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  • The Economist: Emerging Economies

    Emerging economies
    Climbing back
    Jan 19th 2006
    From The Economist print edition

    The economies of what used to be called the “third world” are regaining their ancient pre-eminence

    SINCE their industrial revolutions in the 19th century, the rich countries of the “first world” have dominated the global economy. By one measure at least, that era may be over. According to estimates by The Economist, in 2005 the combined output of emerging (or developing) economies rose above half of the global total.

    This figure has been calculated from the International Monetary Fund's World Economic Outlook database. We have adjusted the IMF's numbers in two ways. First, we have taken account of China's recent upward revision of its GDP by 17%. Second, we include the newly industrialised Asian economies (South Korea, Taiwan, Hong Kong and Singapore). These countries might well now be classed as developed, but should surely be counted in any estimate of the long-term success of developing countries. If you exclude countries once they prosper, developing economies' share will never increase.


    We have used the IMF's method of converting national GDPs into dollars using purchasing-power parities (PPPs) instead of market exchange rates. The latter can distort the relative size of economies, not only because currencies fluctuate, but also because prices are lower in poorer economies (so a dollar of spending in China, say, is worth a lot more than it is in America).

    The prices of traded goods tend to be similar to those in developed economies, but the prices of non-tradable products, such as housing and haircuts, are generally much lower. As a result, converting a poor country's GDP into dollars at market exchange rates could understate the size of its economy and its living standards. This is why the IMF uses PPPs, which take account of international differences in prices of the same goods and services, to provide a more accurate measure of the purchasing power of each country's inhabitants.

    It makes a big difference. Measured at market exchange rates, developing economies' share of global output has fallen over the past quarter-century, to just 26% last year. Measured at PPP, it has (more realistically) risen, to just over half. Perhaps the best evidence of the flaw in current-dollar figures is that they suggest developing Asia's share of world output was barely higher in 2000 than in 1980, even though it had been by far the world's fastest growing region. The effect of growth was distorted by currency movements.

    Admittedly, calculating PPPs is tricky. They are based on surveys of prices around the world. But as Keynes used to say, “It is better to be roughly right than precisely wrong.” Using PPPs provides a more realistic estimate of the balance of output between rich and poor countries. But they are not always appropriate. Trade and financial flows, which, unlike the bulk of GDP, are transacted at market exchange rates, should be converted at those rates into dollars. For businesses too, market exchange rates are relevant for converting foreign revenues and profits into dollars.

    But even when measured by market exchange rates emerging economies are flexing their muscles. Last year, their combined GDP grew in current dollar terms by $1.6 trillion, more than the $1.4 trillion increase of developed economies. And there is more to this than just China and India: these two countries together accounted for only one-fifth of the total increase in emerging economies'GDP last year.


    Of course, with half the world's output but five-sixths of its population, emerging economies still have incomes per head far lower than the rich world. But by a wide range of gauges they are looming larger (see chart 1). Their share of exports has jumped to 42%, from 20% in 1970. Over the past five years, they have accounted for more than half of the growth in world exports. Emerging economies are now sitting on two-thirds of the world's foreign-exchange reserves and they consume 47% of the world's oil. On the other hand, their stockmarkets still account for only 14% of global capitalisation.

    Emerging economies have also become increasingly important markets for companies from the rich world. Developed economies' trade with developing countries is growing twice as fast as their trade with one another. Over half of the total exports of America, the euro area and Japan now go to emerging economies. The EU exports twice as much to them as it does to America and Japan combined.

    As you were
    The growing clout of emerging economies is in fact returning them to the position they held for most of history. Before the steam engine and the power loom gave Britain its industrial lead, today's emerging economies dominated world output. Estimates by Angus Maddison, an economic historian, suggest that in the 18 centuries until 1820 they produced, on average, around 80% of the total. But they were then left behind by Europe's technological revolution. By the early 20th century their share had fallen to 40% (see chart 2).

    The term “emerging market” was coined 25 years ago by the International Finance Corporation, the private-sector arm of the World Bank. For much of the time since, “submerging” has been more apt: look at the succession of crises, from Latin America to East Asia and Russia, in the past decade or so.


    Now emerging economies are on the rebound, enjoying their best performance for decades. All 32 economies tracked each week by The Economist (see articles) grew in 2005, for the second year running. In every previous year since the 1970s, at least one emerging economy suffered a recession, if not a severe financial crisis. In the past three years, their growth has averaged more than 6%, compared with 2.4% in rich economies. The IMF forecasts that in the next five years they will roll along at just under 6%, twice as fast as developed economies. Extrapolation is risky, but if this relative pace were sustained, in 20 years' time emerging economies would account for two-thirds of global output. Is this likely?

    It stands a good chance. Most emerging economies are today in much stronger health, leaving them better able to withstand adverse global shocks. Their economic policies have matured: most have cut inflation, thanks to stricter monetary and fiscal policies; they have generally shifted towards more flexible exchange rates; and many are now running current-account surpluses and have built up weighty foreign-exchange reserves. Structural reforms to open up markets and to strengthen financial systems are also helping to improve the efficiency of investment.

    This week the Institute of International Finance, a bankers' association, said that net private capital flows to emerging markets hit a record $358 billion in 2005. But most countries no longer need this money to finance current-account deficits. Unlike many previous booms, their current expansion has been financed largely by domestic saving rather than debt: their average ratio of foreign debt to exports has fallen from 174% in 1998 to 82% last year.

    Beware of hiccups
    However, some of the recent boom in emerging economies is due to three factors that may be unsustainable. First, rising commodity prices have given a fillip to producing countries, such as Russia, Brazil and South Africa. Second, low interest rates have reduced debt-service costs—especially important for Latin America, where the debt-to-export ratio is twice as high as the average for emerging economies. And last, exports have been boosted by America's strong import demand. This favourable environment cannot last: interest rates are rising, and American consumers cannot keep spending more than they earn. Emerging economies' energy-intensive heavy industries are also vulnerable to high oil prices. A saving grace is that these risks partly offset each other. A slump in American demand would reduce both interest rates and oil prices.

    Perhaps the biggest risk is that the boom may encourage complacency and reform fatigue. Yet further action is needed, from greater fiscal discipline to more flexible exchange rates.

    The future expansion of emerging economies will not follow a straight line. It is unavoidable that emerging economies are more prone to economic ups and downs and financial bubbles, as America was during its entry on to the global stage in the late 19th century. However, the long-run prospects for emerging economies as a whole look excellent, so long as their move towards free and open markets and sound fiscal and monetary policies continues. Get these basics right, and developing countries ought to outpace advanced economies. Because they start with much less capital per worker than developed economies, there is huge scope for boosting productivity by importing western machines and know-how.

    Confirmation that emerging economies are grabbing a bigger slice of global output will frighten many people in the rich world. It shouldn't: living standards depend on absolute not relative growth. Emerging economies' spurt is boosting global output, not substituting for growth elsewhere. Their vim is fuelling growth in the rich world just when greying populations might otherwise cause it to slow—not only by importing from developed countries, but also by supplying cheaper consumer goods, by allowing multinational firms to exploit bigger economies of scale, and by encouraging a better allocation of resources through increased competition. It is surely better for today's rich countries to have a smaller share of a fast-growing global economy than a bigger one of a stagnant world.
    Emerging economies
    Coming of age
    Jan 19th 2006
    From The Economist print edition

    The rich nations no longer dominate global production


    THREE striking facts highlight the dramatic shift in recent years in the relative economic balance of “first-world” and “third-world” economies. Last year, according to our estimates, emerging economies produced slightly more than half of world output measured at purchasing-power parity. Second, they also accounted for more than half of the increase in global GDP in current-dollar terms. And third, perhaps most striking of all, the 32 biggest emerging economies, which we track weekly in The Economist and Economist.com, grew in both 2004 and 2005. Every previous year during the past three decades saw at least one country in recession—if not a deep crisis. Some economies will inevitably stumble over the coming years, but, thanks to sounder policies, most can look forward to rapid long-term growth (see article). The young emerging economies have grown up in more ways than one.

    Such happenings are part of the biggest shift in economic strength since the emergence of the United States more than a century ago. As developing countries and the former Soviet block have embraced market-friendly economic reforms and opened their borders to trade and investment, more countries are industrialising than ever before—and more quickly. During their industrial revolutions America and Britain took 50 years to double their real incomes per head; today China is achieving that in a single decade. In an open world, it is much easier to catch up by adopting advanced countries' technology than it is to be an economic leader that has to invent new technologies in order to keep growing. The shift in economic power towards emerging economies is therefore likely to continue. This is returning the world to the sort of state that endured throughout most of its history. People forget that, until the late 19th century, China and India were the world's two biggest economies and today's “emerging economies” accounted for the bulk of world production.

    Fear or cheer?
    Many bosses, workers and politicians in the rich world fear that the success of these newcomers will be at their own expense. But rich countries will gain more than they lose from the enrichment of others. Fears that the third world will steal rich-world output and jobs are based on the old fallacy that an increase in one country's output must be at the expense of another's. But more exports give developing countries more money to spend on imports—mainly from developed economies. Faster growth in poor countries is therefore more likely to increase the output of their richer counterparts than to reduce it. The emerging economies are helping to lift world GDP growth at the very time when the rich world's ageing populations would otherwise cause growth to slow.


    Although stronger growth in emerging economies will make developed countries as a whole better off, not everybody will be a winner. Globalisation is causing the biggest shift in relative prices (of labour, capital, commodities and goods) for a century, and this in turn is causing a significant redistribution of income. Low-skilled workers in developed economies are losing out relative to skilled workers. And owners of capital are grabbing a bigger slice of the cake relative to workers as a whole.

    As a result of China, India and the former Soviet Union embracing market capitalism, the global labour force has doubled in size. To the extent that this has made labour more abundant, and capital relatively scarcer, it has put downward pressure on wages relative to the return on capital. Throughout the rich world, profits have surged to record levels as a share of national income, while the workers' slice has fallen. Hence western workers as a whole do not appear to have shared fully in the fruits of globalisation; many low-skilled ones may even be worse off. But this is only part of the story. Workers' wages may be squeezed, but as consumers they benefit from lower prices. And as shareholders and future pensioners, they stand to gain from a more efficient use of global capital. Competition from emerging economies should also help to spur rich-world productivity growth and thus average incomes.

    To the extent that rich economies as a whole gain from the new wealth of emerging ones, governments have more scope to compensate losers. Governments have another vital role to play, too. The intensifying competition from emerging economies makes flexible labour and product markets even more imperative, so as to speed up the shift from old industries to new ones. That is why Europe and Japan cannot afford to drag their heels over reform or leave workers ill-equipped to take up tomorrow's jobs. Developed countries that are quick to abandon declining industries and move upmarket into new industries and services will fare best as the emerging economies come of age. Those that resist change can look forward to years of relative decline. Those that embrace it can best share in the emerging economies' astonishing new wealt
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    "Everything for the State, nothing against the State, nothing outside the State" - Benito Mussolini

  • #2
    Stupid article build on stupid premises. First stupid premise, treating "the emerging economies" as a monolith, as if there are connections between South Korea and Chad or Iran and Peru aside from the fact they're not in Europe or North America. Besides, many of these supposedly "emerging economies" aren't "emerging" at all. They're still stuck in the same old rut they've been in for decades or centuries. And the second stupid premise, which is stupid to the square, is treating all these economies as a monolith 500 to 1000 years back.
    If the author would have wanted to write an article about the grand scheme of things, he'd been better off noting that the traditional pre-eminence of Eurasia got broken by the rise of North America (although it's a child of Eurasia) or alternatively, that the balance of power is shifting towards South and East Asia. But then again, if anyone hadn't realised that yet then we're probably talking about some who died sometime during the 50's or about someone who lives in blissful ignorance in some god forsaken Amazon tribe.
    DISCLAIMER: the author of the above written texts does not warrant or assume any legal liability or responsibility for any offence and insult; disrespect, arrogance and related forms of demeaning behaviour; discrimination based on race, gender, age, income class, body mass, living area, political voting-record, football fan-ship and musical preference; insensitivity towards material, emotional or spiritual distress; and attempted emotional or financial black-mailing, skirt-chasing or death-threats perceived by the reader of the said written texts.

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    • #3
      And another thing, how the hell you can derive GDP data from time periods in which the concept of "GDP" was still a distant future, or from regions that didn't gather economic data to the slightest, is beyond me.

      Stupid article.
      DISCLAIMER: the author of the above written texts does not warrant or assume any legal liability or responsibility for any offence and insult; disrespect, arrogance and related forms of demeaning behaviour; discrimination based on race, gender, age, income class, body mass, living area, political voting-record, football fan-ship and musical preference; insensitivity towards material, emotional or spiritual distress; and attempted emotional or financial black-mailing, skirt-chasing or death-threats perceived by the reader of the said written texts.

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      • #4
        #3

        Increase Your PM Length
        And another thing, how the hell you can derive GDP data from time periods in which the concept of "GDP" was still a distant future, or from regions that didn't gather economic data to the slightest, is beyond me.

        Stupid article.
        actually, thats where you are wrong. We know that $250 GDP per capita is subsistence level, therefore, no society could ever have had less then that amount and have existed. Theres a whole field called Historical Economics or something, which looks into GDP and growth figures of the past, using a variety of tools. Anyways, the fact is that they are pretty good at coming up with estimates.
        "Everything for the State, nothing against the State, nothing outside the State" - Benito Mussolini

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        • #5
          btw, which is totally in line with the Middle East, which had dominated world economic power from the beginnings of the first cities, the Arab Empire, to China, which was the worlds richest country for centuries. Europe lagged far behind these two powerhouses (Aztecs and Incans also had their thing going too, both very rich)
          "Everything for the State, nothing against the State, nothing outside the State" - Benito Mussolini

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          • #6
            Lawrence, those GDP figures are nothing but guesstimates and even that is a generous description. Even today's international GDP/PPP comparisons are riddled with uncertainties since manufactured goods and services are rarely homogenous. Moreover, GDP figures in general should be taken with a grain of salt because of the uncertainties surrounding the black and grey economies. (eg: if you clean your own house, it doesn't show up in GDP figures, if you let a paid cleaner do it for you, it is considered to be an 'economic' activity)
            In many cases, we have to rely on anecdotal evidence, or when there are aggregate statistics, they measures volumes without accounting for quality.
            Last edited by Colon™; January 25, 2006, 08:24.
            DISCLAIMER: the author of the above written texts does not warrant or assume any legal liability or responsibility for any offence and insult; disrespect, arrogance and related forms of demeaning behaviour; discrimination based on race, gender, age, income class, body mass, living area, political voting-record, football fan-ship and musical preference; insensitivity towards material, emotional or spiritual distress; and attempted emotional or financial black-mailing, skirt-chasing or death-threats perceived by the reader of the said written texts.

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            • #7
              Lawrence, those GDP figures are nothing but guesstimates and even that is a generous description. Even today's international GDP/PPP comparisons are riddled with uncertainties since manufactured goods and services are rarely homogenous. Moreover, GDP figures in general should be taken with a grain of salt because of the uncertainties surrounding the black and grey economies. (eg: if you clean your own house, it doesn't show up in GDP figures, if you let a paid cleaner do it for you, it is considered to be an 'economic' activity)
              In many cases, we have to rely on anecdotal evidence, or when there are aggregate statistics, they measures volumes without accounting for quality.
              like I said, they are pretty good at coming up with estimates. But you would be a fool to think that the the rest of the world did not dominate until the 19th C.

              Up until Rome, the worlds wealth was all in the Middle East (even Alexander went east because of its wealth)
              Then with Rome, we have also China in the East as the worlds two big powers.
              Afte Rome, we have the rise of the Arab/ Islamic Empire, which dominated the world (and europe) for 1000 years (another empire, centered in Constantinople, was also quite rich)
              After the fall of Constantinope, we have the Ottoman Empire, another incredibly powerful empire until its decline in the early 19th C.
              Then we have the Incas and the Aztec, both incredibly rich societies.
              China was powerful until the 19th C.

              Notice how none of these are in Europe? EDIT: except for Rome.
              "Everything for the State, nothing against the State, nothing outside the State" - Benito Mussolini

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              • #8
                You are talking about power of centralised empires, which is quite something different from output per capita. It's not because Europe lacked unified empires that the people in the various European states were producing less. And again, it's ridiculous to talk about "the rest of the world" vs Europe. What do the Incas have in common with the Ottoman Empire? Absolutely nothing. In fact, the Ottomans had far more in common with the European states than they had with China or Japan.

                Let us take a look at the Americas. Suppose we're in the pre-Columbian age and we are able to compile aggregate GDP data of American and European output. Presumably the pre-Columbion civilizations had a lot of bullion mining/gathering going on, if we are to believe the witness reports of the Spanish discoveres. Now, if you compile those GDP data you include that mining in the Americas. But what kind of value are you supposed to assign to a given ounce of gold they dug? Do you assign the valuations the Europeans attached to it, which was high because it was relatively rare to them, or do you assign the valuations the Americans themselves attached to it, with was low because it was relatively abundant to them? There is no common valuation of gold because you had no trade between either continent. And this does not even consider the fact that gold had little use for them aside of decoration. So if you'd compile GDP data for pre-Columbian economies, using European valuations, you might come up with a high figure because of a good that didn't materially improved people's lives.

                Besides, if you've read Oerdin's thread a while back, there's dispute how large the population of the pre-Columbian Americas was. So, how can you tell how large those continents' share of global GDP was, if you're not even sure 20 million people lived there, or 100 million people?
                DISCLAIMER: the author of the above written texts does not warrant or assume any legal liability or responsibility for any offence and insult; disrespect, arrogance and related forms of demeaning behaviour; discrimination based on race, gender, age, income class, body mass, living area, political voting-record, football fan-ship and musical preference; insensitivity towards material, emotional or spiritual distress; and attempted emotional or financial black-mailing, skirt-chasing or death-threats perceived by the reader of the said written texts.

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                • #9
                  no centralized empire has even been poor and lasted. only when they got poor did they fall.
                  we use the european standard for gold, just as we always have. We've always compared others to what the europeans value, therefore we do that now.

                  you dont need the whole continent, you need the populations of the two big empires, the incas (at most 7 million) and the aztecs (at most 15 million)
                  "Everything for the State, nothing against the State, nothing outside the State" - Benito Mussolini

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                  • #10
                    I imagine the huge surge in exports and increases in GDP seen in the third world mostly have to do with free trade and the off shoring of jobs from the first world. In the long run this is good for the world economy but in the short run that means a lot of manufacturing jobs going to the country which will pay the cheapest wages. Those who still have jobs in the first world benifet from lower costs while companies benifet from increased profits and lastly the third world benifets by gaining some jobs for their masses of unemployed. It just sucks if you work in one of the outsourced jobs or depend upon purchases by those people.

                    Luckily, I'm in a location dependent technical job so mine can't be off shored.
                    Try http://wordforge.net/index.php for discussion and debate.

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                    • #11
                      Originally posted by Lawrence of Arabia
                      no centralized empire has even been poor and lasted. only when they got poor did they fall.
                      we use the european standard for gold, just as we always have. We've always compared others to what the europeans value, therefore we do that now.

                      you dont need the whole continent, you need the populations of the two big empires, the incas (at most 7 million) and the aztecs (at most 15 million)
                      Wouldn't it be better to use purchasing power parity as the OP article did? Wouldn't that be impossible to figure out since the concept of currency was unknown in the Americas and because, as Colon already said, no one knows if there were 20 million or 100 million people in the Americas.
                      Try http://wordforge.net/index.php for discussion and debate.

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                      • #12
                        Originally posted by Lawrence of Arabia
                        no centralized empire has even been poor and lasted. only when they got poor did they fall.
                        we use the european standard for gold, just as we always have. We've always compared others to what the europeans value, therefore we do that now.

                        you dont need the whole continent, you need the populations of the two big empires, the incas (at most 7 million) and the aztecs (at most 15 million)
                        How does the fact that Europe was not a centralised empire show Europeans were less productive?

                        You are aware that GDP is fundamentally based on valuations of produced goods, are you? How can you value the gold production of the Americas if there was no trade between the Americas and Europe, and subsequently no arbitrage and no means of aligning the valuations?

                        Hypothetical example: suppose you have a primitive tribe that's cut off from the wider world. It survives on subsistence farming and hunting, but does sit next to a rock formation brimmed with diamonds, which the tribe gathers for decoration. At the same time, there's a civilization with crop rotation, manufactories and substantial trade, but to which diamonds are rare and therefore, extremely valuable. I suppose that according your methods of valuation the tribe would in fact be more productive than that civilization, in spite of its primitiveness.

                        As Oerdin stated in his thread a while back, it may have been possible civilization did exist beyond the Incas and the Aztecs. In any case, why would you want to ignore a substantial chunk of the population of the Americas if you do not even bother to argue their production was negligent?
                        DISCLAIMER: the author of the above written texts does not warrant or assume any legal liability or responsibility for any offence and insult; disrespect, arrogance and related forms of demeaning behaviour; discrimination based on race, gender, age, income class, body mass, living area, political voting-record, football fan-ship and musical preference; insensitivity towards material, emotional or spiritual distress; and attempted emotional or financial black-mailing, skirt-chasing or death-threats perceived by the reader of the said written texts.

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                        • #13
                          Originally posted by Colon™
                          Stupid article build on stupid premises.
                          See what I mean? Expect nothing less from the Economist.

                          In many respects, GDP makes sense as a measure of the extent of the sphere of commerce. Gray economy stuff just doesn't belong. While the $250 figure may be insufficiently enlightening as an unadjusted measure, we could expect some estimation of the sphere of commerce to adjust it to sufficiency.

                          By the way, shouldn't it be Colon® rather than Colon™?
                          Last edited by DanS; January 25, 2006, 11:45.
                          I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

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                          • #14

                            How does the fact that Europe was not a centralised empire show Europeans were less productive?
                            because they did not have any economic power. they were eating dirt, while the arabs had flushing toilets and the chinese had gunpowder. what, do you think the dark ages in europe were high output and growth periods for GDP in european countries?

                            Hypothetical example:
                            why dont you just take the aztec example: they built canals, pyramids, sat on a load of diamonds, even had a zoo in their capital. that doesnt sound like subsistance to me.

                            Wouldn't it be better to use purchasing power parity as the OP article did? Wouldn't that be impossible to figure out since the concept of currency was unknown in the Americas and because, as Colon already said, no one knows if there were 20 million or 100 million people in the Americas.

                            you're missing the point, we are looking at two empires, not the entire continent. Its clear that the two most powerful empires in the americas were the Incans and the Aztec. Who cares how many inuits there were, they are not useful for this comparaison.
                            "Everything for the State, nothing against the State, nothing outside the State" - Benito Mussolini

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                            • #15
                              also, one more thing.

                              Presumably the pre-Columbion civilizations had a lot of bullion mining/gathering going on, if we are to believe the witness reports of the Spanish discoveres. Now, if you compile those GDP data you include that mining in the Americas
                              if gold was so worthless for the aztec and incas, why did they amass so much of it?
                              "Everything for the State, nothing against the State, nothing outside the State" - Benito Mussolini

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