the results desired – in the long run we need to try to involve and engage all stakeholders by promoting the public debate on these issues: to adequately balance economic, political and societal interests, to foster the realisation of the sustainable development goals, to ensure that these goals are not just word, but lived reality.

From how we perceived the UNCTAD during our visit and from what we’ve read, they try to do precisely this and we would like to commend them for their efforts and excellent work: every reform – yet another step in the evolvement of international investment policy, a constant refinement of the investment policy framework. The UNCTAD’s work is important because, yes, as stated in the beginning of this short entry: Investment policy concerns us all and we should all try to become experts in the field by participating in the public debate on these issues.

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