Yesterday we discussed the ongoing opposition of Egyptian President Muhammad Morsi. While the opposition has political and secretarian issues with Egypt’s first democratically elected president, these issues alone would constitute a very weak argument for the removal or Morsi or demands of a national coalition government. Knowing this, the opposition has created an atmosphere that is not conducive to economic activity. Egypt’s economy has been producing below potential since the instability caused by the ousting of former Dictator Hosni Mubarak. The Egyptian pound has depreciated, but Egypt has been unable to take advantage of having cheaper exports because it cannot mobilize its factors of production to produce more exports (compounding the issue, there’s no escaping higher food prices, as Egypt is a net food importer and everybody has to eat to survive).

The monetary crisis has turned into a humanitarian crisis. People are having trouble feeding themselves, there is not enough oil being produced to meet both international and domestic needs, creating food and fuel shortages usually symptomatic of a country at war (and compounding the stagnation in the Egyptian economy, people cannot be as productive without enough food and machines cannot run without an energy source).

With the economy producing below capacity, the government’s ability to provide basic services to the people is in jeopardy. Less tax revenue means it is much more difficult to pay for social programs that people rely on. Printing more money would further weaken an already weak Egyptian Pound, and Egypt cannot assume more debt as it seeks an IMF loan contingent on strong fiscal indicators. Competitive devaluation of the currency would scare off potential investors; having a more competitive Fx rate has done little to boost Egyptian production up until this point, so there is no reason to believe further devaluation would be an effective measure.

Egypt needs a more stable environment to grow its economy. People often point to political uncertainty (rightfully so) as a reason for a slow recovery from the “Great Recession”. Imagine how much slower it would be if on top of political uncertainty you had instability and insecurity that threatened the overall legitimacy and sustainability of the current government in power (and if that government was a new government attempting democracy after decades of dictatorship):

“Mursi’s supporters say the protesters want to overthrow Egypt’s first democratically elected leader. The unrest has prevented a return to stability ahead of parliamentary elections due within months, and worsened an economic crisis that has seen the pound currency tumble in recent weeks.”

Egypt needs IMF loans and Foreign Direct Investment (FDI) from developed countries and Multi-National Corporations (MNC) to get its economy growing again. However, international capital will not flow into Egypt with its current level of instability and insecurity, regardless of the expected rate of return on investment:

“German industry leaders see potential in Egypt but are concerned about political instability.

‘At the moment many firms are waiting on political developments and are cautious on any big investments,’ said Hans Heinrich Driftmann, head of Germany’s Chamber of Industry and Commerce…Germany’s ‘offer to help with Egypt’s transformation clearly depends on it sticking to democratic reforms’”

I, for one, believe that any call for a national coalition government is illegitimate and would damage the long term sustainability of democracy in Egypt. What would it say for the future of democracy if a violent minority could successfully influence the way Egyptian politics work. However, defending the long term sustainability of democracy in Egypt may be a fool’s errand if there is a real chance that Morsi’s democratic regime may break down in the very short run. Morsi must also be careful in using military power and/or executive orders to ensure security in Egypt. Any use of these measures will unfairly associate Morsi’s democratically elected government with Mubarak’s military dictatorship.

The opposition, instead of being concerned with the future of the Egyptian state, has used current instability as a tool in hopes of ousting Morsi or at least strong-arming him into appointing members of the opposition to positions within his government:

“’Our demand is simply that Mursi goes, and leaves the country alone. He is just like Mubarak and his crowd who are now in prison,’ said Ahmed Mustafa, 28, a youth who had goggles on his head to protect his eyes from teargas.”

“Opposition politician Mohamed ElBaradei called for a meeting of the president, ministers, the ruling party and the opposition to halt the violence. But he also restated the opposition’s precondition that Mursi first commit to seeking a national unity government.”

Egypt has the potential to be a dynamic economy and a symbol of democracy and modernization working alongside Islamic principles. Setting this precedent would go a long way in establishing a friendlier relationship between the “Western world” and the Middle-East. Just as the many citizens of Egypt (and the region as a whole) have much to gain from such a relationship, the current elite and those ideologically opposed to “Western values” have much to lose.

Democracy in Egypt could be a lynchpin to this mutually beneficial relationship, but such a relationship is far from a foregone conclusion. The Morsi regime must be able to provide stability and security in order to maintain its legitimacy. The key to this objective is jump-starting the Egyptian economy with foreign capital. Sources of foreign capital have been apprehensive to get involved in Egypt because of the instability and uncertainty caused by Morsi’s opponents.

As you can see, we have a circular pattern here where Egypt’s economy continues to stagnate and the opposition continues to undermine the regimes legitimacy. Hopefully the international community can come together with President Morsi to figure out a way out of this vicious cycle that works for everyone. A national unity government may undermine the principles of a democratically elected government, but if it would bring the requisite stability and security needed to sustain democracy in Egypt (and infuse desperately needed international capital into Egypt’s economy), then it is an idea worth pursuing.