Culture

Mexico is home to some of the earliest and most advanced civilizations of the western hemisphere. This area in Latin America was formerly known as Mesoamerica, a tern that refers to the geographic area and cultural traditions of the pre-Colombian civilizations. There are many native cultures that have their roots planted in Mexico, but there are six that are considered to have been the most influential; the Olmecs, Teotihuacans, the Toltecs, the Mayans, the Zapotex/Mixtecs, and the Aztecs. Each one of these civilization existed in their own geographical area and traces of the original civilizations are still being uncovered today. The Mexican culture is interesting mix of Native American traditions and Spanish colonial influences. The official and predominant language is Spanish and is spoken by nearly the entire population. However, there also exist dozens of indeginous languages although spoken by few in comparison. One thing the Mexican culture is known for is the unified nature of the family. The country’s divorce rate is among the lowest in the world, and children usually live with their parents until they marry. The culture is predominately patriarchal with the father acting as the ruler of the family and the mother being the heart that holds the family together.

Politics

Mexico is a federal republic constituting of thirty one sates and one federal district. There are three agencies that govern the country, the independent executive, legislative, and judicial branch. The chief of state who is also the head of the government is the president. The president is elected by a popular vote resulting in a six year term. There are a few political parties present in Mexico; however, the three prevailing parties are the Institutional Revolutionary Party (PRI), the National Action Party (PAN), and the Party of the Democratic Revolution (PRD). There is not one single party that holds majority in either house of congress.

Economics

Mexico has a free market economy that recently entered the trillion dollar class. It contains a mixture if modern and outmoded industry and agriculture, increasingly dominated by the private sector (“CIA World Fact Book”). The government is phased with serious continued chronic problems such as corruption and crime. Together these two may constitute for as much as 25% of Mexico’s GDP. Continued financial problems prevent the government for doing things such as adequately subsidizing its universities or the basic research that would provide full employment for Mexican scientist and engineers, and ultimately improving the national economy (Wikipedia). In December of 1994 the Mexican government at that time headed by Ernesto Zedillo was forced to devalue the peso by 50% which eventually led to the collapse of the Mexican stock market. In an effort to address financial market imbalances, on December 22, 1994 the government allowed the peso to float and substantially raised short term interest rates. To ensure orderly conditions in foreign exchange markets with the new floating exchange rate and Exchange Stabilization Funs of US$18 billion was established with contributions from the North American Financial Agreement and from the monetary authorities from major countries and from private commercial banks (IMF). In order to receive payment Mexico had to institute cutbacks on social, infrastructural and educational spending. Accepting this money further instituted Mexico’s dependence to the United States as well as other foreign countries which some say further reduced their sovereignty. Mexico has seen annual average real growth rates of about 4.1% consistently high unemployment. There was a continued decline in the exchange rate from 2000 (9.456 Mexican pesos/US dollar) to 2004 (11.286 Mexican pesos/US dollar), however, Mexico is currently experiencing a slight increase with the present exchange rate set at 10.5715 Mexican pesos/US dollar. The graph below illustrates Mexico’s exchange rate trend for the past 10 years.

Economic Rates

One issue that has been in the area of contention in regards to Mexico’s economy has been the real impact the North American Free Trade Agreement had on Mexico’s growth rates. Mexico has been a member of NAFTA for ten years and has made some incredible developments in term of human development. Mexico has been successful in improving health and educational rates but continues to fight low and inequitable growth that has resulted in present high poverty rates. “According to 2000 date, 53 percent of the country’s population is poor (living on less than $2 per say) while close to 24 percent is extremely poor (living on less than $1 per day)” (World Bank). Policies put in place to deal with the 1994 economic crisis have helped Mexico on the road to recovery. “After a 6.2% GDP’s contraction in 1995, form 1996 onwards the Mexican economy has grown at and annual average rate higher than 5.0%, a rate not achieved during the past two decades” (Ministry of Finance). The growth rate experienced by the Mexican during this time period is higher than the world’s average and higher than any other Latin American country during that same period. Today the GDP per capita amounts to $US 9,600 which is 59% higher than just five years ago. At the moment Mexico continues to experience a decline in inflation rates. The inflation rate in 2000 was 8.96% which was an important milestone for Mexico to reach since it was the lowest it had been since 1994. The country has continued its downward inflation trend, “twelve month inflation dropped to its lowest rate of 3.05% at the end of October, well within the target of between 2 and 4 percent set by Mexico’s central bank for 2009” (Yahoo Finance). Literacy rates in the country have also experienced an increase within the last 10 years. In 1995 78.2% of the population over 15 was able to read and write. Numbers for 2010 have not yet been calculated, but as of 2003 92.2% of the population of 15 was able to read and write, a 14% increase in just eight years.

Natural Resources

The natural resources of Mexico are petroleum, silver, cooper, gold, lead, zinc, natural gas, and timber. The country is recognized as being one of the most biologically diverse places on the planet. In 1992 Mexico’s secretary of urban development and technology stated, “the costs and benefits of the use of natural resources…which annual rates of between 2% and 4.5% in tropical rain forests, must be incorporated into Mexico’s accounting” (SUDE).

FDI Inflows and Outflows

Since about 1995 foreign direct investments (FDI) in to Mexico have increased substantially. A New foreign direct investment law instituted in 1993 abolished restrictions to foreign ownership in the majority of Mexico’s economic activities. In recent years Mexico has come in second place as a leader in receiving the most FDI from any other Latin American country. In the year 2000 “by country, the United States alone account for 60.4% of FDI in the country through 11,630 subsidiary companies established in Mexico” (Ministry of Finance). The textile, garments, automotive and electronic sectors have been the largest and fastest growing investments in recent times In 2009 manufacturing alone was responsible for 77% of FDI in Mexico.

The following graph illustrates Mexico’s rank as compared to 132 other countries in the levels of FDI Outflow in the years 1990, 1995, 2000, 2005, and 2010.

International firms are investing into Mexico primarily in regards to three different industries. The industries have been sectioned of by either being primary, secondary, or tertiary. A primary industry is considered as one that includes agriculture, hunting, forestry and fishing, mining, and or quarrying and petroleum. A secondary industry includes areas such as food, beverages and tobacco, chemicals and chemical products, metal and metal products, machinery and equipment, and any other manufacturing products. The final type of industry is what is called a tertiary industry and it includes, electricity, gas and water, construction, trade, hotels and restaurants, transport, finance, real estate, and other services. The following graph illustrates the amount of FDI allocated to ach of the three industries mentioned above from 1994 to 2002. Information has been taken from the United Nations Conference on Trade and Development website.

There are several countries that are investing in Mexico, with the largest of these investors being the United States. Information as to what countries are investing in Mexico are usually separated as the type of country that each is. For example countries are separated into developed or developing countries. There are many countries that fall into the developed section, but for purposes of this report I will only give information on the top four developed countries (European Union, Canada, US, and Japan). Another source of FDI for Mexico comes from developing countries. These will be grouped together in the graph to make things easier to read. Some developing countries investing in Mexico include but are not limited to, Chile, Bahamas, Cayman Islands, Panama, India, China, Korea, and Taiwan). The following graph illustrates the breakdown as to how much each country contributes to Mexico’s FDI inflow. The graph includes numbers compiled from 1994 to 2002.

Mexico’s FDI in Foreign Countries

Mexico’s FDI is concentrated in the United States, but is also does some small investing in countries such as Colombia, Costa Rica, Ecuador, Spain and Chile. The graph below gives an idea in the amount it invests in foreign countries. For simplicity reasons I have chosen to provide information on only a few countries (those which receive the most FDI from Mexico).

World trade

Mexico has become a great example of trade as a vehicle for economic modernization and growth. Mexico’s overall performance over the last five years has been positive. ‘Between 1997 and 2000, GDP expanded at an annual average rate of 5.2%; Mexican trade in goods grew at an annual average rate of 17.1%, the fastest among WTO’s twenty largest single members, with imports slightly outpacing exports” (WTO). Mexico’s trade policy remains closely related with the advancement of FDI.

Trading partners

Mexico’s major trading partners are the United States, Canada, Germany, China, and Japan. Mexico has been through a significant economic transformation becoming a much more open economy welcoming free world trade. The World Trade Organization in 2000 ranked Mexico as the 8^th leading exporter and the 7^th leading importer. The European Union is Mexico’s second largest trading partner. The structure of the Mexican and European Union economies trade flows between the two countries tend to be paired with a high relationship in intra-industrial trade that include goods such as chemicals, cars, and electronics. “European Imports total volume in 2004 amounted to € 14,628 million mainly in machinery (27.5%); followed by energy (22.8%), transport equipment (14.7%, automotive products (12.5%), chemical products (8.3%) and agriculture products (5.6%)” (Trade Issues).

Trade Volume

Trade volume is an indicator of how much a country depends on foreign trade. Goods that are not possible to produce locally are sought after in the international trade market. Imports reflect dependence on foreign made goods while exports a countries dependence on foreign markets that will buy their goods. A country with a high level of trade volume is an indicator that the country has a strong responsibility towards the global economy. Mexico’s merchandise exports from 1994 to 2004 are illustrated in the graph below.

Import and Export levels

After the creation of NAFTA Mexico’s trade volumes with the United States and Canada have increased. The next step is increasing trade between Mexico and the European Union under EFTA (European Free Trade Agreement). Mexico is a producer of high quality goods in sectors such as alcoholic beverages, coffee, construction, food manufacturing, and textiles. By the same token Mexico is currently seeking investment, supplies and partners in sectors such as agriculture, airports, automotive, and communication. According to the CIA World Fact Book, exports accounted for $182.4 billion in 2004 while imports totaled $190.8 billion that same year. Mexico’s export commodities include manufactured goods, oil and oil products, silver, fruits, vegetables, coffee, and cotton. Their import commodities include metalworking machines, steel mill products, agricultural machinery, electrical equipment, and car parts for assembly. Its three most import export partners are the US (53.7%), China (7%), and Japan (5.1%).

Trade balance

Currently Mexico is running a $36.5 million dollar deficit. The following table and graph illustrate Mexico import and export levels from 1996 to 2008. Information has been taken from the U.S Census Bureau.

Current Account

Mexico’s current account, which is made up of its services, net income, net export of goods, and net current transfers is currently suffering a $4.113 billion dollar deficit. Slow GDP growth taking place over the last few years and the historical depreciation of the peso have caused Mexico’s current account deficit to narrow. The following exhibit shows Mexico’s current account compared to that of the U.S

Attractiveness

Mexico’s new economic policies put into effect in the 1990’s have been highly successful in promotion trade and in attracting greater flows of foreign investment. The presence of free trade agreements, such as NAFTA, ant the new economic policies have made Mexico one of the most attractive countries for FDI. “Manufacturing activities have especially benefited from increased foreign capital inflows, accounting for more than 75 percent of total FDI in Mexico: 57% went to the production of metal goods; machinery and equipment; 16 percent to food and beverages, and 9% to chemicals and plastics” (Maquilaportal). Mexico’s increased attractiveness in the eyes of foreign investors may also be the result of an important skilled labor force that is young and willing to work for lower wages which attract Multinational Corporations trying to maximize profits.

Future expectations

Mexico’s economy continues to grow, inflation rates are declining and FDI inflows continue to rise. There are many signs of increasing confidence in the future. The exchange rate has just started an upward trend than can be thought to continue to improve. Foreign companies continue to view Mexico as a country of opportunities for increased profits. The Mexican government’s liberal view on free trade allows for Multinational Corporations to set up shop with minimal requirements. One of the major factors that will be playing an important part as to how well Mexico’s economy does will be based on what the U.S economy looks like in the future. Due to Mexico’s strong ties with the United States. Almost 90% of Mexican imports are destined for the United States and as much as 60% of Mexican imports come from the U.S.

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Inelastic demand is a “situation in which a price change leads to a less than proportionate change in quantity demanded” (Hirschey). There are many goods whose inelasticity is considered perfect. Some of these goods could include; gasoline, coffee, cigarettes, and illegal drugs. As we have formed a basis for our inelastic principality, it is important that we start with an example of inelastic demand so that it is easier to understand. If we are paying two dollars per gallon of gas, and the government imposes a 90 cent tax on each gallon consumed what will happen to the prices, and the quantity demanded?

There will be a decrease in supply, which will create a new equilibrium point in the demand and supply function. This will occur as the consumer demand continues to remain the same, as there are no alternative or substitute goods available for gasoline. Visually below, we can see the implications of any price increases in the oil industry are passed directly to the consumer.

Cause of Increasing Oil Prices

To see what is causing the price of gasoline to increase we need to look at environmental factors that are affecting these wayward and substantial increases. As supply and demand are two of the biggest components of the cyclical price of oil, there are other factors the influence the price of gasoline. First, the U.S. imports almost 70 percent of its oil supply. This drives up the demand, as the U.S. must compete with other emerging economies, such as India and China. Although these countries consume a fair amount of oil, they are still considerably behind the U.S., as we consume 20.4 million barrels a day, whereas countries such as China “only” consume 6.5 million barrels a day. Second, there are not only environmental, but governmental levies, marketing, and location costs that are associated with the production and distribution of the final product. If we look at the components that make up a gallon of gasoline, we can see that the cost of crude oil is 50 percent, distribution and marketing is 10 percent, taxes are 19 percent, and refining is 21 percent.

Next, we can see that the cost of terrorism and worldwide political instability has surely driven the cost of oil in an upward fashion. It however remains interesting that as our demand for foreign oil increases that we are funding countries, such as Saudi Arabia, Iran, and Venezuela, who are not only awash in terrorism, but are gaining more anti-American sentiment. Thus, if we look further at this issue, we can see that as we spend enormous amounts of money fighting terrorism and anti-Americanism, we are in the end funding the root of the problem. Translated into dollars, implications of a potential terrorist attack have increased the price per barrel by almost $15.

Although the aforementioned reasons are some of the major factors, there are many more influencers on the price of oil. Seasonality, which causes cyclicality in the price of gas, is determined by what time of year it is. Increasing travel during the summer months increases demand by nearly 5 percent, thus causing an increase in price, which is transferred to the consumer.

OPEC (Oil Producing and Exporting Countries), another important factor in the price of oil, determines at what level produce output. As OPEC holds nearly 70 percent of the world’s oil reserves, if they decide to produce more supply, than prices will drop. Conversely, if they decide to reduce production, prices will rise, and can be visually seen in below:

Environmental regulations also influence the price of gasoline. A state that has statutes less forgiving than federal guidelines is California, where refiners are subject to restrictions on reformulation, storage, and other miscellaneous rules which they must follow to comply with standards established by the state. These increasing rules and regulations are felt by the consumer, as the refiner passes these costs to the consumer at the pump.

Lastly, in terms of affect of increasing oil prices, severe or deteriorating weather conditions can drastically influence the price. As Hurricane Katrina has ravaged the Gulf Coast, it has damaged the heart of oil refineries, which use the Gulf Coast as a centralization point in storage, production, and distribution of oil supplies.

The Effects On The Economy

Gasoline prices continue to increase and are currently at record levels. Hurricane Katrina ravaged New Orleans and parts of Mississippi. New Orleans and the Gulf Coast area have refineries that account for ten percent of the refining of the United States. A loss of ten percent production translated to an increase of fifty cents a gallon or more at the pump. To further complicate the refinery production problem, hurricane Rita is on a course for Galveston and other areas of Texas which account for thirty five percent of US oil refining production. This could prove to be a major problem for the United States with another major increase in gasoline prices. When the gas prices continue to shift the question becomes “What will this do to consumer spending?” Ultimately, a significant change in consumer spending will determine what happens to the economy.

Will consumer spending go down simply because it costs more to commute to work or leave town to visit relatives. The answer is no. People will still continue to drive where they need to go, and they will continue to take trips to see family and friends. The frequency of these trips may decrease, but not at a level that would affect the economy. The large affect stems from the cost of manufacturing and transporting goods. Businesses will pay more to produce items, which will ultimately be passed to the consumer. When prices escalate to a level that consumers are unwilling to pay they will spend their money elsewhere. This is a direct reflection of the law of demand. As the price of an item goes up, the quantity demanded will decrease. This inverse relationship defined by the law of demand will begin to have an impact on the economy over time.

In the past, high energy costs have been a key predictor of economic slowdowns. So far we have not seen a recession begin to occur. The Federal Reserve chairman has kept the economy in check by increasing interest rates eleven consecutive times in a row. This has been done in an effort to control the very inflated housing market. The Fed may have to continue with this trend to combat inflation due to the rise in energy costs.

Gas prices are only a part of the problem that Americans are facing. The winter months are approaching, which will begin to show an even larger problem. Gasoline only accounts for about fifty percent of the oil use in the United States. Energy prices will become a shocking reality when heating bills begin to surface this winter. Natural gas, home heating oil, and electricity costs all continue to rise. So, why aren’t citizens rushing to the stores to purchase thicker jackets, blankets, and sweaters? Wouldn’t this help alleviate the higher energy prices this winter? The problem is that the prices for all of these goods are going to continue to increase as well. Oil prices will be felt in the trucking and shipping industry, which in turn will be passed along to the consumer.

What Can be Done?

Consumers are crazy to think that by not buying gas on a specific day will cause oil companies to decrease their prices. The only thing that will bring the price down is to decrease the quantity demanded. How can we as consumers do this? We are headed in the right direction by companies producing more energy efficient products. Everything from refrigerators to hot water heaters to automobiles are more energy efficient than they were thirty years ago. What else can be done to reduce the quantity demanded? In cities such as New York and Chicago, the transit system is sufficient to support a majority of those that work in the city. The transit system in San Diego is not as efficient nor does it have the capacity to transport a majority of those that work. However, parking the SUV during the week, arranging to carpool, and walking or biking for those that are close enough could certainly have a large enough impact to affect the quantity of gasoline demanded. Additionally, homeowners can take measures to make their homes more energy efficient for the winter by caulking windows and doors, or possibly by turning off the heater to their pool. These may seem like insignificant ideas, but if a large percentage of the population were to take these steps in conserving energy it would certainly be felt by the oil companies.

In an article by Congresswoman Deborah Pryce, she states that the US Department of Commerce estimates that America is losing nearly 2 million jobs annually due to oil prices. Even as our economy grows, the increased demand for energy and our dependence on foreign sources of oil will keep us from meeting our full economic potential. Alan Greenspan states that our low energy supplies are the biggest threat to an otherwise burgeoning economy. The simple answer then may be to open up Alaska for oil drilling. We must find ways to be more efficient when drilling in our oil fields. Innovation is the key. We need to find a way to use existing energy supplies more efficiently and explore new alternatives through extensive research and development. If conservation and innovation are promoted through incentives, we will undoubtedly create new technologies to provide energy in the future. Additionally, oil rigs that were shut down when prices were thirty five dollars per barrel may now operate out of the red at sixty five dollars a barrel. We must operate at maximum capacity and have less dependence on other countries for our oil supply. If we are able to do this, our economy will continue to prosper throughout the years to come.

References

Associated Press. Gas Prices Drive Up Wholesale-Level Inflation

Hirschey, M. Managerial Economics. Florence, KY: Thomson South-Western.

Pryce, D. Rising Gas Prices Highlight the Need for a National Energy Policy

Zakria, F. How to Escape The Oil Trap. Newsweek.

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The Arts bring wonders to the community and the city of Philadelphia. Firstly it provides a tourist attraction which gives the city impressive revenue. For example, “The Salvador Dali exhibit generated a total economic impact of $54.9 million within the Philadelphia region, with a total direct economic impact of $30.7 million and a total indirect economic impact of $24.2 million” (GPTMC, pg 5, 2005). The Arts provide a service to those who reside in the region, with education and multi-cultural organizations that topic all interests and branch out to all demographics from the Asian- American Alliance to the India Music and Dance Society. The city is still growing but the fact remains that though the Arts are such a large part of Philadelphia society, it is still fragile and could be eliminated at any given time if organizations do not remain competitive, active in the community, and contributive to the city’s revenue. The purpose of researching this topic is to define and assess cultural organizations’ contributions to the city’s economy, example; jobs, spending and tax revenues. For Non-profit arts to remain competitive, researchers must look beyond obvious inputting and outputting costs. “Understanding how this region’s nonprofit cultural community contributes to our economy and its economic is a vital tool in building our economic future.” (PEL, pg. 3, 1998). In order to understand the purpose of this research, one must recognize the challenge.

The challenge is to capitalize on emerging opportunity, remaining competitive and increase revenue base. Nonprofit arts societies have a disadvantage of fragility as was mentioned earlier, in comparison to say, a local brewery or a bookstore that works independently, generating revenue for their own use. Nonprofit arts must focus on, tourism, restaurant sales, economic spending, jobs, creativity, political leanings, attracting talented people, to name just a few bullets on the agenda. All of those factors make it difficult for a mere handful of people to coordinate and facilitate these efforts. Many local nonprofit organizations must be involved.

Several organizations are involved to conduct research on economy – nonprofit arts and culture in Philadelphia. Three prominent organizations that stand out in this research are Pennsylvania council on the arts (PCA), Pennsylvania Economy League (PEL) and the National Endowment for the Arts. Pennsylvania Council on the arts or the PCA is “governed by a Council of 19 members – 15 private citizens and four members of the General Assembly. Citizen members are appointed by the Governor and confirmed by the Senate. The Council sets the mission and goals for the agency, evaluates the PCA’s progress toward these goals, formulates policy, and makes final decisions on the use of funds” (PACouncilontheArts.org). The PCA has funded hundreds of art and community projects which makes them a key role in this research project and their role in this project is to provide data that includes – income trends, spending comparisons and non-profit cultural revenues. The Pennsylvania Economy League’s role in this research project is similar to that of the PCA in that their research reflects financial aspects of nonprofit arts. PEL is a research organization who’s mission is to provide information for all nonprofits in Southeastern Pennsylvania. PEL works directly with government officials to execute programs. PEL’s role in this research project is generally to collect massive amounts of information, conduct surveys to inevitably find solutions. In order to expand research to areas throughout the country, the National Endowment for the Arts or the NEA is crucial to this project in relationship to national art and culture. The NEA, based in Washington DC is by far the most important contribution to this research. Two advantages, being a national organization and sharing close ties with the US government and also has accessibility to global artistic relations. With these prominent organizations backing research on Philadelphia non-profit arts and the economy, several methods were used to calculate economic impact.

Three methods that stand out are: the IMPLAN model, surveying, and data mining. Pennsylvania Economic League chose to use IMPLAN to conduct research. IMPLAN stands for Impact analysis for Planning. With the use of this model, PEL was able to “build a customized model of the arts and culture sector within the Philadelphia region”. (PEL, pg 49, 1998) Using results from surveys conducted, the IMPLAN team collaborates to create charts and bar graphs that indicate everything from – Sources of contributed nonprofit cultural income to total spending impact, which includes tourist spending, audience spending and organization spending. PEL mails out detailed surveys to cultural centers, museums, galleries and theaters that ask questions relating to facilities, souvenir sales, and money spent on marketing and promotion, maintenance etc. PEL’s surveys ask about number of attendees for performances, lectures, and workshops. Once this information is sent back PEL, PCA collaborates to come up with defined theories. Pennsylvania Council on the Arts collects the data – figures, expense reports, government documents and works with PEL for the IMPLAN model to go into effect.

In summary these methods produced powerful results. It has shown that, “Greater Philadelphia’s nonprofit cultural industry is a $300 million industry with more than 5,500 direct full and part time employees” (PEL, pg 39, 1998) This study has also proven that the so called “new- dollars” or external funds are continuing to increase the city’s revenue. Tourism is definitely at large today, and will continue to thrive as well as branch off into different dimensions. This research was conducted by the Regional Arts and the Cultural Economy task force. The author defined the business research and the purpose, she then explained the business problem under investigation, identified all parties involved in conducting this research and described the methods used to conduct this project.

Cited

GPTMC Dali Hotel Package – Report on Survey Findings pg 5

Pennsylvania Economy League – Regional Arts and Culture Economic Initiative Greater Philadelphia’s Competitive Edge pg 3, 39, 49

About PCA Council Members

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“As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to the direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it (Wealth of Nations. VI, ii. P.456).” This is Adam Smith’s most popular quote from his book written in 1776, An Enquiry into the Nature and Causes of the Wealth of Nations.

What Adam Smith was saying in this passage was that foreign trade is the least beneficial form of economic activity. Smith favors a domestic rather than international economy. Even when it may seem profitable to go international and trade, the society will still benefit more by staying domestic. A nations development depends mainly on the investment in it’s own manufacturing and agriculture over trade.

The invisible hand was, and still is, taught to economist all over the world. It is the most central metaphor in economics. Mr. Smith is credit with developing this term of an invisible hand, although he only used it once in The Wealth of Nations. Referred to as the “groundwork” for the study of economics, the invisible hand became significant in the development of other essential economic ideas. Smith influenced such people like Mandeville, Ferguson, and Hume. All of these men made observations saying that man is motivated by self-love. For Smith self-love was the principle of motion in society. Another example of how significant the invisible hand has been is the development of the invisible handshake and the invisible foot. The term invisible handshake was thought of by an economist named Arthur Okun, he argued that social and historical forces – the invisible handshake – often prevented the invisible hand from working. A chairman at the University of Texas named Stephen Magee brought about the term invisible foot. He said that individuals often use politics and laws to get what they want. Government action to benefit particular pressure groups is the invisible foot.

What did Smith really say when he coined the phrase invisible hand? Smith simple said those individuals who support domestic to foreign industry intends only for his own wellbeing. In addition, by producing to get the greatest value, the individual is intending personal gain. An invisible hand to promote an end that was not part of his intention then guides him. Individuals use capital to invest in capital, although they may make a better profit investing in international capital. The invisible hand was described well by an economist named Keith Rankin on a paper he wrote on the 10th, of November in 1998. He stated:  “Smith’s invisible hand is actually an instinct towards patriotism; the semi-conscious identification of our individual interests with the collective well-being of our nation.”

Smith felt very strong that the market would allocate resources efficiently. An invisible hand would guide supplier’s actions toward the general good; no government would be necessary. Smith refers to the government controlling a society to a chess-player controlling pieces on a chessboard. The only principles of motion the chess-pieces have are those imposed on them by the hand controlling them. Human individuals are not like chess-pieces and each on has its own principle of motion. That principle of motion is different from the motion the government might pick to impress upon society.

Man, according to Smith, has an inclination to truck, barter, and exchange. Exchange leads to the division of labor, which enables workers to take advantage of economies of scale with the unpredicted result of wealth. Trade is done because individuals see gain in what they are trading for. Barter is done so individuals can get mutual gains from one another.

To some, it may sound like Smith wants greed to run our economy. Smith said that capitalists have a deep sense of their true self-interest, than to greedily follow market signals as the only indicator of self-interest. The invisible hand can be broken down to three simple steps. The first is that individuals usually get a result that they were not expecting or trying to get. All of these unpredicted outcomes from everyone in society put together will make sense after some time, and will seem as if it were planned to come out like it did. The third is that all orders are beneficial to the participants because, although unintended, the outcomes are desirable.

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In order to better understand why democracy stands out as the most important variable for a country’s economy and politics, we must look also address the other issues scholars point to. Like education, for example. Some scholars believe that education has a large impact on the outcome of a country’s economy and politics. Education has shown relevance in the survival of democracy, for example. Democratic countries that provide their citizens with higher education are more likely to remain democracies. While elementary school education has actually shown to significantly matter for democratization, the rate of economic growth and investment relates more to secondary and higher schooling. (Barro: S170) In terms of economics, the significance is obvious: educated people find higher-paying jobs and therefore contribute more to the country’s economy. Education also plays a part in the spreading of diseases, like the AIDS issue in Africa. The number of HIV positive men and women in Africa is growing every day, mainly because they are poorly educated about this issue, and also because they don’t have enough doctors. This significantly affects the African economy.

The next issue we must address is migration. When people start leaving one country to go to another country, the country they migrate from and the country they migrate to will both feel a positive and negative effect from this migration. Mass migration, as was the case for Scandinavia between 1870 and 1913, affects labor and therefore affects the economy. When Scandinavians began moving to America, the price of labor in Scandinavia increased while the price of land dropped. Another similar issue here is how much geography affects a country’s economy. “The geography hypothesis claims that differences in economic performance reflect differences in geographic, climatic, and ecological characteristics across countries.” (Acemoglu: 29) The idea here is that the country’s climate (based on its location) has a direct effect on income and economy because it affects the kind of work that country can do. Geographic location also adversely affects a country’s ability to trade.

Trade is also seen as an important determinant for political and economic outcome. Trade is very important for a country’s economy. Trade allows for specialization among countries which allows for faster and cheaper production around the world. Making one product at home while purchasing a different product from another country allows for more available labor to put into the making of the country’s own product, and also allows the country to sell its item at greater quantities. It allows countries to “make the best use of their scarce productive resources, and to improve their overall consumption by producing certain things themselves and obtaining other goods and services from other nations.” (Grieco: 21) Autarky, or not trading, has shown to have a very negative effect on a country’s economy and also decreases overall satisfaction and consumption. In short, trade is beneficial and it definitely plays a role in the economic outcome of a country.

Some scholars point to wealth as the key issue in determining political and economic outcomes. This is the point where scholars are also faced with the ‘Origins problem’ of which comes first – wealth or democracy? Some data has shown that poor countries have a faster growth rate than rich countries and that these poor countries converge at a faster rate. Some evidence has also shown that countries which were poor 500 years ago are rich today, and countries which were rich 500 years ago are poor today. Rich countries generally tend to be democracies, however, other types of governments may also be wealthy. And while these other governments don’t usually succeed politically, the wealth their country has acquired does not necessarily breed democracy or political success. If a dictatorship, for example, survives “in a country that became sufficiently wealthy, transition to democracy is less likely.” (Przeworski: 6) These arguments then also tie into the importance of earlier colonization and the institutions that are chosen and adapted.

Countries that were rich and populated tended to have power concentrated in the elite and tended to have extractive policies. Countries that were poor and scarcely populated had private property institutionalized and were more democratic. The areas that had institutionalized private property industrialized, while the areas with extractive institutions failed. In conclusion, institutions are important as they facilitated or blocked industrialization, and the choice of institutions by colonial powers determined subsequent economic development and later wealth. The institutions that remained in countries today are also then important in determining their outcomes. Democracies and dictatorships are important to look at here.

Democracy tends to have a positive and a negative effect on a country’s economy. “On the positive side, democratic institutions provide a check on governmental power and thereby limit the potential of public officials to amass personal wealth and to carry out unpopular policies. But on the negative side, more democracy encourages rich-to-poor redistributions of income and may enhance the power of interest groups.” (Barro: S158) In a democracy the people choose their leader by voting for the candidate they feel will provide them with better living standards. This leader then wants to keep the economy growing and to provide the people with everything they need because he represents a party and he must not destroy this party’s reputation. Economy also grows when there is investment from the nation’s citizens, but in order for citizens to invest they must have some kind of security for their investments. Democracy provides this security and therefore prospers from individual investments. There is less redistribution and lower tax rates in the democracy.

In terms of politics, democracy gives a country’s citizens certain rights that other governments don’t. Democracy gives people freedom. It protects property rights just like it would protect any other civil right. It provides citizens with a sense of security. Democracy, even when it works very badly, “does not give the leader of the government the incentive that an autocrat has to extract the maximum attainable social surplus from the society to achieve his personal objectives.” (Olson: 571) Basically, the leader in a democratic country cannot manipulate the citizen’s and the state as much as a dictator can.

A dictatorship, while still better off economically than in anarchy, is not economically efficient. A big reason why a dictatorship economy will not grow rich is because investment is necessary for growth and dictatorships do not succeed in this area. Most dictatorships do not provide their people with the sense of security that is necessary for individuals to invest, so people don’t invest. There are high tax rates and monopoly rents are charged, which is good for the leader, but not for the people. While some dictatorships have grown wealthy, it is only a short-term growth and does not last.

When looking at the survival rate of a dictatorship, it seems that they die out at some point under a broad variety of conditions. (Przeworski: 7) Dictatorships do not last. Mainly because there is no sense of security. People do not know what will happen tomorrow, or in a few years. Those who are well off are afraid to invest because there is no security that they will benefit. There is also no security about property because property rights are not fully developed in a dictatorship and they are not protected.

Basically, the conclusion we come to is that a democratic government will positively affect the political outcome of a country. It will remain stable and its citizens will continue to be satisfied. Economically, a democracy will generally prosper because the people will invest their capital, knowing it is secure, and the leaders will not be able to manipulate the fund and steal money from the people. A dictatorship, having only one ruler, will eventually die out. Whether with the death of the leader, or in some other way, dictatorships do not survive as well as democracies do. Economically, a dictatorship can grow wealthy but only for a short period. A dictatorship’s per capita growth is much lower than that of a democracy. Factor productivity is also much lower than in a democracy. A dictatorship simply will not grow economically as fast as a democracy will.

While many factors affect the outcome of a country’s politics and economics, some stand out as more important than others. Trade has a very important role in a country’s economy, and economic institutions highly affect the political outcome of a country. But of all the variables scholars look at in determining their importance for economic and political outcomes, democracy seems to have the greatest affect on these results. Democracy greatly affects a country’s economy, more positively than negatively. Politically, it also seems to have the greatest importance in future outcomes of a country. Democratic institutions affect politics and economics more than trade, migration, and any other variable we have looked at.

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