2018/05/23

Moody’s mejora la clasificación de riesgo de Enel Generación Chile


"La actualización reconoce el mantenimiento de sólidas métricas crediticias y una menor incertidumbre sobre la estructura de capital a largo plazo", señaló la agencia.


Moody’s Investors Service elevó la calificación de riesgo de la deuda senior de Enel Generacion Chile a a Baa1 desde Baa2, y le asignó una perspectiva estable.
La actualización reconoce el mantenimiento de sólidas métricas crediticias y una menor incertidumbre sobre la estructura de capital a largo plazo de la compañía tras la importante reestructuración de las operaciones latinoamericanas del Grupo Enel en 2016, seguida de la absorción de las operaciones chilenas de Enel Green Power Latin America por la empresa matriz de Enel Generación Chile, en abril de 2018, dijo la clasificadora.
Asimismo indicó que la perspectiva estable refleja la expectativa de que Enel Generación Chile continuará ejecutando con éxito su política comercial y mantendrá una política financiera equilibrada, con un índice de pago de dividendos que no superará el 70%.

Lowering Drug Prices: Will the Cost Outweigh the Cure?

pharma prices

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Wharton's Mark Pauly and Drexel's Robert Field discuss Trump's plan to lower prescription drug prices.
President Trump’s recently announced plan to lower prescription drug prices could achieve that goal in the short run as pharmaceutical companies chip in with token reductions, but its long-run outcomes are uncertain, according to experts at Wharton and Drexel University. At the same time, lower drug prices may not always be in patients’ best interests because they could hurt R&D investments in new and better treatments, they said.
The “American Patients First” program, announced last Friday, has several moving pieces and an incremental approach that calls for changes in laws, rules and regulations. A key piece of it is to renegotiate trade contracts with foreign governments to get them to pay their “fair share,” or more than what they now pay for drugs made in the U.S. It also aims to change rules to let pharmacists guide customers to less-expensive medicines; boost over-the-counter, generic and biosimilar drugs; help Medicare programs negotiate better drug prices; and prevent drug companies from gaming the system to unfairly protect monopolies.
“You’ll see kind of the Carrier Corporation story – some drug companies will reduce the prices of some of their high priced products just to go with the program,” said Mark Pauly, Wharton professor of health care management. He was referring to Trump’s unsuccessful efforts to prevent layoffs at the company’s Indianapolis plant last year. “The long-term effects are unlikely to be very large on overall drug prices.”
Robert Field, professor of law, and health management and policy at Drexel University, agreed. “There might be a publicity bounce where some companies decide to do something for the media to say, ‘Look, we were repentant, and we’re going to change our ways,’” he said. At the same time, the route to those lower prices could be long and complex. Field noted that the Trump plan has “a lot of general ideas,” some of which would require changes in legislation and regulations.
Pauly and Field discussed the likely outcomes of Trump’s plan to lower drug prices on the Knowledge@Wharton show on SiriusXM channel 111. (Listen to the full podcast using the player at the top of this page.)
Lower drug prices may not necessarily be a good idea, according to Pauly. “Be careful what you wish for,” he said. “Drug companies of course will treat any interruption in the flow of new products as sacrosanct and sacrilege. There will be some interruption [in innovation]. It’s a question of what tradeoff we’re willing to make as consumers and as citizens, and as taxpayers.”
“Lives will be lost [if new drugs aren’t developed], but lives are also lost by overpriced drugs when people don’t have access to them.”–Mark Pauly
According to Pauly, “Pharmaceutical companies tend to invest only if they think they can make money on what is often a very uncertain new product…. If you allow them to expect greater profits if they hit the jackpot, they’re going to invest more in jackpot-hitting products.” Lower drug prices would inevitably curb investments by pharmaceutical companies to create new products, he predicted. At the same time, it’s not clear how bad an outcome that would be. “What nobody knows is, what are those new products? Would they be the blockbuster with a low chance of success that would cure Alzheimer’s or cystic fibrosis or whatever it might be? Or would it be the next me-too drug, and who the heck cares whether it shows up on the market or not?”
Field said that drug makers might overstate the impact of lower prices on their R&D investments to find new cures. “The drug companies are in the situation of the boy who cried wolf,” he noted. “They’ve been saying for decades” that any restriction would hurt innovation and their efforts to develop miracle drugs. Added Pauly: “Well, lives will be lost [if new drugs aren’t developed], but lives are also lost by overpriced drugs when people don’t have access to them.”
Preventing Foreign Freeloading
In his announcement of the plan, Trump also said he wants to prevent “foreign freeloading,” where other countries negotiate “unfairly low prices” from U.S. pharmaceutical companies. “This places the burden of financing drug development largely on American patients and taxpayers, subsidizes foreign consumers, and reduces innovation and the development of new treatments,” he said. He noted that U.S. consumers end up paying more than 70% of the profits from branded drugs among OECD countries. His plan is to get the U.S. Trade Representative to rectify unfair intellectual property and market access policies in trade agreements with foreign countries.
Compelling foreign governments to pay more for American drugs will again not necessarily mean lower prices for U.S. patients, according to Field. “If we get them to pay more, that might just be more drug company profits,” he said, noting that the pharmaceutical industry has among the highest profit margins. Pauly agreed, and said, “At least according to economic theory of monopoly pricing, if you can get the Portuguese to pay more for a drug than they are now paying, drug companies won’t turn around and charge Americans less – they’ll charge whatever is the more profit-maximizing price in the U.S.”
American consumers may be better or worse off than those in other countries, depending on whether access or affordability matters. “Every other developed country has a national health program that provides coverage to all, or essentially all, of its citizens, and every one of those programs negotiates drug prices and sets limits on what patients will have to pay,” Pauly told a caller on the show. “We’re the only one that doesn’t.” At the same time, American consumers have access to all drugs, so long as they or their insurance plans can pay for them, unlike in other countries where price bargaining could result in some drugs not being made available, he added.
Reining in PBMs
The Trump plan to tighten rules governing pharmacy benefit managers, or PBMs, would bring savings to customers, said Field. The proposals include revamping rebate programs for PBMs in their drug purchases and freeing pharmacists from the current “gag rules” that prevent them from telling patients of lower-cost alternatives to their prescription drugs.
PBMs typically do not pass on to consumers the rebates they secure from drug makers, said Field. He also noted that “the rebates are a violation of the law” if they are not disclosed and passed on to consumers. “The PBMs are accepting money in return for recommending a product or a drug, which is a kind of kickback,” he explained. Pauly pointed out that if PBMs pass on those rebates to consumers in the form of lower drug prices, they would attempt to make up those revenues in the form of higher premiums.
“The PBMs are accepting money in return for recommending a product or a drug, which is a kind of kickback.”–Robert Field
For those who have employer-sponsored health insurance, the cost of drugs may not matter because they only have to make a fixed copayment, irrespective of the prices of their prescription medicines, Field noted. However, those who have insurance plans with percentage-based co-pay requirements would have to shell out proportionately more for higher-priced treatments, he added.
Unfinished Agenda
Significantly, the Trump plan is conspicuously silent on two aspects. One, it did not directly target pharmaceutical companies, whom Trump has previously accused of “getting away with murder” with their prices. Two, it did not seek to use the government’s purchasing power in the Medicare program to negotiate lower prices from drug companies.
Pauly pointed out that the government’s use of its buying power under Medicare could prevent access to medicines that are badly needed. “The important thing to know about bargaining is that it’s economic chicken,” he said. If the buyer insists on a lower price, the seller may refuse, he explained. “The consequence of bargaining inevitably is that some products that might have been available to you under a non-bargaining setting [may not be available]. You may have a smaller menu of products available to you.”
Generic drugs may be a solution in some cases, but not with patented drugs for which generic equivalents are not available, said Field. In the case of monopoly drugs, he added there is a strong case for the government to intervene and impose price regulation.
Pauly called for changes in both the patent terms for branded prescription drugs and the “exclusivity” benefits the Food and Drug Administration grants companies by prohibiting or delaying the entry of generic, competitor drugs. Field said that although the Trump plan does not specify it, there are moves afoot within the administration to allow easier entry for generics. Incentives to develop drugs for relatively smaller patient markets is another issue the Trump plan has left unaddressed, Field said.
All said, making drugs more affordable for American citizens will address only a fraction of the larger task of reining in national health care spending. Prescription drug spending accounted for just about 10% ($329 billion) of the total national health expenditure of $3.3 trillion in 2016, according to the latest data put out by the Centers for Medicare & Medicaid services.
http://knowledge.wharton.upenn.edu/article/will-increased-competition-actually-lower-drug-prices/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2018-05-22

Network Synergy: A New Way to Value M&A

Merger-Acquisition
Why do companies choose to acquire rather than form a partnership? And when they do decide to buy another firm, what makes them choose one target over another? Wharton research reveals that companies pursue M&A when there are both internal synergies at work as well as network synergies. Research on mergers and acquisitions has typically focused on exploring internal synergies — where the deal generates value by combining the internal assets that each firm owns and controls.
Two Wharton papers mine the less beaten path of network synergies — the idea that the external partnerships of the combined company prove to be more valuable than separate partnerships the two firms would have inked on their own. The research papers are “Network Synergy,” authored by Wharton management professor Exequiel (Zeke) Hernandez and University of Minnesota professor J. Myles Shaver; and “Acquisitions, Node Collapse, and Network Revolution,” by Hernandez and fellow Wharton management professor Anoop Menon. Hernandez recently spoke with Knowledge@Wharton to discuss the two papers’ complementary research. (Listen to the podcast at the top of the page.)
An edited transcript of the conversation follows.
Knowledge@Wharton: Can you tell us more about your research? How did you pick this topic, and what did you set out to discover?
Zeke Hernandez: For a long time, I had been interested in two things that companies do all the time, but nobody had really put them together. The first is that we’ve known for quite a long time now that strategic alliances or collaborative partnerships with other companies are valuable.
For example, firms collaborate all the time to do R&D or share knowledge or commercialize a product, etc. Each of those alliances on its own has a certain value, but most important is that the portfolio of alliances of a company is valuable because it’s a network of external resources. And research has shown before that how a firm is positioned in that network is valuable.
For example, if your firm is a central hub in an alliance network, it gets more resources and controls the flow of those resources. Or if your firm is exposed to a lot of different ideas through the network, it will produce more innovative products. That’s the first part.
Secondly, another thing that firms do all the time is mergers and acquisitions. And we know from literature — whether it’s academic literature or just talking with managers — that value in mergers and acquisitions happens through synergy. Synergy is just when the combination of the two firms or the assets of the two firms is more valuable put together than separate.
But what I noticed is that managers and researchers had focused on synergies coming from assets that the two companies own and control. Think machinery, or patents, or teams and people, or rights over markets. But I was surprised that they overlooked these alliance networks. I started wondering whether they would be valuable when firms are choosing to do mergers and acquisitions, even if they don’t own and control those relationships.
“We wanted to know whether firms make acquisitions to get these network synergies.”
What my coauthors did was combine those two ideas and ask a question that had never been asked before, which is this: Could synergies come from combining the alliance networks by acquiring a target? We called those synergies “network synergies.”
Knowledge@Wharton: What is the importance of network synergies, and how is it different from what you described as corporate or internal synergies?
Hernandez: A network synergy we define as the value or the benefit that an acquirer can get from combining its network of alliance partners with the network of alliance partners of a target firm.
Let’s say my company has five alliances and your company has its own five alliances with other firms that I don’t have alliances with. So I could acquire you, and if I inherit those five alliances that you had, I’m going to generate a new network that now has 10 alliances. Or let’s say my company and your company each have five alliances. But our networks perfectly overlap. What that means is that your five partners are the same as my five partners. I can acquire you now and be the only firm in control of those five alliance relationships.
In the first example, there are probably some benefits associated with gaining those five new alliances, or eliminating redundancies in the five alliances in the second case. We call those benefits network synergies.
How they’re different from other kinds of synergies is also important. We distinguish in the paper between network synergies and internal synergies, which come from combining assets that you and I own and control internally. So again, think of those patents and machinery and teams and people I mentioned earlier.
There’s also other synergies, I think what you’re referring to as corporate synergies, which is more about giving me more power in the market. So for those who do mergers and acquisitions, that would be something like vertical integration or horizontal integration, which allows me to maybe eliminate a rival or consolidate with a supplier.
But network synergies don’t come from that. They come from a very different kind of asset, which is these external collaborative alliances with other firms.
Knowledge@Wharton: What were your key findings?
Hernandez: We wanted to know whether firms make acquisitions to get these network synergies. And really, it was a very simple question. We gathered a sample of acquisitions made by firms in the biotechnology industry. And here’s what we found.
We found that firms are much more likely to pick a target firm among a choice of other potential targets, if the combination of the two firms’ alliance networks puts the acquirer in a better position. So if I’m going to choose among A, B and C, I’m more likely to choose A over B and C, if A generates greater network synergies.
Also, let me give you two very specific types of network synergies we discovered. The first one is what I would call an additive network synergy. And that’s the five plus five example I gave you earlier. The target brings to the acquirer a set of new partners it didn’t have before. And the benefit of that is that now [the acquirer is] more central in the network, it gets more resources than before.
The second type was what I’ll call a subtractive network synergy. The target had overlapping redundant alliances, like the example I mentioned earlier. And the merger allows the acquirer to take exclusive control of those alliances.
Any one of those two could be a network synergy, be it additive or subtractive.
Knowledge@Wharton: Comparing internal synergies versus network synergies, which one weighed more in the decision to acquire a company?
Hernandez: I was actually surprised at this finding — they actually weighed about the same. If you think about it, that’s quite surprising. You’re trying to acquire another company; you’re thinking about a million different things. You’re trying to value if your systems … or your people are compatible, or your market positions.
“I would expect network synergies to matter in industries where … resources are widely distributed.”
Are you really thinking about these strategic alliances and these network synergies? I would have expected or at least hoped that yes, network synergies had an effect in terms of which target I choose. But it didn’t have to be as strong as internal. But they were similar, in the same range [of magnitude].
To make it very concrete, we found that, for example, if you’re going to pick a target [between] one that has produced about 90 patents versus [a company with] one patent. That’s a big difference, right? And there are some benefits in combining my patents with the target’s. [Having more patents] increased the likelihood I would acquire that target by about 3.5% [in an example of internal synergies]. In comparison, additive network synergies increase the likelihood of acquisition about 2.5%. So a little bit less, but within the same order of magnitude, which was surprising to me.
Knowledge@Wharton: Can you give us some examples in the corporate world? Are there some companies out there that have actually exhibited these things that you found in your research?
Hernandez: Yes, I’ll give you two examples, one of each kind of network synergy I mentioned. For the additive network synergy, there was a deal a few years ago between two biotech firms, Hyseq and Variagenics. Before they merged, each had about nine to 10 alliance partners. They were doing joint R&D and drug commercialization through these alliances. But their alliance portfolios actually had zero overlap, meaning that the partners of these two firms had no interactions, no alliances with each other.
Hyseq buys Variagenics. It gets in one transaction 10 new strategic alliance partners. So what this does effectively is it double’s Hyseq’s external sources of knowledge and access to resources.
Now, you know, at first that seems rather obvious when stated that way, but here’s a counterfactual. What would it have taken for Hyseq to reach the same effect without an acquisition? It would have to go and get 10 separate firms, negotiate 10 separate alliance contracts, develop trust with each one of those 10 partners, etc. You see that that may not be possible. There may not be 10 partners available. Those 10 partners might not all want to partner with Hyseq. It’s much more efficient to pay a reasonable amount to inherit the network of Variagenics and get those partnerships all at once. When you put it that way, it highlights the power of seeking these network synergies.
Now, a second example of a subtractive network synergy was a deal that happened some years ago between two firms, Lynx and Solexa. In contrast to the previous example, these two companies had about 15 partnerships each, but they were very, very overlapping. If Lynx had a partnership with company A, so did Solexa.
“What this research is offering is … a new source of value that you hadn’t thought about before.”
So what can that company A do because it has partnerships with both Lynx and Solexa? It can basically play them off each other. It can also perhaps share part of its knowledge with one, part with the other. But neither Lynx nor Solexa are getting the full benefit of what each individual partner is offering. By merging, all of a sudden, you have one exclusive partner, like one hub that controls all the alliances. Now it has more control and more influence.
Again, let’s think of the counterfactual. What would it have taken for Solexa to do that? Solexa couldn’t just go to Lynx and say ‘Hey, I want you to end your partnerships just because I want to be the exclusive hub’ for these alliances. That’s impossible, right? So you can only accomplish that by taking ownership of the other firm and consolidating all the alliances [under one firm].
Knowledge@Wharton: Are there specific sectors or industries where network synergies are more critical for M&A deals? Or they are pretty much the same across the board?
Hernandez: We need to keep in mind that we only tested this in one industry, in biotechnology. That choice was a bit intentional, because we know from prior research that this is an industry where strategic alliances and external relationships are valuable. And they’re valuable there for two reasons. The first is that this is an extremely technologically complex industry. So what it takes to develop molecules, to develop drugs, to take them through the FDA approval process, etc., — no firm has everything it takes to do it all internally. That leads to the second point: Partnerships are just very common [in that industry]. You have to collaborate. You can’t go at it alone. So these alliances end up being quite valuable to being profitable in this industry. And it makes sense that firms should — and they do — seek network synergies.
Now, the general point is that I would expect network synergies to matter in industries where I would say resources are widely distributed. What I mean by that is that no individual firm can systematically do everything needed to be profitable on its own.
What industries is this true of? Clearly high tech industries — biotech, electronics, software. I also think it’s true in industries that are very global. If you think of an industry where talent, resources, technology are spread across many countries — it’s very hard to control all of that internally. Probably this is where these network effects would be important [and you’d be more likely to see firms pursue network synergies via M&A].
Knowledge@Wharton: What are some practical implications of your research? What can companies take away from it that they can apply it?
Hernandez: Here’s one very, very practical consequence. I’ve observed that in many, not all, but many companies, the corporate development groups are split into an M&A team and an alliance team or a strategic partnerships team. Often, these teams are in different buildings. They might even be in completely different cities. Sometimes, companies might have an M&A team but not an alliance team or vice versa.
If alliances and acquisitions are mutually affecting each other, then a very practical implication is that you need the team to be together, right? You need the same group to be managing alliances and M&A as a unified corporate strategy as opposed to two separate things.
And importantly, if you are an M&A manager or an M&A researcher, what this research is offering is that there is perhaps a new source of value that you hadn’t thought about before. Maybe you thought about combining the teams and the internal stuff. Maybe you thought about how the merger changes your market position.
“Acquirers choose targets that create … network synergies.”
But my guess is that probably not everyone has thought about value coming from combining strategic alliance networks. And I think the reason for that is that unlike the assets I just mentioned, you don’t own and control those [external alliances]. You don’t technically own a partnership. It’s a contractual relationship that in part is controlled by someone else or partially controlled. However, it doesn’t mean it’s not valuable. It doesn’t mean that a merger can’t change your position in that network. So think of [network synergy] as a new source of value [for acquirers].
Knowledge@Wharton: You’ve alluded to this earlier — how your research is different from prior work that’s done in this area. Can you give us more details about how you’re different?
Hernandez: There’s a very clear division between people doing and studying mergers and acquisitions and people doing and studying strategic alliances. And really, this is one of the very few studies so far that has combined both perspectives. And so I think the research is different because we integrate the two — and the two sides do need to talk to each other. It’s exciting because there’s probably a lot of implications that we haven’t explored yet.
Knowledge@Wharton: How will you follow up this research?
Hernandez: We have really just scratched the surface. … What we’ve done is show that acquirers choose targets that create … network synergies. Another way to think of that is we’ve shown that acquirers expect network synergies, and that they’re willing to pay for them, at least in some industries. But we still need to learn a lot about what happens afterward.
Think of post-merger integration. What do firms need to do to actually realize the expected network synergies? And also, how long do those network synergies last? Especially when we compare them to the other synergies about which we’ve known a lot more. There’s a lot of research to be done on just comparing network synergies with the other types of synergies.
Then there’s a question that’s been intriguing me: How do the capital markets react? I don’t know if, say, the stock price of a firm is affected by announcing a deal that has network synergy. I don’t see analysts talking about alliance networks too much [when valuing acquisitions], so that would be an interesting question, maybe even in the finance realm.
Lastly, a very different but related issue, is thinking about divestitures. If you think about it from a network’s lens, a divestiture is a fission or splitting of two networks. That has a whole series of other implications. It’s very interesting to see how these strategic alliances are reassigned after a divestiture, and what domino effects occur.
Those are just a few examples of things that I want to do. But certainly, what’s exciting is that there’s so much to be done because it’s … new territory.

Why Monarchies Rule When It Comes to Standard of Living

royal wedding

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Wharton's Mauro Guillen talks about his new research showing how monarchies benefit countries' economies.
As the U.K.’s House of Windsor prepares for Saturday’s royal wedding of Prince Harry and American actress Meghan Markle, British taxpayers are bracing to foot an estimated bill of more than $40 million (£30 million) for security arrangements alone. That surely is painful in the short run, but the long-term effects of monarchies are good for the economy and the standard of living, according to a new study by Wharton management professor Mauro Guillen.
Guillen’s study found that over the 110 years between 1900 and 2010, monarchies had a better record than republics in protecting property rights of businesses and individuals. The study, titled, Symbolic Unity, Dynastic Continuity, and Countervailing Power: Monarchies, Republics, and the Economy,” looked at data on 137 countries that included republics of different types and dictatorships. He spoke about his research on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Spurring Economic Growth
Why exactly are property rights so important? “The form of government has an immediate, direct effect on the protection of property rights,” Guillen said. When companies and individuals feel confident that their property rights — including intellectual property — will not be abused or confiscated by the government, they are more willing to invest in the economy, create more jobs and generate other economic boosters, he explained.
According to Guillen, property rights come under attack in three specific situations. One is when there is a social or political conflict in the country. “That always leads to undermining of property rights and has negative economic consequences,” he said. The second is when politicians remain in power. “As they get used to being the ones who run the government, they become abusive and they tend to privilege their friends — that’s why we have term limits,” he explained. The third is the level of checks and balances on the government. For example, the Congress or the judiciary in a country could restrain the executive branch from acting arbitrarily or expropriating the assets of a company or an individual.
“Don’t assume that monarchies are backward and that monarchies don’t deliver a good result economically. That’s not true.”–Mauro Guillen
In order for countries to thrive, “[you] need to reduce conflict; you need to reduce the number of years that politicians sustain power because we know that they become abusive sooner or later; and you want to have checks and balances,” he said.
Why Now?
The study is timely, according to Guillen. “There is a lot of discussion about whether it’s better to have a democracy or a dictatorship, and another dimension to this debate has been whether monarchies have a reason to exist today,” he said. The results surprised him. “I wasn’t expecting monarchies actually to perform relatively well in terms of delivering higher standards of living for the population,” he says. “But in a nutshell, that’s what I found.”
Over the past century, many countries have gained independence, especially in the 1950s, 1960s and 1970s, Guillen noted. Today, of the 190 or so countries in the world, around 23 have monarchies, he said. As it happens, the number of monarchies has been rising over the past few years, he added. “There is something about monarchies that keeps them in place, and some of that is the economic performance that they deliver.”
Both monarchies and democracies have a mixed record in delivering economic growth and all the benefits that flow from that. “We have some monarchies in the world that perform economically extremely well like the U.K., Sweden, Norway, the Netherlands, Denmark and Japan,” he said. Similarly, republics that have done well include the U.S., Germany and Italy. At the same time, many countries that are either monarchies or republics have poor track records, he noted.
Surprising, But True
Guillen said he is aware that his finding that monarchies do a better job at protecting property rights is “very counter intuitive.” People may say “that sounds really weird,” because they think kings and queens are arbitrary, and in many cases, absolute rulers.
Many monarchies have changed for the better over time, Guillen said, and pointed to the so-called “constitutional democratic monarchies” like those in Europe or in Japan. Such monarchies “tend to be very protective of property rights,” have a better chance of reducing internal conflict, and put limits on politicians and prime ministers that want to abuse their powers, he said. For every four monarchies that are democratic and constitutional, one is non-democratic, he noted, adding that many of those are in the Middle East.
To be sure, more and more countries have become democracies over the years. “The historical trend is towards monarchies — essentially kings and queens — accepting a constitutional order and accepting … the democratic rules of the game,” said Guillen. That could also mean the best of both worlds. “You can get all of the benefits from being a democratic country with a constitutional order, and at the same time you get some of the benefits from having a monarchy in place.”
Some constitutional democratic monarchies “work better than others, and have delivered a better standard of living for the population,” Guillen noted. “The evidence in my research shows that there’s no reason for those countries to abolish the monarchy.”
Why Some Monarchies Deliver
Guillen went over some of the chief benefits of monarchies. Countries that are not democratic, such as those in North Africa like Morocco or in the Middle East, may have “one advantage” over a country like the U.K., which is that in overcoming social or political conflict, they can engage in repression. Although such repression may help a monarchy cling to power, “in the long run this comes back to haunt them,” he said.
In constitutional democratic monarchies like the U.K., Sweden and Denmark, the key advantage is that they have much more legitimacy in telling politicians not to perpetrate themselves in power and make way for rotation, Guillen said.
Monarchies tend to be dynasties, and therefore have a long-term focus, Guillen noted. “If you focus on the long run, you are bound to be more protective of property rights,” he said. “You’re more likely to put term limits on politicians that want to abuse [their powers].” Here, he said Queen Elizabeth of the U.K. has exercised her constitutional role admirably in keeping the country’s prime ministers in check, whenever they seemed to overextend their reach.
“You need to reduce conflict; you need to reduce the number of years that politicians sustain power because we know that they become abusive sooner or later; and you want to have checks and balances.”–Mauro Guillen
Also, monarchies bring in “a psychological mechanism,” said Guillen. “If you’re the prime minister and you know there is a higher authority, although it may be a purely formal one and a pure figurehead like a king or queen, you are a little bit more subdued. If there’s nobody else higher or above you, then psychologically you are more prone to abuse your position,” he said.
“Don’t assume that monarchies are backward and that they don’t deliver good results economically — that’s not true,” Guillen said. At the same time, he made it abundantly clear that he is not making a case for a return to monarchies as the form of government. “I’m not advocating in any way, shape or form that every country in the world should adopt a monarchy on the basis of these results,” he said. “The monarchy only works wherever there is a tradition and a foundation for it.” For example, a monarchy in the U.S. would fail, he noted.
Guillen’s argument is more about allowing a particular form of government to prevail if it is delivering the goods. “There’s no point in those countries in which the monarchy works well to organize a movement to get it abolished, because it does produce higher standards of living.”
Republics’ Scorecard
Republics that protect property rights, ensure economic growth and higher standards of living are of two types — parliamentary republics like Germany, or presidential republics like the U.S.
Parliamentary republics tend to ensure better protection of property rights than presidential republics, Guillen found in his study. He pointed out that many presidential republics, especially in Latin America, perform poorly. “The U.S. is the exception rather than the rule among the presidential republics.”
Monarchies are also “much better than republics at navigating periods of uncertainty” such as the one triggered by Britain’s imminent exit from the European Union, Guillen said, citing research by other scholars on the subject. “Somehow, the institution of the monarchy [in the U.K.] provides a measure of stability.”
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