Defining Moment

• Author: David Lipton
• Position: the IMF's First Deputy Managing Director.

Straight Talk

The Arab Awakening, which started with the self-immolation of a street vendor in a rural town in Tunisia in December 2010, continues to dominate events in the region. The following month, the call in Egypt for “bread, freedom, and social justice” echoed across much of the Arab world. The mandate for change is not just political—it extends deep into the economic sphere. People are calling for a say in how their countries are governed and for greater opportunities for human fulfillment.Â

Two years later, the future of the Middle East and North Africa is unclear. Policymakers face the immediate challenge of satisfying people’s high expectations and carrying out tough reforms to bring public finances under control and bolster weakened financial systems. And progressing on economic reform is proving difficult in the face of political wrangling over constitutional and governance issues and a debate over the role of religion in public life.Â

Some are warning darkly that the revolution in the region is failing. Rather, I believe it could take any one of three paths. We could see

• a tendency toward economic chaos, if squabbling over political power prevents stabilization, let alone reform;Â

• stabilization achieved by a reassertion of vested business interests, which would offer a respite from eroding economic conditions but would condemn the region to a return to economic stagnation, or tepid growth at best; or

• emergence of a new economy, as newly mandated governments gradually end economic disruptions and undertake reforms to open the way to greater economic opportunity for their people.Â

Needless to say, the first two paths are undesirable, but the third will be hard to attain. The current state of the world economy is not making it easier to undertake substantial reform. A slowing global economy, ongoing uncertainties in Europe, higher food and fuel prices, and the conflict in Syria, with its deplorable loss of life, all risk undermining the fragile gains that have been made in the region these past two years.Â

For leaders trying to manage difficult political transitions, pursuing both stabilization and transformation is daunting. What are the prospects for success? And what, if anything, can the international community do to affect the outcome?

Region in transition

The Middle East and North Africa is a diverse region, encompassing 20 countries with a population of more than 400 million people and $3 trillion in GDP—about 6...