Truffles in the Sand

Everyone knows Saudi Arabia is rich in oil. But who had any idea the desert kingdom harbored another prized commodity?

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State of Denial

Kemal Helbawy is a founding member of the Muslim Association of Britain and a member of the Muslim Brotherhood, the Egyptian-based Islamist movement with chapters throughout the Islamic world, including Hamas in the Palestinian territories. It comprises the largest opposition bloc in the Egyptian parliament, with eighty-eight seats, and it administers a network of social services that is far more efficient and responsive than those provided by the state. Brotherhood leaders have been at the vanguard of Egypt's grassroots push for political reform, consistent with the Bush Administration's policy of democratizing the Middle East.

But on October 18, Helbawy found out what all that hard work and credibility is worth, at least as far as the White House is concerned. The London-based religious scholar was tightly buckled into his aisle seat on an American Airlines flight bound for New York, where he was to be the lead speaker at a conference on the Muslim Brotherhood. Within minutes after leaving the gate, the flight captain announced a departure delay and the aircraft was towed back. Helbaway was asked to come forward, where he was met by an official of the US Department of Homeland Security and informed he had been rendered inadmissible for entry to the United States without a visa issued by the US embassy in London.

It didn't matter to the agent that, as a British citizen, the 80-year-old Helbawy did not require a visa, nor that Helbawy had traveled frequently to the United States a decade ago as part of a university lecture series. Orders were orders, and Helbawy was escorted off the plane.
The State Department would not say why Helbawy was barred from the United States. Increasingly, however, the Bush Administration is using broad interpretation of the USA Patriot Act to keep out foreign scholars critical of White House policies. According to State Department documents obtained by the American Civil Liberties Union through a Freedom of Information Act lawsuit, the act's "ideological exclusion" provision may apply to anyone who "endorses or espouses" terrorism or who voices "irresponsible expressions of opinions."

The same provision was used in July to revoke a visa issued to the Swiss Islamic scholar Tariq Ramadan after he was offered a job at the University of Notre Dame as a professor of Islamic studies. When Notre Dame officials pressed for an explanation, the State Department initially declared Ramadan a terrorist sympathizer before backing away for lack of evidence. It then accused Ramadan of giving money to charities blacklisted by the United States for funding Hamas. But Ramadan made his donations years before the United States blacklisted the groups; how could he have known of their activities, he and his supporters point out, before the United States itself knew?

Ramadan, a vocal critic of US foreign policy as well as Islamic extremists, is active in ecumenical affairs. He is also a grandson of Hassan al-Banna, the founder of the Muslim Brotherhood, and that alone could be enough to make you persona non grata in post-9/11 America. For years, US diplomats in Egypt were allowed informal contacts with Brotherhood members, a source of valuable information given how intimately twinned the group is with Egyptian society. Since 9/11, however, the State Department has frozen even unofficial relations with the group, and Secretary of State Condoleezza Rice pointedly excludes Brotherhood members from meetings in Cairo with secular--and significantly less influential--leaders of Egypt's reform movement.

The estrangement calcified early this year after Hamas's electoral victory in the Palestinian territories and its refusal to recognize the state of Israel. Hard-liners in the White House blame the Muslim Brotherhood for Hamas's recalcitrance, though the group's influence over its affiliates is thought to be passive at best. For their part, Helbawy and other Brotherhood members say they would embrace a mutually acceptable conclusion to the Israeli-Palestinian dispute.

"We disagree with US policy," Helbawy said by telephone from his London home. "But we would be happy to see the issue resolved. And for this I am refused permission to attend a conference in New York?"

In taking on the Muslim Brotherhood, the Bush Administration has aligned itself against the most powerful and authentic political movement in the Arab world. Established in 1928 in opposition to foreign occupation and Zionism, the Brotherhood is the closest thing to an established, centrist party in an Arab world that over the years has shifted rightward on a riptide of outrage. Egyptians are drawn in by the group's message of moderation and tolerance and by their contempt for US Middle East policy, which includes support of Hosni Mubarak, the country's brutal, secular president. The group renounced violence decades ago and has condemned Osama bin Laden and his acolytes as apostates. It is not on the US list of terrorist organizations and gets high praise from many Egyptians--secular as well as religious, Christian as well as Muslim--for its civic-mindedness.

Unlike Al Qaeda, the Muslim Brotherhood knows how to contest and win elections. While bin Laden and President Bush indulge in existential combat in which the average Muslim has little if any personal stake, the Brotherhood has been winning hearts and minds through assiduous and nonsectarian ward-heeling. While Bushism has wrought war, anarchy, occupation and the specter of the lethal Zionist-Crusader alliance that bin Laden warned of in the run up to 9/11, the Muslim Brotherhood salves some of the deprivations and inequities of ordinary life. It is what makes the group the hardest target yet in Bush's "war on terror," and the likely successor to the aging Mubarak.

Attempts to sideline the Muslim Brotherhood by locking its members out of America will only raise the price of dealing with its leaders when there is no one else in Cairo to talk to.

Islam in Office

Judeo-Christian scripture offers little economic instruction. The Book of Deuteronomy, for example, is loaded with edicts on how the faithful should pray, eat, bequeath, keep the holy festivals and treat slaves and spouses, but it is silent on trade and commerce. In Matthew, when Christ admonishes his followers to "give to the emperor the things that are the emperor's," he is effectively conceding fiscal and monetary authority to pagan Rome.

Islam is different. The prophet Muhammad-himself a trader-preached merchant honor, the only regulation that the borderless Levantine market knew. In Muslim liturgy, the deals cut in the souk become a metaphor for the contract between God and the faithful. And the business model Muhammad prescribed, according to Muslim scholars and economists, is very much in the laissez-faire tradition later embraced by the West. Prices were to be set by God alone-anticipating by more than a millennium Adam Smith's reference to the "invisible hand" of market-based pricing. Merchants were not to cut deals outside the souk, an early attempt to thwart insider trading.

Today, with a spiritual revival sweeping much of the Muslim world and with the Bush administration still keen on democratizing the region, it is worth asking how an Islamist movement would manage the economy. Since 2001, Islamist parties have made strong showings or won elections in 10 Arab countries (Morocco, Jordan, Lebanon, Turkey, Iraq, Iran, Bahrain, Egypt, Kuwait and Pakistan) and the Palestinian Authority. And none are clashing with the West on free-market economics. In Iraq, the supply-side economic-reform plan submitted in 2003 by former U.S. administrator Paul Bremer has survived with only minor revisions under Baghdad's new Shia-dominated government.

An interesting test came in the January election in Egypt, when the Muslim Brotherhood-the fountainhead of modern Islamism-took a fifth of the seats in Parliament. Now the largest opposition party, much of the brotherhood's appeal rests on its network of hospitals, schools and charities, which are often superior to state services (and help explain why the secular regime cracks down harder on the secular opposition than on the religious one). Fortunately for the reform-minded prime minister, Ahmed Nazif, the brotherhood's economic agenda is largely consistent with his own, albeit with a more populist twist.

The brotherhood embraces free-trade deals in general, but criticizes the government for failing to negotiate better terms for Egyptians. Though Islam tends to frown on tax collection, the brotherhood supports tax reform (not abolition) and opposes a proposed flat tax as regressive. It even endorsed the recent decision to lift budget-busting food and fuel subsidies, but wants to use Egypt's ample natural-gas reserves to finance a less painful transition to market prices. "It must be done gently," says Mohammad Habib, the brotherhood's first deputy chairman, "with the objective of reducing the gap between rich and poor."

In the 1950s, as the brotherhood gained political momentum, it opposed President Gamal Abdel Nasser as much for his decision to nationalize the Egyptian economy as for his fierce secularism. Muhammad, says Yasser Abdo, a Muslim Brotherhood member and a former economist at the International Islamic Bank for Investment and Development in Cairo, "believed in the private sector as the basis of productive activity," with a "limited" state role.

Today, brotherhood parliamentarians remain anti-statist and staunchly antitrust, citing a verse in the Qur'an: "He who brings commodities to the market is good, but he who practices monopolies is evil." Not that any member goes as far as questioning the OPEC cartel. As Cairo University economist Abdel Hamid Abuzaid puts it, Islam promotes "competition of a cooperative" nature, not the "cutthroat" Western kind.

Politically, at least, the objective of fundamentalist Islam is to restore the Islamic caliphate, the unified Muslim kingdom of the 7th to the early 20th centuries that stretched from the Hindu Kush to the Strait of Gibraltar. This rhetoric turns more practical on the subject of trade. "If the ancient caliphate can revive itself," says Habib, who has a U.S. doctorate in geology, "it will happen through regional commerce." A brotherhood in power, says Habib, would respect Cairo's free-trade agreements-though the group appears to be divided over whether it would honor one with Israel.

In the days of the caliphate, Islam developed the most sophisticated monetary system the world had yet known. Today, some economists cite Islamic banking as further evidence of an intrinsic Islamic pragmatism. Though still guided by a Qur'anic ban on riba, or interest, Islamic banking has adapted to the needs of a booming oil region for liquidity.

In recent years, some 500 Islamic banks and investment firms holding $2 trillion in assets have emerged in the Gulf States, with more in Islamic communities of the West. British Chancellor of the Exchequer Gordon Brown wants to make London a global center for Islamic finance-and elicits no howl of protest from fundamentalists. How Islamists might run a central bank is more problematic: scholars say they would manipulate currency reserves, not interest rates.

The Muslim Brotherhood hails 14th century philosopher Ibn Khaldun as its economic guide. Anticipating supply-side economics, Khaldun argued that cutting taxes raises production and tax revenues, and that state control should be limited to providing water, fire and free grazing land, the utilities of the ancient world. The World Bank has called Ibn Khaldun the first advocate of privatization. His founding influence is a sign of moderation. If Islamists in power ever do clash with the West, it won't be over commerce.

A Tale of Two Chinas

The dimly lit room has low ceilings and poor ventilation. The machinery is outdated and the glue guns leak. Rubber cement fumes spike the air. Rolls of leather stand alongside a pile of rubber soles. In a corner, a woman cuts synthetic material into shoe linings while her colleagues take a break over bowls of spicy tofu.

Chen Chuang and Dai Wei located their factory in Wenzhou (pop. seven million), China’s unofficial shoemaking capital, because of the city’s ready supply of laborers. The factory produces some 100,000 pairs of shoes a year—deck shoes to cross-trainers—making a profit of about three yuan, or 37 cents, a pair. Chen, who wears a T-shirt with “Welcome to the Love Hood” on it, says he would have been miserable in the state-run rubber factory that employed his father. “Our future is much more interesting,” he says. “We work for ourselves, and we are more successful because we can survive with such small margins.”

In less than a generation, Wenzhou, a port city on the East China Sea about 200 miles south of Shanghai, has transformed itself from a charming backwater to a showcase of China’s new commercial vitality. Wenzhou churns out not only shoes but also pharmaceuticals, garments, sporting goods, optics, kitchen appliances, valves, paint and metal works. Construction cranes rake across work sites manned by crews on double and triple shifts. The city’s annual per capita income of $2,500 is almost double the national average of $1,300. Gated communities of opulent villas have mushroomed in the suburbs, while entire neighborhoods of dilapidated hutongs—wooden homes and courtyards that have stood for centuries—await the wrecking ball. Traffic along the city’s main thoroughfares is a frenzied ballet in which bicycles, wagon-pulling tractors and carts pedaled by coolies (derived in part from the Chinese ku li, or “bitter labor”) vie with Cadillacs, BMWs and even Hummers.

Since 1989, when pro-democracy demonstrators were massacred in Beijing’s Tiananmen Square, prompting many foreign business men and women to vow they would never bet again on China, the country has attracted $600 billion in foreign investment. China now enjoys an estimated $202 billion trade surplus with the United States and owns more than $795 billion in foreign currency, most of which is invested in U.S. bonds, which help the deficit-saddled U.S. government finance itself. In the two decades before 2000, the Chinese economy quadrupled, and it is expected to become the world’s fourth largest by the end of this decade.

But the socialist state also suffers high levels of unemployment. Some 13 percent of its 1.3 billion people survive on a dollar a day or less. Chinese banks are stuck with half a trillion dollars in bad loans. And China’s roads, railroads, energy grids and healthcare systems are woefully inadequate.

If China’s colossal impact on world markets is now familiar, the effect of the red-hot economy at home, where it is fueling record levels of internal unrest, is less well known. Last year, China’s public security minister Zhou Yongkang reported that almost four million Chinese took part in nearly 75,000 protest “incidents” in 2004. Zhou characterized the number as a “dramatic increase” over the previous year and noted a trend toward organized, rather than spontaneous, outbursts. In response, Beijing has reportedly formed a new police force equipped with helicopters and armored vehicles.

Meanwhile in the West, starry-eyed accounts of China’s economic transformation often obscure Beijing’s contempt for basic human rights, its one-party politics, its rubber-stamp judiciary, its censored Internet and oppressed minorities, and a prison system so secretive that human rights groups can only guess at how many people may be languishing in it.
“China is facing a huge number of social and economic challenges that are making expensive demands on the national budget,” says Murray Scot Tanner, a China analyst at the Washington office of the Rand Corporation, a Santa Monica-based think tank. “If the economy does not grow at an [adequate] rate, the pressure will intensify. There is not yet a sufficient appreciation in this country that when it comes to China, a number of things could still go wrong. The stakes are very high.”

To reacquaint myself with China, a country I had not covered for seven years, I visited two cities separated by geography, history and politics. In Wenzhou, I found China’s bold future, where newly made fortunes and go-go consumerism have transformed lifestyles but at a cost to the environment. In Shenyang, I found a once proud government stronghold now convulsed by free-market commerce, high unemployment, anxiety about the future and a certain longing for days past. Once the crucible of Maoism, Shenyang is by some accounts China’s most politically unstable region. Both cities suggest that the global economy needs a stable China at least as much as China needs the global economy.

The mountains are high and the emperor is far away.” The old Chinese proverb alludes to how much can be achieved beyond the meddling reach of the state, and it is nowhere more appropriate than in Wenzhou.

Wenzhounese are known for their resourcefulness in turning what could be a geographic liability—isolation due to the forbidding Yandang Mountains—into an asset. Neglected for centuries by the central government, Wenzhou’s citizens began pioneering a more nimble, private-enterprise economy long before Beijing launched its “market-socialist” reforms in the early 1980s under Premier Deng Xiaoping, who ended more than a quarter-century of totalitarian restrictions under Mao Zedong.

“People are defined by their geography, and Wenzhou was once an island, always remote from the cities,” says Chen Youxin, a 73-year-old semiretired government historian who edits Wenzhou’s official statistical yearbook. The city was a tiny kingdom with its own language and culture until, he says, it participated in a failed rebellion against a Han dynasty emperor in the second century b.c. In retaliation, the emperor exiled Wenzhou’s entire population to the present-day eastern province of Anhui, and replaced it with people from the northeast who were among China’s most cultured and educated. By the tenth century a.d., Wenzhou had emerged as an enclave of art, literature, handicraft and scholarship.

Wenzhounese became shrewd and self-reliant, Chen says. Centuries before the state began experimenting with private enterprise, the Wenzhou economy revolved around a nucleus of small, family-owned businesses financed by gao li dai, or high-interest loans from one family member or friend to another. Often capital is pooled among members of a meng, a fraternity of sorts of half a dozen or more male friends. The meng might help a member finance a home, find medical attention for a loved one or ensure that the seats at his wedding are filled—a real bonus in a country where guests are honor-bound to give newlyweds money.

Last year, according to the Chongqing Morning Post, a provincial newspaper, Wenzhou residents spent nearly 11 percent of their income on wedding gifts, the highest in China.
The Wenzhou shoe market and factory complex takes up several city blocks. Inside a honeycomb of small shops and factories, pedestrians compete for sidewalk space with scooters, construction crews and boxes stacked outside crowded showrooms. The streets are slick with oil and garbage. Rows of squat warehouses roofed in corrugated steel or terra-cotta tile front sewage-choked waterways.

Pan Wenheng and his wife started the Wenzhou Rui Xing Shoe Factory 13 years ago with an initial investment of $6,230. The factory now turns out a thousand pairs of shoes a day. In its warehouse, canvas moccasins for Chinese buyers and leather loafers and lace-ups bound for Italy and Germany are stacked in black boxes on wooden pallets. The company generated sales of $4.6 million last year, according to Pan, whose laborers earn between $125 and $374 annually. “We work from 8 a.m. to 11 p.m.,” he says. “We Wenzhounese work harder than anyone else in China.”

A few blocks from Pan’s factory, Wong Tsinhuei is cutting linoleum for a storefront. Wong says he makes ten times the amount he could earn back home in Shaanxi Province. He says he came to the city five years ago with his wife and three sisters, who work as chambermaids. They’re among the 300 million people who left rural villages to find work in cities since Beijing lifted restrictions on personal movement in the mid-1980s—one of the largest migrations in human history. “I work every day if I can,” says the 38-year-old Wong, an expert furniture-maker who began an apprenticeship at the age of 18. Wong says he makes about $200 a month, and he and his wife, who earns about $100 herself, send more than 15 percent of their income to family members back home.

The abundance of cheap labor in China has kept the prices of most consumer products low. Chinese people can now afford such commodities as televisions, refrigerators and personal computers, which were once considered luxury items. But services such as healthcare, which was jettisoned by the government to the free market decades ago, are costly and of uneven quality, and rent can absorb half of an average worker’s wages. Still, many of China’s itinerant workers have the same ambitions as their counterparts in other market economies. “There is no way we could make this kind of money in the village,” Wong says. “But we won’t stay here forever. Our dream is to make enough to build a big new house and lead a quiet life back in Shaanxi.”

Getting rich may be an article of faith in Wenzhou, but it is not the only one. Religion, both Western and Asian, is enjoying a revival in a city known, because of its many Christian churches and Buddhist temples, as the Jerusalem of China. Organized faith has rebounded since the 1980s, when the Communist Party relaxed Mao-era prohibitions on religion. “Communism has become bankrupt as a worldview,” says Daniel Wright, author of The Promise of the Revolution, a book about his experiences living in rural Guizhou Province, one of China’s poorest regions. “Since the early 1980s, you’ve had a vacuum that religion has partially filled.”

One of Wenzhou’s oldest Christian establishments is the Cheng Xi Tang Methodist Church. It was built by British missionaries about 120 years ago, and its cherry-wood pews and lofty pulpit would make any Anglican congregation in Surrey proud. Yu Jianrong is the parish priest. He was attending a seminary in Nanjing when it was shut down in 1958 in the backlash that followed Mao’s “Let A Hundred Flowers Bloom” campaign inviting public criticism of the Communist Party. (The movement turned out to be a ruse to expose and punish dissidents, clerics and intellectuals.) The genial Yu was forced to work in an electronics factory, and the Cheng Xi Tang Church was turned into a cinema. The church reopened in 1979. “There were 200 people then,” he told me. “Now thousands come every Sunday.” The parish bookstore offers Chinese- and English-language Gospels, prayer books, self-help books and Holy Land tour guides. There are even Chinese-language copies of They Call Me Coach, the autobiography of legendary UCLA basketball coach John Wooden, a pious Christian. Business is brisk.

Shenyang, the capital of Liaoning Province, is about 940 miles northeast of Wenzhou. In the heart of what is known in the West as Manchuria, Shenyang was once celebrated as the blast furnace of Communist China’s industrial might. Its wide thoroughfares are flanked by sprawling factories that for decades produced the bulk of China’s steel, automobiles and machine tools. But by the late 1990s, when the government declared it would privatize its failing enterprises, most of Shenyang’s factories were shut down or restructured. Tens of thousands of laborers, many of whom had spent their lives toiling for the state, were laid off and their pensions and benefits slashed or canceled.

Until health problems forced him to quit in the late 1990s, Li Zizhong used to work at the state-owned Shenyang City Metal Works just east of the city. The factory was privatized beginning in 1991, and many of its employees were let go. “The lower class is suffering due to these free-market changes,” says Li. “It used to be you had guaranteed employment. No longer.” Still, Li says he’s happily retired, exercising, practicing tai chi and assisting his daughter, 27-year-old Li Hongyu, who runs a shop that exhibits and sells paintings and calligraphy from local artists.

Her 8- by 12-foot gallery cost her the equivalent of $200 to purchase, and she estimates she makes $60 to $100 a month. “It’s not much, but it helps us get by,” she says. Li, an expert digital-lathe operator, has a college degree in industrial engineering and went into the art business only after fruitless attempts to find work at a large company.

Many Shenyangese are uneasy capitalists. Unlike in clannish Wenzhou, there is no meng safety net here. And with the size of an average Chinese family vastly reduced by the government’s 25-year-old one-child policy, failed businessmen have few if any siblings to turn to for support. Many older Shenyangese are nostalgic for the cradle-to-grave health and education benefits of the Mao era, though not for Mao himself, who died in 1976 and whose brutality, drug use and perverse appetites have come to light in the years since.

A prosperous trading center under Mongol rule from the 10th to 12th centuries, Shenyang was an early capital of the Manchu dynasty, which ruled from 1644 to 1911. At the turn of the last century, Russia and Japan competed for influence in Shenyang and the rest of Manchuria, a rivalry that culminated in the 1904-5 Russo-Japanese War. The victorious Japanese went on to occupy and develop the region into an industrial base from the early 1930s to the end of World War II, after which Manchuria was restored by the Communists as China’s industrial heartland.

Today, many engineers, managers and other former members of Shenyang’s industrial elites drive taxis or run nanny and day care services. Some work for low wages in the city’s vast indoor market amid counters piled high with fruits and vegetables and butchers’ stalls full of animal carcasses. Li Fu, a 31-year-old electrician, has worked at a meat counter since he lost his job at the Donlu Radio Factory about a year ago. A member of Manchuria’s large Muslim community, Li Fu lives with his parents, who both work outside the home, while his wife is a homemaker. Like many of his former colleagues, Li Fu says he earns slightly more money running his own business than he did as an electrician at a state-owned company. But the work is less rewarding, he says, and he worries about the future. “It’s hard to say if things are better now than they used to be,” Li Fu says as he pushes beef through a meat grinder. “When business is good, times are good. But when I worked for the state, I had medical benefits. Now, all that is gone.”

Free-market economics has also caught up with the Chang family, whose home has been scheduled for demolition as part of Shenyang’s urban renewal program. For 57 years the Changs have lived in two rooms and a vestibule that doubles as a kitchen. The Changs (who declined to give their real name for fear of reprisal from local officials) worry that the rent on their new home will drain half of their monthly earnings. “Frankly, I would rather rebuild what we have,” Mrs. Chang says. “When you haven’t been able to save all these years, you can’t really afford a decent place. But the land belongs to the government, even if we own the house.”

Mr. Chang was 21 when he joined the Shenyang Molding Factory in 1968. Thirty years later, it was sold to a private buyer, declared bankrupt and then its ex-director bought it back from the municipal government for a token 8 cents. “Most of the employees were sent home,” Mr. Chang says. “There were demonstrations, but the government would not relent.” The factory was then sold off bit by bit to other recently privatized companies. By the time Chang retired due to poor health in 2001, he had been demoted to mechanic and was earning $50 a month. Today, he collects a monthly pension of about $61. Still, the Changs feel they are lucky. Most redundant employees of state-owned companies are given token buyouts instead of pensions, if they are offered anything at all.

Mrs. Chang was sent during the Cultural Revolution to work on a farm collective in rural Inner Mongolia, and she still resents the six years she feels she wasted in the fields when she wanted to study literature. “We had to do it or else be associated with the ‘unscrupulous few,’” she says solemnly. Almost to herself, she adds: “This was the prime of my life.”

The husband and wife exchange glances. Mr. Chang stiffens. “The government will control the situation in an effective way,” he says finally. “Everyone will have a job. The government works for the people of China. If there is difficulty, the government will take care of everything.”
Napoleon famously counseled the world to “let China sleep, for when she awakes, she will shake the world.” It is a memorable quotation, if somewhat misleading. China may indeed have napped over the centuries, but it has also been the world’s largest economy for all but 3 of the past 20 centuries, and its current rise is more a return to its historic role than anything new.

A statue of Mao towers over the city square in downtown Shenyang. The Great Helmsman, as he was known, smiles broadly with his arm extended in a grand gesture of beneficence. On warm spring and summer evenings, young people mill about the square eating tanghulu, or sugarcoated fruit on a stick, and listen to music from portable radios. One recent afternoon, the square was nearly empty except for a few Shenyangese who seemed to regard the statue as they might a slightly deranged uncle at a family reunion. The statue is surrounded by buildings crested with billboards promoting everything from washing machines to cellphones.

Shenyang is struggling to adjust to China’s new economic reality, but one gets the feeling that it will not be long before boom times consume the Mao statue and what remains of his legacy, assuming an angry mob doesn’t do it first.

The Prince of Saudi's New Economy

Mohammed al-Faisal’s consumer-oriented conglomerate is emblematic of a new entrepreneurial culture in Saudi Arabia that continues to thrive despite the country’s stock market ructions.

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The Brotherhood

The Egyptian city of al Minya clings to a bend in the Nile River about 220 kilometers south of Cairo. It is a tidy place with a population of a half million and several tourist sites, including an ancient Christian monastery and the tombs of some Fatimid-dynasty caliphs who ruled an Islamic empire from Old Cairo a thousand years ago.

Al Minya is also the home district of Mohammad Saad al Catatny, a member of Egypt's Muslim Brotherhood and a leader of the country's political opposition. Not long ago, such a title would have been nearly meaningless. But when Brotherhood members emerged from national elections late last year with a fifth of the parliament's 454 seats they were suddenly an authentic opposition movement with a qualified mandate to lead. (The group is banned as a political party, so its candidates campaign as independents.) With President Hosni Mubarak's fifth and likely final term set to expire in 2010, the Brotherhood is now in its most strategically favorable position since the ousting of King Farouk by the Egyptian strongman Gamal Abdel Nasser in 1952. Victory in Egypt would complete the Brotherhood's journey from a fringe group founded in the 1930s and dedicated to recreating the Muslim caliphate to one of the most important and subversive transnational political movements of the last century.

Since the September 11 terrorist attacks, Islamist groups have been successful in nearly a dozen parliamentary elections-in Morocco, Jordan, Lebanon, Turkey, Iraq, Iran, Bahrain, Egypt, Kuwait, Pakistan, and the Palestinian territories-as well as in municipal races in Saudi Arabia, the Palestinian territories, and Bahrain. Many of these parties have been Muslim Brotherhood affiliates, among the 70 or so operating worldwide. The triumph in January by the Palestinian Islamist group Hamas-a Muslim Brotherhood derivative-was only the most dramatic example of the Islamization of Arab politics at the expense of secular Islam. The process has been evolving since the Nasser era and has been fertilized at least in part by the U.S. government, first through covert support and later, unwittingly, by empowering radical Islam with policies that are widely perceived as anti-Islamic.

Exactly how the Muslim Brotherhood interprets its newly expanded authority is unclear. Few political parties anywhere have advanced so far while preserving for themselves such careful ambiguity on core issues. Would it, for example, impose the kind of Islamic law, or sharia, that forbids women in Saudi Arabia to drive or go out uncovered? Would it tear up Egypt's peace treaty with Israel? Would it reverse the country's free-market reforms in favor of state intervention?
The Muslim Brotherhood has been attacked as heretical by more militant Islamist groups, such as Al-Gama`a al-Islamiyyah and Islamic Jihad, for its code of nonviolence and its participation in politics, which suggests at least tactical recognition of secular democracy. Brotherhood members say that they recruit most effectively in prison, where they entice Islamists from rival groups with their message of peaceful change. The Brotherhood condemned the September 11 terrorist attacks as anti-Islamic within 24 hours of the bombings-though it is virulently anti-Israel, and senior members have publicly suggested that the Holocaust never happened.

The Brotherhood has said it wants to govern with tolerance in a coalition of freely elected parties. But would a movement that has played its hand so shrewdly for so long, and at such a price to its members in blood and imprisonment-Mohammed Mahdi Akef, the current leader of the Brotherhood, has spent about a third of his life behind bars-willingly share absolute power if it earned it?
For now, at least, it is enough for Egyptians that the Muslim Brotherhood is not the deeply unpopular Hosni Mubarak. And unless Mubarak invigorates Egyptian politics by allowing secular parties to thrive and compete with the Islamists, that might be enough until the day Mubarak steps down and the Brotherhood takes over.

* * *

I paid a call on minority leader al Catatny in early February, when the Muslim world was heaving with outrage over caricatures of the Prophet Mohammad published in the Danish paper Jyllands-Posten. The journey from Cairo had taken several hours longer than I had expected, and by the time I arrived in al Minya in the early afternoon, well after my scheduled appointment, the interview had to be postponed to 6 p.m. By then, I was told, Catatny would be back in his office, hearing petitions from constituents.

In the meantime, I was to meet al Catatny's assistant, Kamal al Fouly, at the faculty club of the local university, a casual cluster of deck chairs and tables overlooking the Nile. Al Fouly arrived and greeted me warmly. It was dusk. We were seated under date palms that billowed gently in the breeze. The riots seemed blessedly far away. I offered al Fouly tea, which he politely declined. It was the fasting day of Ashura, he explained, when Muslims as well as Jews celebrate the day Moses led the Israelites from Egypt. Sunni Muslims have celebrated the event by fasting ever since the Prophet Mohammed, persecuted by the religious establishment in Mecca, fled to the neighboring city of Medina in the seventh century and adopted the Jewish ritual of fasting for his followers. "The Prophet, may peace be upon him," said al Fouly, "arrived in Medina and saw the Jews fasting, and he declared, ‘Let their joy be our joy.'"

Al Fouly, tall and erect in a taupe suit, is the Muslim Brotherhood's appealing public face. He is poised, with a quiet charisma that does not discriminate between the sexes. (Unlike many Islamists, the Muslim Brotherhood members I have met, including Akef, greet women easily with a handshake.) In the late 1970s he attended classes at the University of Illinois, where he received a master's degree and a Ph.D. in education studies. The time he spent in America, he says, "were the best six years of my life," and it was there, in the patchwork suburban grids of Champaign, where he joined the Muslim Brotherhood.
"It was not out of outrage," said al Fouly. "I was simply impressed with the people I met there. This was in the late 1970s and early 1980s, when anger over U.S. foreign policy was nothing like it is now."

Al Fouly acknowledged that the Muslim Brotherhood's strong showing in the parliamentary vote was as much an expression of discontent with Mubarak as it was an endorsement of Islamism. He also emphasized what political analysts in Egypt agree on: that the Brotherhood's strong showing could have been even stronger.
"We wanted to send a message," al Fouly said. "The movement did not contest more seats to make clear that we don't want to take over. If we had aimed for a majority, we could have done here what Hamas did in Palestine."

This was no idle boast. The Muslim Brotherhood has proved its appeal to voters of all ages, areas of residence, income levels, even religions. A major Brotherhood stronghold is impoverished Aysut, just south of al Minya and heavily Christian; and in the race to represent the affluent Cairene district of Kasr El Nile, the Muslim Brotherhood's candidate won with 1,800 votes-a considerable plurality given the state's voter intimidation.

The bedrock of Muslim Brotherhood support is its intense civic-mindedness, which contrasts with the ineptitude and corruption of the secular regime. Though inspired by the Islamic code's reverence for alms-giving and charitable works, the Muslim Brotherhood has developed an instinct for ward heeling that would have impressed the most resourceful of 19th-century American political machines. When disaster strikes, the Brotherhood deploys ambulances from hospitals owned by Brotherhood members. It funds health care for the elderly and finds public-sector jobs for the children of remote villages. During the holy months of Ramadan it distributes food to the needy.

In Zaqaziq, between Cairo and Alexandria, the cardiologist and Muslim Brotherhood member Dr. Abu Hashem Abdullah tends to patients who cannot afford health care provided by the state. Dr. Abdullah, a professor at the local university's medical school, spends up to eight hours a day at the clinic when he isn't lecturing. He also works with a group that helps orphans and occasionally visits a smaller clinic in a village just outside the city.

Most of Dr. Abdullah's patients are elderly women, almost all of them veiled. "The government is struggling against the Muslim Brotherhood," he says during a break. "They've arrested our most prominent members, some of them doctors and engineers. And we struggle back."

Unlike members of the ruling National Democratic Party, who rarely attend legislative sessions, Muslim Brotherhood legislators are known to spend long hours on the parliament floor and in chamber. "These are fair, honest, and predictable men," the Egyptian dissident Saad Ibrahim once told me of Brotherhood parliamentarians. "They do their homework."

And, crucially, they are not blemished by the mark of collusion with America. Even al Fouly, unusually equipped to appreciate America's virtues, deeply resents what he regards as joint Israeli-American meddling in Arab and Muslim affairs. The appearance, if not the fact, of a Bush-Likud axis, U.S. designs on Iraqi oil wealth, and the American Pentecostal movement's hostility toward Islam gives the Muslim Brotherhood credibility and the moral high ground. During the cartoon crisis, for example, the Brotherhood publicly distanced itself from the more radical elements, accusing some Arab leaders of playing a "dirty game . . . to distort the image of the Islamic movement-to get the people to say that they are not peaceful, not democratic, against free speech."

"We are tired of the double standards," said al Fouly. "When Muslims say ridiculous things about the Holocaust, everyone condemns them. But it's not okay for us to be offended when someone insults our religion. At the same time, the Americans push for democracy but then don't recognize our success. No wonder secular Islam has declined in favor of moderate Islamic parties."

* * *

Sayyid Qutb, unlike al Fouly, loathed the United States. He was typical of young Muslims who had turned against the imperialist West, in particular Britain and France, for partitioning the Levantine Middle East and creating the state of Israel. By 1948, Qutb's writings had made him a target of the government, and his friends persuaded him to lie low for a time in the Devil's own lair-America-where he took graduate courses in Colorado. There he recoiled at what he regarded as America's vulgar commercialism and intellectual vacuity. He returned to Egypt convinced that only Islam as it was embraced in the time of the Prophet could protect the Muslim world from the West's coarse, creeping modernity.

Qutb would become the Muslim Brotherhood's intellectual architect. His message, that Arab nationalism was a foreign-imposed and secular heresy before the Muslim world's true sovereign, Allah, conflated the struggle against Western imperialism and its proxy emirs with the Prophet's attack on the idolatrous Meccan elites. It defined Islamist doctrine-"the Koran is our constitution"-and set up its struggle with secularism, both at home and abroad.

Qutb's books In the Shadow of the Koran and Signposts on the Road, written in the 1960s, have continued to inspire generations of Islamists long after Qutb was hanged in 1966 by Nasser, the human embodiment of Arab nationalism. "It is hard to underestimate the impact that he had on Islamists around the world," writes the terrorism expert Peter Bergen in his book, The Osama bin Laden I Know. "Not only did Qutb profoundly influence the Islamist movement . . . he provided the handbook for jihadist movements across the Muslim world."

It is noteworthy that Nasser, who despite his one-man rule was known as a conciliator, drew the line when it came to Qutb and the Muslim Brotherhood. A pious but westernized Muslim, Nasser opposed the Islamists long before the West recognized their potential to subvert Middle Eastern regimes. Indeed, Britain and the United States at various times colluded with the Brotherhood to destabilize Nasser, the former because of his preemptive and ultimately triumphant response to the Suez Crisis in 1956, the latter because he was thought to be soft on communism. In fact, Nasser was strongly anti-communist and entered the Soviet orbit only after Washington left him no other options.

In Nasser, The Last Arab, Said Aburish details how both Washington and London, unable to tolerate a non-aligned popular Arab leader, engaged in "open support for Islamic groups . . . [including] the creation of anti-Nasser Islamic cells in eastern Saudi Arabia, near the oil fields." (The same fields, it is worth mentioning, were attacked by Islamic militants in February.) When Nasser refused to make peace with Israel on what he regarded as unjust terms, the United States pressured Jordan, Lebanon, Syria, and Saudi Arabia to offer sanctuary to the Muslim Brotherhood and fund their offices.

"Modern Islamic fundamentalism," writes Aburish, "began with [Saudi] King Faisal, with solid American support. It was created to fight the enemies of Allah, at the time Nasser and the Soviet Union; but as we have seen, this movement has turned into a monster of its own." The communist threat to the Middle East, Aburish writes, was "mostly imaginary." To be fair, the Muslim Brotherhood renounced violence in the 1970s. But by fatally misreading Soviet intentions in the Middle East and undercutting Nasser, the West destroyed a pro-West Arab leader who was secular, uncorrupted, and strong enough to contain the rising tide of Islamism without resorting to civil war-in short, everything the current crop of Arab leaders is not.

* * *

Like his American counterpart, President Hosni Mubarak is long on tactics and short on strategy. Like most Arab leaders, he has remained in power through a calibrated mix of coercion and patronage. Absent any dramatic policy shifts, he will be remembered primarily as a survivor who did enough things right to preserve his grip on power and to subdue potential challengers. Until two years ago, when Prime Minister Ahmed Nazif and his new government introduced a bold, if long-delayed, program of economic reform, Mubarak showed little interest in elevating the living standards of his people. Egypt's per-capita income has remained more or less static for a generation, even as the rate of population growth has mushroomed. Certainly, he has done nothing to liberalize the political environment; citizens who register political parties or agitate for political reform are routinely detained and harassed. His perfunctory reelection campaigns garnered the standard autocrat's plurality of 98 percent.

When confronted with a serious Islamist challenge in the 1990s, Mubarak imposed emergency security laws and waged a decade-long dirty war that consumed a great many innocent lives. After 9/11, he understood the value of giving the Islamists enough room to operate and then spotlighting them, according to Saad Ibrahim, "as a ghoul that focuses the West" away from his human-rights record. With President Bush calling for democratization and the activist Ayman Nour and his secular opposition party drawing attention to his brutality, Mubarak amended the Egyptian constitution to allow for snap elections he knew he would win. (Nour is now serving a five-year jail sentence on a forgery conviction. Secretary of State Condoleezza Rice calls this a "setback" on Egypt's road to democracy.)
The only surprise was the Muslim Brotherhood's dramatic gains. The group won 63 percent of the seats it contested, compared with the NDP's 27 percent. Brotherhood members were conspicuous members of the crowds who fought with riot police in street clashes that left 11 people dead and scores injured.

"Real voters were absent," Ihab Sallam, a human-rights activist and election monitor, told me. "There were only voters who were bought and those from the religious stream, which is why the Muslim Brotherhood did so well. I had monitors in tears after they got caught in the middle of a battle between police and religious voters."

At each polling place, said Sallam, the Brotherhood posted one person inside to guard the ballot box and four guards outside to escort it to collection stations. "They are small but well organized," he said. "They made a strategic decision to enhance their authority [by winning a limited number of seats] without risking a backlash from the government. If they had wanted more, they would have gotten more."
I asked Sallam how the Brotherhood might one day govern.

"It's hard to say. They change all the time. You can be sitting with them, smoking shisha [a water pipe], and they seem very moderate, very reasonable. That's how they're so effective at recruiting. But they do not have a liberal vision for dealing with others. In 2004, they released a document that seemed to suggest they believe in human rights, but if you read it carefully, it projects an us-versus-them world, with ‘them' below ‘us.'"

The best way to counter the Muslim Brotherhood's strength, according to Sallam, is to introduce more parties to the political marketplace. "Within the next four years, the government must do the honorable thing and allow for other streams," he said. "Then, the Muslim Brotherhood's problem will not be the government but other, secular parties."

Sallam drained his coffee. "But that will be difficult for the regime."

* * *

Could Egypt really go Islamist? The Mubarak government is not ruling it out. In February, it delayed municipal elections by two years, a move Muslim Brotherhood members said was clearly aimed at them. Under Mubarak's new election laws, independent candidates can only run for president if they hold a local council seat, and Brotherhood candidates were widely predicted to dominate municipal polls.

The regime cannot indefinitely postpone local elections (to its credit, the Bush administration has criticized the delay), and so long as the political field is limited to two viable players-the regime and the Brotherhood-there is little doubt about the outcome. In putting off the municipal vote, the government may have had in mind the looming political battle over price controls, which the Nazif government has vowed to dismantle. The issue of subsidies has been the third rail of Egyptian politics for 30 years; Anwar Sadat took them on in 1977 and triggered riots throughout the country. Any similar backlash will certainly redound to the Brotherhood's favor.

Nearly a quarter of Egyptians live below the poverty line. The government's aggressive economic restructuring over the last two years has done little to reduce the country's jobless rate, which most economists say is well above the official estimate of 10 percent. Graduates of Egypt's top universities are lucky to find work in the country's bloated civil service, the employer of last resort. An entry-level government job pays an annual wage of about 2,400 Egyptian pounds, or $421.

* * *

Which takes us back to al Minya. When I arrived at al Catatny's office for our 6 p.m. appointment, a dozen aggrieved residents were already lined up outside his door, many with thick files tucked under their arms to document their plight.

Al Catatny arrived and, after a cursory nod to his constituents, disappeared into his chambers. After a few minutes the door swung open and his attendants waved me in. From a modest wooden desk, al Catatny rose to greet me in a pinstripe suit and open-collared shirt. He was warm and animated, despite having been up since dawn. The high walls of his office were white and bare, and the furniture was cheap and mismatched. In the waxwork world of Egyptian politics, al Catatny and his camp seemed refreshingly rebellious. The old order had been swept aside by something spontaneous and unpredictable, and even al Catatny seemed unsure where it would all lead.

"Years ago, the climate precluded opposition," he said. "On the one hand there was repression, on the other corruption, and that created room for us to grab people's attention."

I asked al Catatny about the Muslim Brotherhood's platform. His reply was studied, but not stale. The Brotherhood, he declared, is for civic society with an Islamic "reference." It is moderate and tolerant, not extremist and exclusionary. It supports privatization and free-market reforms, though it opposes the corruption that is so often associated with them. "We accept the game of democracy and we seek to cooperate with others in peace," he said.

With whom? Conciliation with the regime is unlikely, and there is no secular opposition with which to ally.

Al Catatny smiled. "As official parties, there is not much there-it is true. But opposition groups will increase in the coming years. They'll regroup. The people are fed up. The government says six million are unemployed; sometimes its says nine million and sometimes 12 million. These people without jobs are time bombs. This cannot continue."
On my way out, I spoke with some of the people waiting for patronage. Nadia Abdullah was hoping al Catatny could find a less demanding job for her asthma-stricken husband, who earns the equivalent of $8.75 a week as a day laborer; Taha Mohammad, an engineer, wanted al Catatny to raise in parliament the matter of a water-treatment plant that was upgraded at a cost to the city of 20 million Egyptian pounds ($3.5 million). Only half the money was spent, said Mohammad, and the rest was pocketed by the contractor; Faruk Nassef Harun wanted al Catatny to ensure that his daughter was given a job at the Egyptian tax agency, where his wife works and which sets aside entry-level jobs for the children of tenured employees.

Harun had introduced himself to me. He is a member of Egypt's Coptic Christian community, and he wanted me to know how much he appreciates the Brotherhood. "They serve Christians and Muslims equally," he said. "They even have an office for ecumenical affairs."

* * *

Assuming its fidelity to the word of Sayyid Qutb, the Muslim Brotherhood's strategy is to cinch control over Egyptian politics and establish sharia through constitutional fiat. The most populous and geopolitically vital Arab nation would then go the way of Saudi Arabia, Iran, and Sudan to become an orthodox Islamic regime, perhaps to be joined one day by Iraq, Palestine, Pakistan, and possibly Syria and several of the lesser Gulf states.

Or not. It is just as likely that Brotherhood members really believe their big-tent talk of coalition-building and interfaith harmony. They may also know that hammering Arab states together into a borderless fiefdom is just as absurd and impractical as it was when Nasser and the Syrians tried it in 1958.

More important, however, is what the people in al Catatny's chambers believe. If they think the Muslim Brotherhood is the only political group in Egypt with the commitment and resources to address their needs, then they will buoy the Brotherhood to power regardless of its intentions. If, on the other hand, there is a political awakening to match the Islamic one, with a proliferation of secular parties competing for voter loyalty, then the Brotherhood will have to reveal itself as either a center-right political party with an Islamist character or an Islamist movement with a regional agenda.

These are two different things. The former would appeal to the moderate sensibilities of most Egyptians. To follow this path would be to swap orthodoxy for legitimacy, an exchange familiar to all radicals who have traveled from the tributaries of politics to its main currents. The latter would alienate all but a small host of Egyptian radicals. To embrace it would be to strangle political Islam in its crib, as just another failed conceit of Arab self-government.

Egyptian Turnaround

Mahmoud Abdel Latif knew he faced a struggle in trying to rebuild Egypt's state-owned Bank of Alexandria when legislators railed at him about his draconian standards and called him "Mr. Basel." It was November 2002, and nationalist lawmakers were leery of foreign meddling in Egypt's domestic affairs and fearful that the tighter risk controls promulgated by the Basel II capital adequacy rules would put an end to the politically influenced lending practices of the bank.

"We were discussing the need to lift provisions," recalls Abdel Latif of testimony he was giving in the legislature on his plans for the bank, "and members of the general assembly were standing up and yelling, 'Why do we have to listen to this Mr. Basel?' They were attacking everything and everybody."

It was a reminder--if the 52-year-old, Egyptian-born, Citibank-trained banker needed one--of how long his country had been languishing on the dark side of the global economy. Abdel Latif held his ground, however, and introduced a series of landmark reforms that have made the bank a prime asset for privatization and helped revitalize Egyptian banking.

In a whirlwind series of moves, he and his handpicked team of senior managers have cleaned up the bank's balance sheet by establishing a new in-house credit evaluation system that complies with the Basel II accord and are publishing financial results under International Accounting Standards. The efforts have made the bank the first in Egypt to comply with those key international codes.

Abdel Latif has renovated the bank's once-dilapidated branch offices, cut staff and retrained the remaining 7,000 employees. He has also rapidly expanded lending to small businesses and consumers, an untapped sector with enormous potential. The restructuring has paid off in a nearly fivefold increase in operating income since 2002.

Having turned Bank of Alexandria from a financial backwater into arguably the strongest bank in Egypt's increasingly robust financial sector, Abdel Latif is getting ready to harvest the fruits of his efforts. The government of President Hosni Mubarak plans to auction its 76 percent stake in Alexandria later this year, making it the first of Egypt's four state-owned banks to be privatized. Analysts believe that the sale, expected to be held in the middle of this year, will fetch anywhere from 6 billion to 9 billion Egyptian pounds ($1.1 billion to $1.6 billion). Likely bidders include France's BNP Paribas, Saudi American Bank, the National Bank of Kuwait, the National Bank of Greece and Commercial International Bank, a subsidiary of the National Bank of Egypt, the country's largest lender.

"Abdel Latif is running Bank of Alexandria like a real bank," says Amr Abaza, the treasury director for Egyptian telecommunications giant Orascom Telecom, a Bank of Alexandria client. "It's a message to the rest of the banking community that they have to clean up their balance sheets, and they're doing it."

The big four state-owned banks--National Bank of Egypt, Bank Misr, Banque du Caire and Bank of Alexandria--have dominated Egyptian banking for decades, providing almost half of all loans. A handful of foreign institutions, such as Chase Manhattan Bank, American Express Bank and Citibank, established joint ventures with local players in the 1970s under the open-door policy of then-president Anwar Sadat. Most of the country's 60-odd banks, however, are small and inefficient.

Since being appointed in July 2004 by President Hosni Mubarak with a mandate to unleash long-delayed economic reforms, Prime Minister Ahmed Mahmoud Nazif has made bank restructuring a key plank of his economic program. Last year the government sold its stakes in two small joint venture banks, enabling Greece's Piraeus Bank to acquire Egyptian Commercial Bank and Lebanon's BLOM Bank to take control of Misr Romanian Bank, formerly a joint venture between Bank Misr and Bucharest-based Commerciali Bank Romania.

The privatization of Bank of Alexandria is the latest and most dramatic evidence of the government's liberalizing zeal. Over the past two years, Nazif and his team have broken with decades of protectionism and bureaucratic controls and invigorated the economy with market-oriented policies. They have let the pound float freely, slashed customs duties and privatized a raft of companies ranging from steel and cement producers to textile makers (see box). They have also facilitated foreign investment, which, although officially permitted since the 1970s, has been held back by red tape and political opposition.

The results have been impressive: Privatizations and asset sales have raised more than E£16.5 billion, foreign direct investment has surged to $3.9 billion in 2005 from $3.0 billion in 2004 and a measly $237 million in 2003, and exports have expanded rapidly, rising 31 percent, to $13.8 billion, in the fiscal year ended June 2005. The pound has also been firm, gaining 6.4 percent against a strengthening dollar in calendar 2005 and holding steady so far this year, a performance that reflects increasing investor confidence in the government's commitment to reform. Egyptian stock prices have soared--the CMA general index rose 225 percent between January 2004 and early February but has since fallen by 18 percent as part of a regional setback--boosting market capitalization to 80 percent of Egypt's $90 billion gross domestic product.

The work is far from complete, however. Cairo now is preparing to remove billions of pounds' worth of subsidies on everything from energy to housing. The government plans to spend E£38 billion on subsidies--nearly a third of its total budget--in the current fiscal year, contributing to a projected deficit of E£59 billion, or 9.4 percent of GDP. But efforts to reduce the deficit are potentially explosive in a country where 20 percent of the population lives below the poverty line. Previous attempts to dismantle subsidies have led to social unrest, most notably riots in 1977 that forced then-president Sadat to restore subsidies on bread.

Still, even onetime skeptics are impressed with the achievements of the past two years. "Back in the 1990s there was nothing but fluff" from government ministers, says Philip Khoury, head of research at EFG-Hermes Holdings in Cairo, one of the Middle East's biggest investment banks. "Now they're not only making promises, they're delivering in short order. What's going on is very real."

The reformist measures have certainly boosted the economy. EFG-Hermes is forecasting that growth will accelerate to 5.7 percent in the current fiscal year, from 5.1 percent last year. But Nazif's government can't afford to stand still. Egypt has a serious unemployment problem and needs a growth rate of at least 7 percent a year to absorb new entrants into the job market. The jobless rate officially stands at 9.5 percent, and private economists estimate the real rate to be twice as high. The Muslim Brotherhood, Egypt's oldest and most potent Islamic movement, played on discontent over unemployment to win 20 percent of the seats in the People's Assembly in elections last December, making it the largest opposition group.

"Unemployment was a huge issue in the elections," says Hanaa Ramzy, an economics specialist at the British Embassy in Cairo. She notes that even Mubarak's ruling National Democratic Party acknowledges it lost many seats because people hadn't seen the benefits of reform.

The imminent sale of Bank of Alexandria is crucial to the government's broader economic reform agenda. Despite improvements, the country's banking sector remains sprawling and inefficient. Most banks offer only basic products, like checking and savings accounts, and impose onerous collateral requirements that restrict lending, particularly to small and medium-size borrowers who could serve as important engines of growth. Modernizing the banks and giving them the capital and technical strength to increase lending is vital to raising the economy's growth potential.

A successful sale should also help discredit the widespread opposition to privatization, which many Egyptians regard as a plundering of the nation's prized assets by greedy financiers, both foreign and domestic. Consider, for example, the popular resistance to Bank of Alexandria's sale in January of its 33.8 percent stake in Egyptian American Bank to Calyon, the investment banking subsidiary of France's Crédit Agricole. Unions and some shareholders criticized the sale because, at E£50 a share, it was done at a 15 percent discount to the prevailing market price. Abdel Latif countered that the rise in EAB's share price had been purely speculative and that Alexandria and its adviser, Credit Suisse, had determined a minimum fair value of E£45 a share. The transaction was approved by a government committee charged with appraising state holdings.

"This is a society very much against selling the crown jewels," says Mahmoud Mohieldin, the Investment minister who is leading Egypt's privatization program. "If there's nothing wrong to be found in the transaction, some people will object on the grounds of ideology or race. But Bank of Alexandria will be sold by the end of the fiscal year as a key part of the privatization process."

Following the mid-1990s, when the Egyptian economy stagnated after the collapse of a real estate bubble, the government seemed content with reformist tinkering. The temporizing came to an end in 2002, however, after currency speculation provoked a drop in the pound and riots in the streets. Cairo, like many capitals across the region, began looking to economic and political reform as an antidote to Islamic fundamentalism in the post¬9/11 world.

After taking office, Nazif retained reformists like Mohieldin, Finance Minister Youssef Boutros Ghali and Central Bank of Egypt governor Farouk el-Okdah, a former Bank of New York executive; he then buttressed the cabinet with businessmen such as Trade Minister Rachid Mohamed Rachid, an ex-regional head for Unilever, and Transport Minister Mohamed Lutfi Mansour, a former banker and auto dealer.

Abdel Latif first entered public service in 2001 when Prime Minister Atef Obeid, Nazif's predecessor, tapped him as vice chairman of Banque du Caire and gave him the task of making the bank commercially viable. It was an inspired choice.

One year after graduating from Cairo's Ain Shams University in 1976, Abdel Latif joined Citibank's local branch as a clerk. Two years later he was transferred to Athens for a year's training before being posted to Citibank's Saudi Arabian venture at the time, Samba. In 1991 he was sent to Bahrain to run the bank's corporate finance division for the Gulf region. Over the next decade, he arranged financing for deals worth billions of dollars, ranging from new petrochemical projects to energy grids and auto dealerships, and advised clients including General Electric Co., Siemens and the bin-Laden Group.

"What I know about proper procedures, risk management, and debt classification I learned from Citibank," Abdel Latif explains, "and that informs what we're doing here."

Chase Manhattan Bank wooed Abdel Latif back to Cairo in 1998 to run its North African operations. By then he had developed a reputation as a blunt speaker with little time for Levantine subtlety--a by-product, he says, of his upbringing by his father, a corporate lawyer who represented a host of international businesses.

"I grew up around my father's clients, most of whom were very plain-speaking American businessmen," Abdel Latif says. "I guess it rubbed off."

But it would take more than straight talk to salvage Banque du Caire, where Abdel Latif got an intimate view of a musty, subterranean banking culture that only an archeologist could love. The bank had Egypt's largest corporate exposure and a pile of nonperforming loans to real estate developers. Many of the loans were sweetheart deals to favored clients--15 borrowers accounted for 40 percent of outstanding loans--and the institution was called on to finance wasteful public projects like the housing developments in suburban Cairo known as El Fil el-Abyad, or the white elephants. For such lending the national banks became known as sabeel, or public drinking fountains.

Abdel Latif personally took control of Banque du Caire's credit division, writing off some loans, rescheduling payment terms on others and ignoring or rejecting demands for policy loans. To dilute his loan portfolio's concentration, he launched a pilot scheme offering small businesses loans of E£5,000 to E£25,000 at a time when most Egyptian banks wouldn't touch the sector. Abdel Latif also started marketing loans to the country's 15 million state employees, believing that would diversify risk and allocate much-needed credit to workers in low income brackets, a segment of the population where commercial activity is limited and Islamist influence is significant.

"It's not a stretch to suggest this is a tool in the fight against extremism," Abdel Latif said at the time.

In September 2002, Obeid asked Abdel Latif to do a similar makeover at Bank of Alexandria, this time as chairman. It was a clear mandate with no strings attached, the banker explains.

"This government did us the biggest favor by simply staying out of the way," Abdel Latif says from his office in downtown Cairo, where modernity in the form of a state-of-the-art video-conference system contrasts with Victorian-period drapes, leather-bound chairs and cherry-wood molding.

Bank of Alexandria was saddled with less corporate debt than the other state banks, but it was the most backward in procedures and technology. Most bank clerks were using typewriters and calculators. Financial statements were written by hand, and it could take hours, if not days, to cash a check.

Abdel Latif pulled together a management team of Egyptian bankers with extensive experience at home and abroad. He hired Fatma Ibrahim Lotfy, a veteran of Chase Manhattan and American Express Bank in Cairo, as his first deputy chairman, and tapped Mehdat Zakaria, a former credit analyst at Citibank in Jeddah, Saudi Arabia, and at Chase Manhattan in Cairo, to oversee credit and marketing.

Hesham Hamdy, another American Express Bank alumnus, remembers going to Bank of Alexandria headquarters intending to politely decline Abdel Latif's offer to run the bank's risk management division. An hour later he had succumbed to the chairman's bold talk of revitalizing Egyptian banking. "They convinced me to do something for the country," he says.

Hamdy immediately set out to adopt Basel II standards, a bold step considering that Egypt requires its lenders to adhere only to the first Basel accord. He broke down the bank's loan portfolio into three categories based on size; risk managers were assigned to each client, and credit committees were formed to evaluate new loan requests, a process that has shortened the time for approving loan applications to two to three days from two weeks. "We exceed central bank requirements, and our clients are very happy with that," Hamdy says.

Once in place, Abdel Latif led his team on a tour of all 192 Bank of Alexandria branches, most of which were as isolated as they were decrepit. Staff morale was low and procedures were primitive. A bank employee with a college degree and ten years' experience could earn as little as E£400 per month, or slightly more than half of Egypt's per capita income.

At each stop Abdel Latif delivered his gospel of reform. Sohair Gaafar Appadi, a 34-year veteran at the bank's former headquarters in the seaside city of Alexandria, remembers the chairman visiting the branch three years ago and winning over anxious staff with his talk of change.

"People responded," says Appadi, who was recently named branch manager. "They felt as if he really was looking out for us."

To drive the message home, Abdel Latif immediately doubled salaries. He and his managers also launched a series of training programs for everyone from credit analysts to the bank's human relations staff. To pay for the salary hikes and boost efficiency, the bank offered an early retirement package to trim head count from 8,500 to 7,000. The plan slashed the number of clerks in the main hall of the Cairo headquarters from 700 to 250, but even so the bank managed to extend opening hours, thanks to automation.

The new management team overhauled the bank's treasury department and built a dealing room staffed by 15 traders that handle foreign exchange, money market and fixed-income products, including government securities. Once little more than a place for bookkeepers, according to Abdel Latif, the treasury averaged monthly net interest income of E£75.7 million in the six months to December 2005, up from a monthly average of E£18 million in the fiscal year ended June 2005.

With staff numbers stabilized, salaries were doubled for the second time and a system of bonuses and incentives was introduced. "Prior to that, salaries were raised no matter what," says Appadi, who was awarded a bonus after persuading clients, by appealing to their patriotism, to sell their dollars at the official exchange rate rather than unload them at more lucrative black-market rates. The tactic was particularly helpful because the branch needed hard currency to pay for new equipment at the time.

Abdel Latif and his crew then turned to the bank's mountain of bad debts--half of its E£8 billion in private sector loans were nonperforming. They foreclosed on some but renegotiated as many as possible, going so far as to finance raw materials purchases for some stretched companies in return for a share of future profits. "Whenever possible, we'd give people an opportunity to keep going," says Zakaria.

Today the bank still has E£3.5 billion in nonperforming loans, out of a total portfolio of E£7.5 billion, but it has built up provisions equal to 100 percent of those NPLs.

Abdel Latif expects the real growth to come from the retail side. He projects total retail lending, now E£1.5 billion, to grow by 50 percent annually for the next three years, driven in large part by recently adopted laws designed to encourage land registration and make it easier for banks to make mortgage loans, a revolution in a country where most property buyers pay cash.

The bank set up a pilot mortgage program in 2005 that has already extended some E£500 million in home loans. "It's virgin territory for everything from home loans to credit cards," says Abdel Latif. "This is a market of 78 million people where only a fraction of the population actually banks."

Bank of Alexandria's nonperforming public sector debt was settled by the government in January with the delivery of E£7 billion in cash to a vault in the basement of the bank's headquarters. Abdel Latif wouldn't comment on the terms but insists the payment provided a "nearly total" redemption of outstanding credits. The bank is investing the money in short-term government bills. "We're going in a lot of directions at once, and this will allow us to keep our eyes open for midterm opportunities," he says.

The bank has also developed a strong capital markets capability in a bid to generate fee income. In January 2005, Bank of Alexandria was co-underwriter, along with National Bank of Egypt and Bank Misr, on a $270 million domestic bond issue for Orascom Telecom Holdings, a member of Egypt's powerful Orascom Group. (Abdel Latif had a relationship with Orascom Telecom that went back to the chairman's days at Chase, when he syndicated an $800 million loan for Mobinil, the company's cell phone unit.) The bond issue, which Orascom used to refinance outstanding debt, followed a E£2 billion bond that Bank of Alexandria helped underwrite in 2004 for Telecom Egypt, the state-owned giant that listed on the local stock exchange in November. In March 2005, Bank of Alexandria teamed with National Bank of Egypt and Misr to underwrite a $320 million syndicated loan to finance Orascom's buyout of its minority partners in a cell phone company in Algeria.

The bond deal was new for Orascom, says treasury director Abaza. The company had considered borrowing against a margined allotment of its own shares as collateral. After conferring with Bank of Alexandria's senior managers, however, it agreed to tap the capital markets for unsecured credit.

Abdel Latif was characteristically blunt, says Abaza. "He speaks his mind, and he was very direct about how we should structure the transaction. We're used to national banks that know only collateralized lending, but Abdel Latif understands what a company our size needs." Bank of Alexandria's epic makeover has transformed its bottom line and made the bank attractive to potential bidders. Its assets, including holdings of government securities and equity stakes in Egyptian companies, have increased by more than 60 percent over the past three years, from E£26 billion to E£42 billion, while operating profits before provisions during the same period rose from E£432 million to E£2 billion.

Having overhauled Bank of Alexandria, Abdel Latif fully expects to be out of a job by the end of this year, after a foreign owner takes control of the bank. He won't be idle for long, however. He and his wife are having a villa built that overlooks Cairo and will have a view of the pyramids on the horizon. And after the privatization, the banker says he will be ready to tackle another turnaround job.

"I love what I did, and I proved I can do it," he says, adding, "The country needs more reform in other areas."

Breathing new life into old industries

The Egyptian Iron & Steel Co., on the outskirts of Cairo, is almost as much a relic of a bygone era as the nearby pyramids of Giza. The mill looks much like it did when it was opened in 1958 by then- president Gamal Abdel-Nasser, who nationalized everything from banks and power grids to the country's Arabian horse farms. Aging trucks with running boards pass through the compound's gates, and a thick layer of dust covers the narrow-gauge tram that takes workers to the mills from their on-site dormitories.

One thing is new, however. Last year the company was in the black for the first time, posting a modest profit of 100 million Egyptian pounds ($17.5 million) on E£2.5 billion in sales. Rising world steel prices undoubtedly helped, but the turnaround also reflects an aggressive restructuring effort spearheaded by Mahmoud Mohieldin, Egypt's Investment minister.

"We started the renovation a year ago with Mahmoud," says Abdel-Aziz Hafez Gharib, a 32-year veteran who became chairman of the company in October. "For years we approached previous governments for help, but this is the first time they've responded. Now we're optimistic. We feel we can do better."

In the late '90s and the early part of this decade, when Egypt's government was stalling on much-needed economic reforms, Mohieldin--then an adviser to the minister of Economy and Foreign Trade--was a lonely voice for privatization. He got his chance in July 2004, when President Hosni Mubarak tapped him to run the new Ministry of Investment and gave him a mandate to unload a mass of state assets. Since then he has sold E£16.5 billion in government-owned properties. The privatizations include the E£5.1 billion initial public offering of 20 percent of Telecom Egypt and the E£2 billion IPO of 46 percent of Egyptian Fertilizers Co. last year.

"There will be no turning back," says Mohieldin, who has a Ph.D. in economics from the U.K.'s University of Warwick. "I'm not leaving any company behind."

At Egyptian Iron & Steel, Mohieldin has combined steep cost cuts--the company laid off 4,000 workers, or 23 percent of its labor force, offering severance packages worth up to two years' salary--with a E£100 million investment in a new hot-rolling mill to increase capacity. The company is negotiating with the government for a reduction of its E£6 billion debt. "If we can ease the interest on the payment burden," says Gharib, "we can lower prices."

Thanks to such restructurings, Mohieldin's portfolio of state-owned companies earned E£600 million last year, up from E£80 million in 2004. Hot demand for shares in privatized companies has made Egypt's stock market one of the world's top performers for two years running, with foreign investors now accounting for 40 percent of daily turnover. Direct foreign investment surged to $3.9 billion in 2005 from $3 billion in 2004 and hit $2.5 billion in the first quarter of this year alone, two thirds of it in non-energy sectors such as tourism, manufacturing and textiles.

The government plans to sell another 45 companies this year, up from 28 in 2005. Its targets include retail chains and chemical manufacturers. "People have seen that economic reforms are working, and they want more," says Kenneth Ellis, director of the U.S. Agency for International Development in Cairo. "That's as close to a mandate as you'll get in Egypt."

World Economy: No More Easy Money

Is the age of easy money over? After years of cheap credit worldwide, the U.S. Federal Reserve has been raising its short-term rates for two years, and now comes new signs that long-term rates are finally starting to rise, too. The 10-year U.S. Treasury bill broke the 5 percent barrier last Friday, for the first time since 2002. As America goes, so goes the world. The European Central Bank is now tightening credit, too, and the Japan Central Bank looks likely to end a decade-old zero interest rate policy soon.

The first victim could be the U.S. housing market: the price of a 30-year mortgage closed last week at 6.4 percent, up from around 4 percent three years ago. That's likely to dampen a housing boom already showing signs of exhaustion. Soaring house prices made Americans feel rich, and home-equity loans fueled a consumption boom that kept the world economy growing through shocks of all kinds--war, terror, oil. "Rising long-term rates eat into household income, and that will slow growth," says Jared Bernstein, an economist at the Washington-based Economic Policy Institute.

The effect on nations from Latin America to Asia that rely on exports to the United States could be huge. With real interest rates in the developed world at or below zero in recent years, investors have been pouring money into emerging markets in search of higher returns. But those risky investments could dry up if Americans and Europeans can find a solid return on safer bonds at home. Morgan Stanley economist Joachim Fels warned last week that the situation could get "nasty" for risky assets of all kinds, from emerging markets to commodities and stocks.

China Is On the Move

The conventional view of China counts three basic threats to its economic boom: corruption and disrespect for the rule of law, environmental degradation and the tide of rural migrants who threaten to overwhelm its cities. It's no accident, however, that while Beijing is officially campaigning to end corruption, impose the rule of law and clean up the environment, it welcomes internal migration. Over the past few years, China has steadily loosened restrictions on the movement of its citizens—accelerating a trend begun in the late 1970s—most recently by extending welfare benefits to peasants looking for work in urban areas. Indeed, central authorities are pushing this plan over the objections of security forces and provincial officials, who fear that huge population shifts will stoke unrest and burden social services.

What this battle shows is that China's senior leaders are on the same side as a growing number of economists who believe that the benefits of a mobile labor force far outweigh the risks. By freeing its proletariat to move about the country, China has created a dynamic labor market that is closer in character to America's flexible work force than to the static societies of Europe or Japan. Increasingly, worker mobility is rated as important a factor in measuring economic health as productivity and money supply. A recent report on global employment by the Organization for Economic Cooperation and Development devotes an entire chapter to worker mobility and its potentially salutary impact on joblessness and income disparity.

In part, that's due to the boost internal migration has given the U.S. economy—led by the shift of the American population toward jobs in the Southwest—which has had its mirror in the shift of China's population to the southeast. Economists say it is no coincidence that The World's most powerful engines of growth, the United States and China, also have the highest rates of worker itinerancy, while Europe and Japan lag behind. ''In the global economy, two of the most important factors are mobility of capital and mobility of labor," says Mohamed El-Erian, the incoming president of Harvard's trust funds and a noted emerging-market bond expert. ''Capital trades internationally, but labor does not, which is why domestic migration is so important."

Beijing clearly understands this. Over the past few years, it has encouraged the efforts of private job-placement agencies and municipal officials to match job hunters with openings nationwide. Government representatives from central Sichuan province, for example, act as full-time brokers for the unemployed, finding jobs in other provinces, arranging transportation and even mediating disputes with employers. In southeastern Guizhou province, one of China's most impoverished areas, municipal officials have set up sister-city programs in which bright young Guizhounese are enrolled in urban training courses. ''If you're a cadre younger than 30 years old, you'll go to the city and come back with either a skill or an investor," says Daniel Wright, a director and China specialist at the National Bureau for Asian Research in Washington, D.C. ''It's a very fluid dynamic."

The flow of Chinese from rural villages to cities has swelled into a mangliu, or peasant flood, and it is perhaps natural that outsiders tend to dwell on the dangers. The estimated average annual movement of 200 million rural Chinese over the past six years is historically unprecedented, dwarfing the annual average of 40 million Americans who moved during the same period, though as a percentage of population the rates are about the same. The big difference is that in the United States, migration swells the number of McMansions in suburban Phoenix. In China it has carved a grimmer landscape, as peasants advertise their availability for work with hand-scrawled placards on Shenyang street corners, and sleep six to a room in Shanghai. But the economic effect is the same: far more rapid growth than in sit-at-home countries. ''One cannot underestimate the value of labor mobility in China," says Wright. ''China's skylines and export-driven economy were built with the sweat of rural labor."

Migrants are the key component of ''the China price," a corporate buzzword that implies the lowest possible amount of money buyers are prepared to pay for a given commodity and which developing countries, from Mexico to Pakistan, are struggling to beat. In Beijing, laborers from the southeastern coastal city of Wenzhou have established a garment district over the past decade that now competes head-on with the city's established clothiers. They are now major investors in Shanghai's booming real-estate market.

A universal yardstick for comparing worker mobility is hard to come by. The World Bank calculates that 18 percent of American laborers spend less than six months a year in their areas of primary residence, the highest such rate in The World. In China, the ratio is 14 percent, followed by the European Union at 11 percent. Those figures, however, reflect only temporary moves, not permanent shifts—which are more important for matching skills to job openings in a dynamic economy.

It's hard to find precise comparative data on permanent moves for China, but the OECD report makes clear that the rate of gross internal migration in Europe lags behind that of the United States and Asia generally. According to the report, while 3 percent of working-age Americans move within their home country each year, only 1.5 percent of Germans and just over 2 percent of the French do (and the French tend to move for reasons unrelated to work—family or retirement, for instance. Among the factors that keep Europeans from moving, says the OECD, are generous unemployment insurance and high relocation costs. ''When an American citizen loses his job in Detroit and he is offered a job in Denver, he takes his wife and children and travels across the United States to take that new position," says former French Finance minister Dominique Strauss-Kahn. ''When this sort of situation arises in France and you offer jobs 100 kilometers down the road, people say, 'Forget about it'."

China's leaders have shown a clear understanding of the upside of internal migration since Deng Xiaoping first launched economic reform back in the late 1970s. Deng replaced communal work units in the countryside with a Household Responsibility System, which effectively gave farmers control over their own land and output and allowed them to generate profit. Travel restrictions were eased to allow farmers to transport their goods to markets in town, creating a demand for hostels where visitors could spend the night. By the mid-1980s, Deng was further easing the rules that had defined where farmers lived and went to market. All of this encouraged more movement between towns and cities. ''No one in the central government declared, 'You are now allowed to do these things'," says Zai Liang, a professor of sociology at the State University of New York at Albany. ''It just evolved on its own as a way to meet demand and the party cadres let it happen."

The reforms made China's farms more efficient, creating a surplus of rural labor just as Deng was spreading his free-market policy to the coastal cities. After his historic ''southern tour" of booming Guangdong province in spring 1992, the migration pattern changed. Instead of just commuting to market towns, peasants began journeying cross-country for urban work on a permanent or semi-permanent basis. And far from converging exclusively on China's coastal cities, as is often presumed, the trail of labor migration crisscrosses the entire country. Migrant farmers are heading west to Xinjiang province to stake out their own plots of land, for example, while itinerant carpenters, masons and traders are participating in the construction boom there. "In general," says Kam Wing Chan, a geography professor at the University of Washington who has studied itinerant labor in China, "craftsmen and traders head west, where their skills are in short supply, while those who head for the coastal regions tend to be among the unskilled."

Of course, outsiders are not the only ones who worry about the risks of mass migrations inside China. Family-planning agencies say it makes policing the country's one-child policy all but impossible. Security officials say it fuels rising social unrest and urban crime. (An epidemic of bicycle theft in the southern coastal city of Shenzhen, for example, is blamed largely on migrant workers.) Last month leaders at the Communist Party's Central Planning Committee meeting declared the objective of China's new five-year plan to be a ''harmonious society," implicitly acknowledging the fine line between an itinerant work force and a restive one.

Nevertheless, Beijing has consistently defended the migrants' right to move. Early this year the government announced it would loosen Mao-era rules that restrict rural migrants from receiving education and health-care services in urban areas. Last year Prime Minister Wen Jiabao warned employers against exploiting migrants after a woman petitioned him on behalf of her husband, who had gone months without pay.

For China's leaders, encouraging worker mobility is as radical as it is underappreciated. Beijing has been widely praised for assuming the risks of opening its markets rapidly to the outside world, particularly in the 1999 deal that made China a member of The World Trade Organization. But opening national borders to multinationals like HSBC or Microsoft is no more threatening to stability than opening internal borders to mass worker migration. The payoff for both gambles has been huge, measured by the tens of billions in new foreign investment and factory orders flooding into China. ''China and the U.S. are true capitalists at heart," says Tim Cook, president of Kailas Capital, who has spent much of his career living and working in East Asia. ''While much of Europe is still locked in a socialist mind-set, the Chinese have gotten over this speed bump called communism and they're simply returning to their true instincts." For all the dire warnings about migrant-worker unrest, Beijing now seems very comfortable with the risks.

The Secrets of Gao Li Dai

An informal lending network prospering in the shadows of China’s economy offers important lessons for the country’s troubled banks. Can the authorities bring these financiers into the light?

To read the story, click here.

Mid-East AmBush: How Bush policies undermine U.S., and region's, interests

So much attention has been paid to the Bush Administration's dramatic confrontations with its enemies in the Middle East that there is little consideration of how it treats its Arab allies there. In its rush to dispose of perceived threats to U.S. interests in the region, the White House has neglected its relations with Jordan and Saudi Arabia, while accommodating an increasingly autocratic Egypt. And the White House, not to mention the "expert" commentary on the Middle East, fails to distinguish differences between Arab governments and groups-and the U.S. interests at stake with each.

Washington has empowered Islamist groups, particularly the local chapters of Egypt's Muslim Brotherhood, that are bolstering their political and theological franchise by fanning fears of a U.S. war on Islam. The nature of U.S. hegemony, embodied in the ever-tightening relationship with Israel, has made it impossible for moderate Arab regimes to cooperate with Washington-contributing to the leadership vacuum that was so achingly apparent during the month-long conflict between Israel and Lebanon's Hizballah. And while the White House neglects the House of Saud, it overindulges Egyptian President Hosni Mubarak and overestimates the staying power of the Mubarak dynasty.

The Egyptian leader is unwittingly plotting his regime's demise by refusing to recognize rising and potentially destabilizing discontent and to neutralize it through an open political process. Mubarak's re-election last September in Egypt's first free-albeit hardly fair, according to a legion of impartial monitors-national ballot raised hopes that the Bush Administration would pressure Cairo to allow opposition groups to mobilize as political parties. Such a move would have not only put into tangible effect Bush's signature rhetoric on democracy, it would also have created for Mubarak an escape valve for tensions.

Then, in May, when violent demonstrations erupted amid high-level charges of official vote rigging and voter intimidation, many reformers believed Mubarak, with American prodding, would finally relent. Instead, he locked up protestors and rejected a legal appeal from dissident Ayman Nour, who in January 2005 was convicted and jailed on spurious forgery charges. U.S. diplomats in Cairo were stunned by the move, since they had been assured by senior authorities that Nour, a diabetic in poor health, would be released.

Not only did Washington fail to check Mubarak's excesses, it hosted his son and rumored heir apparent, Gamal, at a "secret" meeting in the White House. On the streets of Cairo, the timing of the encounter-it took place just as the demonstrations were gaining momentum-was taken as a White House endorsement of not only Mubarak's tactics but also his filial succession. Indeed, Egyptians see President Bush's pledge to spread democracy throughout the Middle East as fraudulent as the election that returned the 78-year-old Mubarak to his fifth and most certainly final term.

The United States gets little in return for subsidizing Mubarak's brutality. True, Egypt has provided tactical assistance-"rendering" suspected terrorists for interrogation, for example, or negotiating the release of journalists held hostage in Gaza. But Mubarak has studiously avoided playing a constructive role on the issues of overriding, strategic importance to the United States: ending Israeli-Palestinian violence and helping to pre-empt a conflagration over Iranian nuclear ambitions. As the leader of what is widely regarded as the most influential Arab state, Mubarak has chosen to insulate himself amid Arab-world equivocation. Are these the results that Bush, the most unilateral of U.S. leaders, hoped to achieve? Either way, the Middle East is poorer for it.

And what happens at the end of Mubarak's term? Though widely tipped as his successor, Gamal has earned no power base of his own and will most likely flee Egypt should his father die suddenly or become incapacitated. Odds are better that Mubarak will transfer power to a military man in exchange for his own and his family's protection, to spare them the fate that Anwar Sadat meted out to Gamal Abdel Nasser's inner circle after the latter's death in 1970.

Or, Mubarak could be succeeded in free and fair elections by Egypt's Muslim Brotherhood, widely considered the most capable political organization in the Arab world today, with an unparalleled network of patronage and community services. Absent secular competition, the Brotherhood (which is banned as a party but fields candidates as independents) has enlarged its bloc in Parliament to 88 seats, making it the largest opposition group in Egypt. A Brotherhood victory in Egypt would shake an already tremulous Middle East. It would complete the transition of political Islam from the fringes of power to its epicenter, with unknown consequences. And absent some tough love from Cairo's "friends" in the White House, it just might happen.

Conversely, Jordan's King Abdullah II has little to show for his close ties to a U.S. government regarded by most of his subjects with contempt because of its unconditional support for Israel dating back to the outbreak of the second Palestinian Intifada in September 2000. Jordanians, who now includes tens of thousands of Iraqi refugees as well as long-disaffected ethnic Palestinians, are already impatient with a government considered increasingly corrupt, ineffective, and out of touch with its needs. The Islamic Action Front, which has close ties to the Muslim Brotherhood in Cairo, is expected to do well in municipal and Parliamentary elections due later this year and in early 2007. Should the IAF capture a significant bloc of legislative seats, the Bush Administration will be faced with the by-now familiar Hobbesian choice of either accepting an Islamist group's electoral success in a key Arab state that does not recognize Israel, or repudiating it. If history is any guide, the Bush Administration will miscalculate, choosing the latter option at Abdullah's expense.

Saudi Arabia is also estranged from a deeply unpopular Bush Administration after decades of close cooperation with America. Well before he was made king last August, Abdullah bin Abdul Aziz al-Saud and foreign minister, Prince Saud al-Faisal, moved to diversify Riyadh's diplomatic portfolio away from an increasingly pro-Israel Washington by opening the Saudi energy market and other sectors of its economy to foreign investment. Today, the kingdom is enjoying an economic boom and has strong ties with countries such as France and China, which are often in opposition to U.S. foreign policy.

The U.S. embassy in Riyadh, meanwhile, is a near-empty shell. Following terrorist bombings on foreign residential compounds in Riyadh more than two years ago, the State Department recalled all but its most essential personnel from Saudi Arabia and many U.S. businesses in the kingdom, including Citibank, closed their doors. Among the foreign companies enriching themselves off of Saudi Arabia's $300-billion windfall in oil revenue due to record-high crude prices, American corporations and investors are miserably under-represented.

At the same time, the number of Saudi visitors to the United States, either as students, businessmen, or tourists, has plummeted due to post-9/11 visa restrictions. Many of those that do visit the United States complain of harassment from U.S. immigration officials.

The degradation of U.S.-Saudi ties is all the more regrettable in light of the many ways that Abdullah has distinguished himself as a natural ally of the Bush Administration's struggle to manage the Mid-East chaos-uncorked to a large degree by the White House itself. Since the May 2004 bombings, the king's vigorous counter-terrorist campaign against Islamic militants has been effective. He has revealed himself to be an assertive (by Saudi standards) proponent of political and economic reform. And he is regarded as a statesman for the land-for-peace deal he presented at the March 2002 Arab League summit in Beirut, which was all but ignored by the United States and Israel.

The Bush Administration cannot neutralize its adversaries in the Middle East without first giving its friends there an incentive to assist it. That means quietly persuading hardliners like Mubarak that gradual but quantifiable political reform is of existential (political and possibly physical) importance. It also demands the revival of Washington's role as an honest mediator in the Israeli-Palestinian conflict, which despite White House denials remains at the core of Middle East instability. Salving that wound would help to restore America's image on the Arab street and enable its traditional allies to once again embrace U.S. leadership in the region. And it would undermine Islamist groups, which nourish themselves on popular anxieties over U.S. hegemony in the heart of the Muslim world.

 

Banking on Reform

One of the worst-kept secrets in the Syrian Arab Republic is tucked inside a squat concrete office building on an obscure, pothole-ridden street off Harika Square in Old Damascus, the heart of the oldest city on Earth. Up a few flights of well-worn stairs is the office of Yassar Sahloul & Sons Co., Syria's largest money changer. Female receptionists in pantsuits and head scarves greet visitors, and stewards offer cardamom-scented coffee from silver trays. The din of automatic bill-counters riffling through stacks of bank- notes resounds through the lobby and the wood-paneled corridors while clerks rush about in search of signatures and stamps.

In an economy clogged by decades of foreign exchange controls and state ownership, Sahloul & Sons and its smaller competitors are the main arteries of capital to and from the outside world. They operate on the margins of legality -- technically, Syrian law imposes tight restrictions on who may buy dollars or other foreign currencies, and for what purposes. Still, the money changers are tolerated by the government for one compelling reason: Without them, the economy would implode.

"We have been very important to the Syrian economy in the past," says Zouheir Yassar Sahloul, who along with his six brothers launched the company in the early 1980s. "But much is changing, both here and in Lebanon, and who knows what these changes will bring?"

Most of the counterparties for Sahloul and other dealers lie across the border in Lebanon. For four decades, ever since Damascus nationalized its banking industry, Beirut banks have secured much of Syria's savings and financed its commerce. It is a relationship that has survived decades of war, dictatorship and political conspiracy. Today, however, this financial connection -- and the health of the Syrian and Lebanese economies -- is threatened by the political shock waves that have rattled the two countries since the February bombing that killed former Lebanese prime minister Rafik Hariri.

Many Lebanese believe that Syria and its president, Bashar al-Assad, were behind Hariri's assassination. Hundreds of thousands of people took to the streets to demand an end to Syria's 29-year military occupation of their country, an unprecedented show of popular will that forced Assad to withdraw his troops in April. Protesters attacked migrant Syrian laborers, spat on Syrian tourists and trashed the cars of visiting Syrian businessmen. Four months after Hariri's assassination, many Syrians remain afraid to travel to Beirut. For their part, Syrians retaliated by withdrawing millions of dollars in deposits from Beirut banks, forcing Lebanese authorities to defend their currency by selling more than $1 billion of the country's reserves to buy Lebanese pounds. The financial turmoil and political uncertainty have jolted the country's economy. Most economists now expect Lebanon to show no growth this year, compared with expectations of 5 percent expansion before the killing.

"We always thought of Lebanon as this delicate flower," says Abdel Salam Haykal, the president of the Syrian Young Entrepreneurs Association. "And it suddenly became the mouse that roared."

The Bush administration stopped short of accusing Assad of ordering Hariri's murder but made its suspicions clear by recalling its ambassador from Damascus and signaling its desire for the removal of Assad as part of its campaign to democratize the Middle East. Since March, when French President Jacques Chirac told Bush at a dinner in Brussels that Assad was unlikely to survive Syria's withdrawal from Lebanon, administration officials have been meeting with potential alternatives to the regime, including Syrian political exiles. Operations by U.S. forces along the Syrian border with Iraq have put additional pressure on Damascus.

"It will not be a military intervention," says Murhaf Jouejati, a Syrian specialist and a visiting assistant professor of political science at George Washington University. The administration "thinks there will be a coup d'etat if they impose the hardest tasks as preconditions for better relations, such as cutting ties with Hezbollah. It'll be all stick and no carrot."

With its main financial lifeline to the global economy at risk, the Assad regime faces a dilemma. The government has to accelerate reform if it wants to revitalize a stagnant economy and lessen the country's dependence on Lebanon. But opening the economy would force the 39-year-old leader to relax his tight grip on society and would threaten the entrenched interests of a powerful business clique with close ties to the regime.

Syria's conservative Parliament and hidebound bureaucracy have blunted many of Assad's reform attempts by simply ignoring his legislative initiatives. Two years ago the government passed a law allowing the establishment of private banks for the first time in more than 40 years, ending nearly a decade of pitched battles between the Finance Ministry and Parliament. So far three private lenders have opened their doors in Syria; another three have licenses and are expected to begin operations within the next 12 months (see box). The banks are struggling because regulations limit the interest rates they can charge on loans. The Finance Ministry has yet to provide several key supporting measures for the banks, including an interest-bearing facility at the central bank and a database for credit evaluation.

Mohammad al-Hussein, the reform-minded Finance minister, admits he faces an uphill struggle. Responding to complaints from Syria's new private bankers, he recently drafted a proposal to reduce the country's stamp tax, which includes an onerous levy of 6 to 6.25 percent on the value of loans and promissory notes and a separate charge on private banks' total capitalization. It isn't clear, however, when or if Parliament will act on Hussein's proposal.

"I'm not satisfied with the pace of change," he tells Institutional Investor in an interview in his office, which is appointed with opulent inlaid chairs and a bookcase filled with meticulously labeled files. "We're fighting to attract foreign investment, and this [tax] is the kind of thing that has to be lifted or at least reduced to the lowest level possible."

Other needed, and long-overdue, reforms are not yet on the agenda. Syria's big state-owned companies need to be restructured, but the government has ruled out privatization because of the social and political instability it might cause. The government also has no plans to reduce subsidies, which make up 20 percent of the budget and are eroding the country's financial health. The World Bank estimates Syria will post a budget deficit of 4 percent of GDP this year, compared with a surplus of 3.5 percent two years ago, despite the surge in the price of oil, the country's main export. The government continues to buy domestically grown grain and cotton at double the price on world markets while selling gasoline and heating oil at steep discounts.

"The Syrians are very determined to avoid social disruption," says Joseph Saba, director of The World Bank's Middle East and North Africa division. "But things cannot continue as they are."

Unless Assad makes a bold commitment to reform, the country will continue to struggle economically. "To deal with this conclusively requires a major political decision," says Hussein. "Otherwise there will be no meaningful change."

Assad's plight is emblematic of the ferment in the wider Arab world. The war in Iraq unleashed widespread protests against the U.S., but the country's first free elections in January have inspired a clamor for economic and political reform in the region. Tentative moves toward more-pluralist government in Egypt and Saudi Arabia have raised hopes among Syrians for similar reforms.

The need for economic revitalization in Syria is urgent. The economy sputters along on a mix of black-market dealings and oil exports. Growth slowed to an estimated 3 percent last year from 3.4 percent in 2003, according to Hussein. That rate is insufficient for a country whose population is expanding by 2.45 percent annually, and where some 200,000 people enter the labor market each year. Unemployment is estimated at anywhere between 10 and 20 percent. The crucial oil sector is declining rapidly. It generates 37 percent of government revenues today, down from 51 percent in 2002, despite the strength of global prices. Domestic subsidies and declining production are to blame. Economists estimate that the decline in output will accelerate from 2008 and turn Syria into a net oil importer by 2012.

Meanwhile, the forces of globalization are knocking on Syria's door. Damascus signed free-trade agreements last year with Turkey and the European Union that oblige Syria to slash import duties and nontariff barriers, which currently add 20 percent to the price of imports, according to World Bank estimates. "We need to find new sources of public revenue," says Hussein.

The secular state's failure to foster growth is fueling an increasingly powerful Islamist movement. It is barely two decades since Assad's father, Hafez al-Assad, ruthlessly suppressed a Muslim Brotherhood uprising by sending tanks to raze the town of Hama, killing thousands. The challenge for Bashar is to coopt Islamist elements without getting trapped in their potentially lethal embrace. Fundamentalism is particularly strong in Aleppo, Damascus' rival city to the north. The most senior religious leader there, the government-appointed Grand Mufti Ahmad Hassoun, was widely anticipated to be elevated to mufti of all Syria. The expected promotion has been put on hold, however, while the government searches for a successor with enough experience to manage Aleppo's sectarian tensions.

"We still have extremists amongst the men of religion here," Hassoun says from the diwan, or meeting room, of his home. "And I am in a struggle with them."

Analysts characterize Assad as both a would-be reformer and a dutiful son reluctant to dismantle his father's legacy. Powerful forces block the path to reform. Assad must contend with the still-potent Ba'athist retainers and hangers-on from the former regime who keep Syria manacled to its socialist past. "The old guard is not just three or four guys in senior positions but 10,000 fossilized bureaucrats," says Flynt Leverett, who served as senior director for Middle East affairs at the U.S. National Security Council during President Bush's first term and as a senior Mideast analyst at the Central Intelligence Agency. "That's the real obstacle to change."

Syria's oligarchs, known as the New Old Guard, are another powerful impediment. As in other Arab states, many of the country's business elite have gotten rich alongside, or on the shoulders of, the generation of young leaders who have succeeded their fathers to power. Consider Rami Makhlouf, who over the past several years has accumulated some of Syria's most lucrative franchises, including a cell phone company and the country's only network of duty-free retail stores. Makhlouf is a maternal cousin of the president.

These conservative forces help explain the hesitant leadership shown by Assad since he assumed power in 2000. His youth and his background as a London-educated ophthalmologist led many at home and abroad to view him as potentially more liberal-minded than his father. He did introduce some reforms early on, slashing duties on imported cars, banishing military uniforms from schools, phasing out rent controls and lifting press restrictions. A new weekly newspaper, the Lamplighter, briefly emerged as a symbol of a Damascene spring. By the summer of 2001, however, the regime began clamping down again, arresting activists and closing down the Lamplighter. In the past year restrictions on dissent have loosened again and independent newspapers have proliferated, but Syrian dissidents are understandably wary.

"It could well be that nothing has changed, and that this is all just talk," says lawyer Anwar al-Bounni, a senior member of the Human Rights Association in Syria.

The forced withdrawal from Lebanon has raised the stakes for Assad. Analysts in Damascus and Washington say they are watching such prominent officials as Asif Shawkat, chief of Syrian intelligence and Assad's brother-in-law, for signs of a coup. Assad could strengthen his position, they say, by finding ways of preserving the country's vested interests in Lebanon, which Syria accumulated during its occupation. Analysts say Syria will try to build a new network of proxy officials in Lebanon, probably through the patronage of Syrian intelligence agents with legitimate businesses in the country.

Perpetuating Syrian dominance will be especially difficult, however, now that Lebanon has enjoyed a taste of real autonomy. As Institutional Investor went to press, Lebanon was preparing to hold a three-week-long rolling election beginning in late May. Saad Hariri, the late prime minister's son, and Walid Jumblatt, the nation's wily and charismatic Druze leader, are expected to emerge as key players in the country's first freely elected government in a generation.

It's difficult to overestimate the importance of Lebanon to Assad's regime. Military occupation has enabled Syrian businessmen and politicians to extract rich tribute. Some $20 billion has flowed from Lebanon to Syria in the form of remittances from Syrian workers and the sale of cheap Syrian goods, which have displaced Lebanese products, according to a study published recently by An-Nahar, a Lebanese newspaper. Illicit trade has been equally lucrative. Joe Faddoul, an independent Lebanese economist and consultant, estimates that Syrian interests have earned $1 billion to $2 billion a year in Lebanon by selling heating oil on the black market, siphoning electricity from the state electricity utility and rigging bids on road and port projects.

Lebanese banks have been the first port of call for capital fleeing Syria's tight controls. The Syrian Finance Ministry reports that deposits at Syria's state-owned and private banks total some 600 billion Syrian pounds ($11.4 billion) and estimates that an equal amount is sloshing around the black market. Those domestic funds are probably dwarfed by the amount of Syrian-controlled money held abroad, says Finance Minister Hussein. Unofficial estimates suggest that Syrian interests have some $10 billion deposited in Lebanese banks alone.

Hussein hopes to lure some of that capital back home with a raft of financial reforms. In addition to his proposal to reduce the country's stamp tax, he has drafted plans for a stock exchange and capital markets authority. Although Hussein is confident his proposals will become law by the end of this year and the ministry is working with The World Bank to establish listing requirements, he acknowledges that it could take years before Syria has a diversified set of companies worth offering. "We're laying down new laws so that people will feel safe remitting some of that money," he says. "We want to move toward a more liberal, capitalist economy, but there is still this great debate over what a liberal, capitalist economy is."

Lebanon faces equally daunting challenges. With a population of only 3.8 million, the country boasts a per capita income of $4,000, nearly three times that of Syria. Notwithstanding its relative prosperity, however, the country struggles to service a public debt of 180 percent of GDP, the legacy of a massive postwar rebuilding program that did little to address the economy's core problems -- an overbanked financial sector and a reputation among foreign investors for political risk, red tape and corruption.

The political and economic uncertainty spawned by Hariri's assassination has badly hurt growth prospects. Government officials expect the economy to stagnate this year after growing by 4 percent in 2004, and foreign investment is expected to halve, to just $500 million.
In the weeks following Hariri's death, Beirut spent nearly 13 percent of its $11.6 billion in foreign exchange reserves to defend its pound, Riad Toufic Salame, governor of the Central Bank of Lebanon, tells Institutional Investor. He emphatically denies that any withdrawal requests were refused, and the pound, which fell nearly 4 percent after the killing, has recovered to trade at about 1,512 to the dollar.
"The market took a blow," Salame says. "But we reacted accordingly, and exchange rates are now stable."

THE BACKWARD STATE OF SYRIA'S financial system today is an unfortunate departure from the country's rich commercial history. In the eighth century Damascus boasted The World's most sophisticated banking system, based on the silver dinar, which was minted by the Umayyad Caliphate and circulated from Scandinavia to China. A draft order -- known in Arabic as a sek, from which the English "check" derives -- signed against an account in Syria would be honored in Canton. For the next 12 centuries, Damascus served as the financial hub of the Levant. What is today Lebanon existed only as a strip of cities along the coastal frontier of Greater Syria.

It took the colonial ambitions of the U.K. and France in the 20th century to extinguish Syria's long and prosperous trading tradition. With the breakup of the Ottoman Empire at the end of World War I, Paris and London agreed to divide the Middle East into their own areas of influence. The new, arbitrarily drawn borders and restrictions on travel effectively isolated a diminished Syria from its traditional markets in Turkey, Persia and Palestine as well as from the coastal cities enclosed within the tiny new nation of Lebanon. Both countries were made French protectorates. The rest of the Middle East, including today's Israel and its occupied Palestinian territories, Jordan, Iraq and the oil-rich Persian Gulf states, was carved out for the British. Suddenly, to travel from one colonial fiefdom to another, merchants required exit and entry visas, neither of which was easily obtained.

Syria gained independence in 1946 only to endure a series of coups and countercoups. In 1963, following the collapse of the United Arab Republic, a short-lived attempt at Egyptian-Syrian unity, the pro-Soviet Ba'ath Party seized power in Damascus. The party's Moscow-educated leaders pursued a policy of economic nationalization, and by 1965 the Syrian economy was almost entirely state-run. Former air force pilot and then-Defense minister Hafez al-Assad mounted a successful putsch in 1970 and was declared president of Syria a year later. He put an end to the country's political turmoil and liberalized the economy somewhat, deregulating such sectors as tourism and transportation. But he kept the banks under state control, which, not surprisingly, chased the remnants of the country's financial community across the border into Lebanon. Today many of Lebanon's top commercial bankers are Syrian-born, including members of the Azhari family, who occupy senior positions at BLOM Bank, the country's largest lender.

Nabil Hchaime, assistant general manager of Lebanon's Banque Européenne pour le Moyen-Orient, or Bank BEMO, remembers the day more than 40 years ago when his father closed the Damascus branch of the British Bank of the Middle East (later purchased by HSBC Group) and emigrated across the border. "Lebanon was the only country with free movement, good education and health services," says Hchaime. "And that's where capital escaped to."

Since the nationalization of Syria's banks, the country's cash requirements have been met largely by private financiers, ranging from the mighty Sahloul to entrepreneurs working from single offices. By contrast, the country's state-owned banks have failed to provide the capital the economy needs to grow. Official lenders typically require borrowers to secure loans with collateral, usually in the form of real estate, which only wealthy Syrians can provide. Few credit officers have the expertise or daring to lend against a balance sheet or business plan.

"We have banks without bankers," says M. Ayman Midani, a Damascus-based financial consultant. "Our lenders are overwhelmed by regulations. They cannot take initiative and therefore cannot take risks. As a result, there is little business investment."

The state's heavy hand has been a boon for money changers. "This is a cash culture," says Fouad Assi, president of Assi Co., a diversified company that includes foreign exchange dealing. "That's why people feel so comfortable dealing in the black market."

Samir, a veteran money changer who won't reveal his last name, works on the top floor of his family's shop in Souk Hammadiya, which snakes out from the courtyard of the ancient Umayyad Mosque, the dazzling heart of Old Damascus. With nothing more than a telephone, a fax machine and an address book, Samir can arrange money transfers and foreign exchange within 24 hours. Dollars, euros, British pounds and even Japanese yen, he says, can be summoned from the souk's many private vaults. He keeps the money in vinyl bags and locks it in a safe behind his desk.

"I have confidence in the people I deal with," Samir says, showing off a bundle of Syrian pounds the size of a cinder block. "We never count money around here."

The market is cyclical, he explains. In the spring, local currency traders buy Syrian pounds in anticipation of demand from Gulf tourists who summer in Syria. The pounds are smuggled to Lebanon and dispatched to Gulf money changers. When the season ends the Syrian central bank dispatches a clerk to Sahloul & Sons, which as the largest money changer acts as a virtual clearing house, to restore the exchange rate by purchasing surplus pounds. "He arrives with a large vinyl bag and doesn't leave until it's full," says Samir.

For years Samir and his partner ran a lucrative trade arranging remittances for Syrians with family in the U.S. "That was a $50,000-a-year business, and I would take a 2 percent commission," Samir says proudly. The September 11 terrorist attacks put an end to that business, he says. "After 9/11 no one wants to risk the attention of the FBI."

As Samir speaks, a messenger, known in the souk as a forex mule, arrives with an empty black vinyl bag. He dutifully hands Samir an order for $155,000 worth of Syrian pounds to be smuggled into Lebanon, deposited into a local account and then wired to the Paris branch of Lebanon's Banque SBA. Samir casually inspects the order and enters it into a bulging file as the messenger fills his bag with cash -- without bothering to count it.

This informal financial system has kept the country's cash-based economy afloat for decades, but Syria needs a modern banking system and capital markets that can leverage liquidity and finance growth. That is why Bank BEMO's Hchaime has returned to Syria, where he was recently named general manager of Banque BEMO Saudi Fransi. The new private bank's controlling foreign shareholders -- Lebanese, Saudi and French lenders -- own 49 percent of the bank. The balance is held by private Syrian investors, none holding a stake of more than 5 percent.

"It took us three years to get a full banking license," Hchaime says, "and since then we've been lobbying for more services. Right now we're aiming for a share of the trade finance business, but this is just the beginning."

Is Assad listening? Syrians had better hope so. Their future prosperity depends on bankers like Hchaime fulfilling their ambition.

Letter from Jordan: Kingdom of Corruption

Poetry as political manifesto has a long history in the Arab world. The Prophet Mohammed frequently won over converts to Islam with elegant recitals. Caliphs often deployed serrated verses from their court poet to undermine rivals. So in January, when revered Jordanian poet Haider Mahmoud wrote a thinly veiled ode to King Abdullah II warning him about deepening corruption in the Hashemite Kingdom, the palace quickly went to work--on him.

Mahmoud was attacked in Jordan's state-controlled press as a traitor, and his son was pressured into resigning his position at the foreign ministry. Jordan's then-prime minister, Faisal al-Fayez, ordered the mayor of Amman to fire Mahmoud as general director of the city's cultural center. (Faisal backed off after learning the position was unpaid, but Mahmoud resigned anyway.) The offending poem--titled "Saray," a Turkish word for "the palace," but also "the sultan"--became known to Jordanians only after it appeared in a London-based Arabic-language newspaper because no local publisher would touch it.

Mahmoud, who generally avoids controversy, says he wrote "Saray" out of concern that Jordan's vertiginous corruption threatens the integrity, and perhaps the very survival, of the monarchy. "It was not an attack," he says. "I care for this country. The poem was a message from the people to the leader against the corruption around him."

Mahmoud got off easy. These days, public criticism of the Hashemite monarchy can lead to official harassment, detention, arrest and imprisonment--usually in rapid succession. Since February 1999, when Abdullah assumed the throne after his father died of cancer, Jordan has become increasingly authoritarian. At a time when several Arab regimes are at least feinting toward political reform, Jordan is goose-stepping backward. Freedom of assembly has been restricted, and the threshold for dissent has been ratcheted down as political prisoners accumulate and oppositionists are rattled out of bed for interrogation. Journalists have been intimidated or bribed into spying on colleagues and sources. Street demonstrations have been all but eliminated by laws that require protesters to carry permits that are prohibitively difficult to obtain. The tax burden on ordinary Jordanians has intensified as living standards steadily recede. The appeal of Islamic groups is rising inversely to the monarchy's diminished credibility, even among the kingdom's traditionally secular, closely knit and increasingly restive tribes.

Corruption, defiantly uninhibited compared with the low-key looting that percolated under the late King Hussein, has soared. And although diplomats tend to absolve Abdullah of wrongdoing--he is deceived, they imply, by courtiers scheming behind his back--a growing number of Jordanians believe that the 43-year-old monarch is not only aware of the plundering but may be very much a part of it.

"I don't think the monarchy enjoys any popularity with the people," says Toujan Faisal, a former member of Parliament who was jailed for 100 days three years ago after she accused the government of graft. "King Hussein tolerated a margin of corruption, but not the extent to which it exists now."

In short, Jordan has degenerated into the kind of despotic kleptocracy the Bush Administration says it will no longer tolerate. But tolerate it the White House does, inclusive of the roughly $450 million in annual economic and military aid that has become the standard rate for maintaining Jordan's peace treaty with Israel and its support for America's "war on terror."

True, Washington has always indulged Jordan, a buffer state between Israel and the other Arab nations--the country is even shaped like a bottle stopper--by turning a blind eye to its human rights abuses. And it was Hussein, after all, who installed as heir apparent the little-known and unseasoned Abdullah just before he succumbed to cancer. In February the State Department gave Jordan a delicate reproach in its annual human rights report. But beyond that, the kingdom is under little public pressure to fight corruption and allow its rubber-stamp Parliament and feeble political opposition to assert themselves.

"The Hashemites are the fair-haired boys," says a US government official. "The King is such a sycophant, telling Washington what it wants to hear and bashing people like [Syrian president] Bashar al-Assad, that they get away with everything."

Americans got a glimpse at the dark side of their plucky Arab ally early this year, when President Bush was asked at a news conference about Ali Hattar, a Jordanian mechanical engineer who spent a night in jail and was fined after he publicly condemned Jordan's peace treaty with Israel and called for a boycott of US goods. Bush was unaware of the case, which had been otherwise overlooked by the Western press.

Hattar was only the most recent target in a series of controversial arrests and detentions that have followed Abdullah's ascension to power. In December 1999 Khalil Deek, a US citizen, was arrested in Pakistan and deported to his native Jordan on suspicion of having links with Al Qaeda. He was interrogated without a lawyer present and jailed without charge, only to be released two years later for lack of evidence. Faisal, the former parliamentarian, was jailed in March 2002 for "spreading rumors that incite disturbances and crimes," among other charges, and was freed after a monthlong hunger strike. The former university lecturer says she was imprisoned only after security agents tried to buy her silence with offers of money and luxury cars. "I asked for reform and was offered only bribes and then jail," she says.

In January security agents staged a midnight roundup of Islamic leaders who had criticized government policies while leading Friday prayers. Several were taken to a police precinct and left there overnight. According to the government, the men were detained for violating the state's laws on preaching and spiritual guidance. "It was very, very savage treatment," says Abdul-Lateef Arabiyat, former secretary-general of the Islamic Action Front, who like most of Jordan's established Muslim leaders is fiercely moderate. "This would not have happened under King Hussein."

Then, in early March, leaders of Jordan's Professional Associations Council, a federation of white-collar unions, called for a sit-in to protest a draft law they say would neutralize their ability to organize and mount the closest thing Jordan has to political opposition. Police shut down the demonstration by cordoning off the council's headquarters, the fourth time this year that authorities have banned such an assembly. Security agents also detained a television news crew that had filmed the incident and confiscated its video.

"Even during martial law [during Jordan's 1970 civil war], public gathering was a right for the people," says Hussein Mjali, who in March resigned as head of the Jordanian Bar Association to protest the draft law. "Now it is a gift from the ruler."

The steady erosion of civil liberties is matched only by the seismic growth of corruption. A large share of the private fortunes that fled war-torn Iraq has been deposited in Jordan, where it is leavening an underground economy that had already thrived off the UN-run Oil for Food program. Enormous villas have mushroomed in Amman's most fashionable districts, and luxury cars choke the city's roads. It is a gross and potentially destabilizing display of wealth in a country with an annual per capita income of $1,700, chronic unemployment and a population growth rate of 2.6 percent. And in harmony with Jordan's growing tolerance of corruption, this month King Abdullah agreed to overturn the 1992 conviction of Pentagon outcast Ahmad Chalabi, now a deputy prime minister in Iraq's new government, for his role in the collapse of a major Jordanian bank. "There is a new look to the corruption in Jordan," says journalist Abdullah Abu Romman. "Traditionally, we'd say the corrupt man is a thief. Now we look up to him as someone who was smart enough to avoid getting caught."

Enter the Shaheen brothers. From humble beginnings as West Bank vegetable merchants, Khaled, Riyadh and Akram Shaheen have established themselves as the Jordanian government's contractors of choice. According to a 1999 Times of London story, the Shaheens have known Abdullah since Khaled met him at a sports event in Dubai nearly ten years ago. Khaled, reported the Times, "went on to shower [the King] with gifts, including, allegedly, a Porsche." Not long after Abdullah's coronation, the government dropped Mercedes-Benz as its fleet automobile and logged a massive order with BMW--which had only months before tapped the Shaheens as its local distributor.

Since then, the Shaheens have rung up one major contract after another. In 2003 a Shaheen-controlled company was given a large share of a contract to train Iraqi policemen, even though it had no experience in such work (the value of the Shaheens' share is unknown, but the total cost of the operation could surpass $1 billion). In March 2004 a Shaheen subsidiary won a $72 million Pentagon contract to supply fuel to coalition forces in Iraq. The deal was canceled a week later because the company was unable to meet its obligations. It turned out the Shaheens knew nothing of the oil-supply business beyond what they learned by smuggling more than 7 million barrels from Iraq in 2003, according to an investigation by Britain's Financial Times and Italy's Il Sole 24 Ore. A government spokesperson said there is no relationship between King Abdullah and the Shaheens.

Business continues to come the Shaheens' way despite their poor credit history. In 1995 Jordan's Arab Bank sued the family to recoup $40 million in outstanding loans. Five years later the Standard Chartered Bank of London filed suit against the brothers for unpaid debts worth $77 million. "The Shaheens have been a factor for years," says a diplomat in Amman. "They have given the consistent impression that this is not a level playing field. And it doesn't help when they talk about having top-level protection."

Charges of corruption have even tainted Jordan's awqaf, the charitable trust that in Islamic countries is an important source of finance for social welfare programs. Ghazi Zaben, a first-term parliamentarian, recently opened an investigation into awqaf funding, and is also looking into allegations that the former minister of awqaf and Islamic affairs, Ahmad Hilayel, profited from hajj-related travel packages. Hilayel, who was replaced in a recent Cabinet shuffle, was attacked in Mecca late last year by pilgrims angered at what they said was price-gouging by companies related to him.

Zaben, a plastic surgeon by trade, said he launched his investigation because of discrepancies between what the awqaf was reporting as allocations to his district and what his constituents were actually collecting. "These numbers don't add up," says Zaben, leafing through a file of documents several inches thick. "At this point we can't say the awqaf is corrupt, though we do know [Hilayel's wife] has stakes in companies that arrange trips to Mecca and those crowds obviously thought they had a good reason to beat him up. That's why we're having these hearings." Corruption probes in Jordan have a way of getting blocked, however, and Zaben says he has already been pressured by Hilayel's "good will messengers" to back off. "Frankly, I don't think I'll get very far," he says. "But it's worth it. Perhaps it will encourage other MPs to launch their own investigations."

Zaben represents the Central Badia district, a cluster of villages linked by rutted, single-lane roads. It is inhabited largely by the Beni Sakhr, a once-powerful tribe that has been diminished over the years by poverty entrenched by official neglect. Like many Bedouin tribesmen, the Beni Sakhr lack the skills needed to survive in a modern economy, and the state has failed to provide them with adequate education and vocational training.Zaben considers himself fortunate to have secured the state funds needed to build a new highway that will dramatically cut the time it takes to get from one end of Badia to the other. Projects like this, he says, help him compete with the Islamists for influence among his constituents. "People are now more religious," he says above the din of a steamroller smashing chunks of granite into a foundation for the new road. "What else do they have?"

Zaben tours his district, a mere forty-minute drive from Amman, in his son's late-model Jeep Cherokee. He is warmly welcomed as he calls unannounced on homes made of cinder-block walls and corrugated steel roofs suspended by narrow, roughly hewn wooden beams. The average income here is about half the national level and most families rely on the awqaf to get by. Beni Sakhr tribesmen used to be well represented in Jordan's armed forces until the government required new recruits to have at least a high school education.

"We're not getting the schools we need," says Awad Shamoor, a minor sheik, after greeting Zaben in an outdoor circle of tea-sipping notables. Shamoor, a security guard at a high school, makes about $100 a month. He is affluent by Badia standards, with two of his seven children in college. To finance their tuition and other expenses, he has been selling strips of his estate--land that has been in his family for generations--to wealthy Palestinians. "I used to own 200 dunams [about 800 acres]," Shamoor says between sips of tea. "Now I'm down to ten."

As Shamoor's estate has dwindled, King Abdullah has expanded his--or at least that's how some Jordanian dissidents are interpreting a May 10, 2000, government memo. In the memo, a copy of which has been obtained by The Nation, the Aqaba Regional Authority informs the land registrar of a decision "to register all the land that belongs to the treasury that is in field no. 1 and also the land no. 51 which is in field no. 3 from Aqaba land, in His Majesty Abdullah's name"; in a similar memo, dated less than a year later, the registrar orders its regional offices to "register land in Naour, Lipat, Bilalal, Um Qasyr, Samek, in the name of His Majesty, Abdullah, [and] to cancel land use...from list no. 7...for municipal use and re-register it in the name of His Majesty Abdullah (God protect and preserve him)." The government spokesperson acknowledged "swaps" between crown property and public land, but only to expedite public-works projects. In such exchanges, she said, the value greatly favors the state rather than the crown.

Rumors of a royal land grab have simmered for years. In 2001, according to a source close to the palace, Abdullah sold for $43 million property his father confiscated under martial law in 1982. The palace denies this. Laith Shubuilat, a former parliamentarian who has spent much of his political career in opposition, says a recent decision to let the army control Jordan's largest freshwater reserve will give the King de facto control of it.

"The army is the King's power base," says Shubuilat. "The King is robbing the government and the army is his bagman."

Perhaps not surprisingly, there is in Jordan today a transcendent nostalgia for the light touch of the late king. Six years after his death Jordanians of all ethnicities and sects--even among those who oppose the monarchy--speak mystically of Hussein as if he were still among them, like a twitch in an amputated limb. It is why many cherish the 25-year-old Prince Hamzah, Hussein's son by Queen Noor, who bears an uncanny resemblance to his father and is said to have inherited his legendary charisma and body language. Days before his death Hussein made the elevation of Abdullah as his successor conditional on Abdullah's maintaining Hamzah as crown prince and heir apparent.

Last year Hamzah abruptly vacated his offices to make room for a primary school run by Queen Rania for the children of Amman's rich elites--a conspicuous and somewhat ironic move in a country with a failing public school system. In November Abdullah relieved Hamzah as crown prince--a gesture, the king declared in a televised message, that would allow his half-brother "more freedom of movement." Following the announcement palace officials phoned journalists and recommended they keep the reporting to a minimum. "We were told it was purely a family matter," says Randa Habib, Jordan bureau chief for Agence France-Presse.

In response to his dismissal, Hamzah sent the king a verse from the Koran, published by several Jordanian newspapers, about the hypocrisies of unjust leadership.

Sanctions could empower Syria's hardliners

Dictators love embargoes. Just look at North Korea - if you can gain entry. The secretive Stalinist state hosts few foreigners, either as visitors or residents. When I visited Pyongyang in 1995 to report on a Hong Kong-based investor's bid to operate there, the negotiations were plagued by a shortage of English speakers with enough knowledge of financial matters to translate properly.

North Korea's language deficit is symptomatic of the isolation that is key to the power of Kim Jong Il, its leader. Though embargoes deprived Pyongyang of modern weaponry - its non-conventional arms, which may soon include nuclear weapons, are another matter - they have also shut North Koreans off from the world, along with the toxic ideas and technologies that could undermine Mr Kim's authority. The Brussels-based International Crisis Group recently called on the international community to assist Pyongyang by training North Koreans in business and finance. But Pyongyang is unlikely to expose its people to ideas it cannot control. Far from subverting the regime, sanctions have provided North Korea's leaders the antiseptic curtain they need to cut their people off from the world.

Now consider Syria, currently preparing for the ruling Ba'ath party congress on June 6. Analysts say there are signs that Bashar al-Assad, Syria's president, will unveil political reforms consistent with George W. Bush's campaign to democratise the Middle East. Nonetheless, the White House is proceeding with plans that would empower hardliners in Damascus in the same way they have strengthened those in Pyongyang: shrouding Syria in a comprehensive trade embargo.

The Bush administration's intensifying pressure on Damascus is part of a move to uproot the Assad regime through external pressure. Little matter that Damascus has been for the last 16 months or so managing a tentative political and economic opening.

Foreign-controlled, private banks have been operating in Syria for a year and Syrians have for the first time been permitted to hold foreign exchange. Dissidents are increasingly vocal and several groups have launched independent non-governmental organisations, fertile ground for civic institutions that could offer compelling opposition to the regime. And while activists differ on how best to challenge Mr Assad, their message to Washington is broadly similar: back off.

Most Syrians dread the Syrian Accountability Act, passed overwhelmingly by the US Congress two years ago in response to Syrian support of Lebanon's Hizbollah and other anti-Israel groups. If fully enforced - some provisions were implemented last May - the act would limit the country's interaction with the outside world and allow the regime, in the manner of Pyongyang, to control what comes in and what goes out. This would undermine activists, who need to project their message, and would also create a siege mentality that Mr Assad and his lieutenants could manipulate to stifle dissent.

Resonant in Damascus but lost on Washington is how the United Nations-led embargo on Iraq and the accompanying smuggling trade so enriched Saddam Hussein he could buy the loyalty of tribal and religious leaders. They dramatically thinned Iraq's population of diplomats, businessmen and aid workers, to say nothing of spies, which allowed Mr Hussein to commit his most egregious acts free of international scrutiny. They also eviscerated Iraq's once-robust middle class, historically an antechamber for reform and revolution. While Syrians might applaud the White House for standing up to Arab autocracy, they fear the collapse of the political air-pocket Mr Bush helped create unless he rigorously engages the Middle East and its problems, rather than simply isolating and neglecting them.

The Ba'ath party congress will reveal much about the nature and motives of both Syrian and US leaders. If Mr Assad unfurls an agenda for substantial reform - expectations have been raised for the release of jailed dissidents and a green light for a multi-party political system - it will prove he is strong enough to do what is right and smart enough to call Mr Bush's bluff.

A commitment to real change would be enough for the European Union, led by France, to rally behind Damascus, leaving the White House with a choice: abandon the sanctions threat along with ambitions for another Middle East intervention, or stay faithful to unilateral instincts and defy international currents - including the majority of Syrian opinion.

Yet Another Great Game

If a report circulating among senior members of America's defense establishment is any guide, the Sino-American war for future petroleum supplies has already begun. According to the 80-page study, Beijing has identified the United States as "a paramount threat to its energy security and economic stability" and is busily establishing a "string of pearls"—forward deployments of surveillance stations, naval facilities and airstrips—to safeguard the petroleum-transport route from the Persian Gulf to the South China Sea.

Once it controls Asia's vital sea lanes, the report goes on, China may then move on some of The World's key oil reserves—perhaps by replacing the United States as Saudi Arabia's patron and protector, or by seizing a strategic oil pipeline in the Russian Far East. The Chinese, the report says, "equate energy security with physical possession or control of energy supplies" and "have a tendency to see securing their energy security as a zero-sum game." Nowhere is that more clear than in sub-Saharan Africa, where Chinese oil and natural-gas companies have over the past several years inked deals with regimes such as Sudan's, ostracized by the West for its complicity in atrocities committed against villagers in Darfur.

"It's very effective and farsighted diplomacy," says John Tkacik, a China expert at the Heritage Foundation in Washington. "They look to where their opponent is not and discreetly place their pieces in unclaimed areas of the map, which in this case is Africa."

In staking out Africa, however, Beijing is setting itself up for a seismic rivalry with the —United States, which has identified the region as key to its efforts to diversify its oil sources away from the unstable Middle East. In the aftermath of 9/11, a U.S.-Israeli study group recommended that Washington prevent "rivals such as China" from horning in on Africa's natural resources, while the Pentagon study says, "Chinese companies are investing in East, West, and North Africa and [the Chinese Army] has sent troops to protect its energy investments in Sudan" —an assertion long rumored by human-rights groups and other Africa experts but never confirmed.

In turn, American oil companies have raised their profile in Africa amid rumors that the United States is planning to build a military base in the oil-rich Gulf of Guinea. "In Africa," says Jamal Qureshi, an oil-markets expert at PFC Energy in Washington, "you've got new players, with China as a possible counterweight to the U.S. There could be elements of confrontation."

Before 9/11, U.S. oil companies generally kept their distance from such countries as Sudan, the Democratic Republic of the Congo and Libya, due to political risk, concerns over human-rights violations, sanctions or all three. True, U.S. firms have done business with autocracies like Nigeria, despite the Bush administration's public snubbing of President Olusegun Obasanjo. But until now, such deals have been cut on a piecemeal basis—unlike those recently struck by state-owned China National Petroleum Co. (CNPC) as part of an official policy of nurturing diplomatic ties in exchange for oil concessions.

During the cold war, China reached out to Africa in political solidarity with its nonaligned nations, and to block them from having relations with Taiwan. Indeed, Africa accounts for a dwindling share of the 27 or so countries that still recognize the island state over China. Now China is supporting developing countries as part of a transparent bid for economic gain, and its petro diplomacy extends worldwide. In October Beijing agreed to buy up to $100 billion in Iranian petroleum and gas and to help develop a major Iranian oilfield near the Iraqi border—evidence of an evolving Sino-Iranian alliance that is featured in the Pentagon report. Earlier this year Beijing signed a 25-year deal to develop natural-gas reserves in Iran—despite U.S.-led sanctions—and it is increasingly active in the Gulf states. Iranian Oil Minister Bijan Zanganeh recently said that the strengthening Tehran-Beijing link was "neutralizing" U.S.-imposed sanctions. "Japan is our No. 1 energy importer for historical reasons... but we would like to give preference to exports to China," said Zanganeh.

Africa, though, remains the new oil frontier for both China and the United States. Since Chinese President Hu Jintao's February goodwill mission to oil-producing states, Beijing has signed agreements with Algeria, Gabon and Nigeria, and is discussing similar deals with Niger, Chad, the Central African Republic, Congo and Angola. In return for access to raw materials in Africa, China is financing and building roads, dams, airports and energy grids, signing free-trade agreements and even promoting Africa at home as a tourist destination. Within the next half decade, according to energy analysts, Africa is expected to account for nearly a third of the oil China purchases overseas, up from 25 percent today.

Once oil-independent, China has over the last decade become increasingly reliant on imports, which now account for 60 percent of its oil consumption, up from 6.4 percent in 1993. Within the next five years, according to Beijing, China will be importing 50 million tons of oil and 50 billion cubic meters of gas annually. Even for a country more concerned with human rights, those kinds of numbers would remove many inhibitions.

In 2001 Beijing identified Sudan as the springboard for its campaign to triple its overseas oil production within four years, despite U.N. sanctions against the Sudanese regime. CNPC now dominates a consortium of Asian companies drilling Sudan's fields under license by Khartoum. Through a subsidiary, CNPC took a lead role in building a 1,500-kilometer-long pipeline from the main oilfields to the Red Sea and built a refinery near Khartoum with a 2.5 million-ton processing capacity. Safely distanced from the chaos in southern Darfur, these facilities have helped swell Sudan's oil output to 345,000 barrels per day, up from 270,000 in 2003, and provide an estimated 8 percent of China's total oil consumption. The sales have also helped finance Khartoum's arms purchases from Beijing; the government is thought to be nurturing a Sudanese arms industry with Chinese technology.

"Khartoum is emboldened and encouraged by China's assistance," says Jemera Rone, a Sudan specialist for Human Rights Watch. "It is using petrodollars to manufacture arms, many of them knockoff versions of Chinese weapons."

The Sino-Sudanese ties are complicating U.N. efforts to isolate Khartoum for its alleged complicity in massacres and rapes in southern Darfur. Beijing has blocked or diluted several U.S.-sponsored draft resolutions condemning Khartoum, and has signaled it will veto further sanctions. Washington, which needs Chinese support in Security Council matters regarding Iraq, is unlikely to push Beijing on Sudan.

While the United States appears to have conceded Sudan to China, it is active elsewhere in Africa. U.S. President George W. Bush has made a point of meeting with leaders of such countries as Chad and Congo, which in the past barely registered on Washington's foreign-policy map. The African Oil Policy Initiative Group, a confederation of oil executives, members of Congress, White House officials and consultants, has recommended that the United States work openly with Nigeria to secure Africa's oil-rich areas and enhance the prospects for foreign investment. It has also urged the Pentagon to build a naval base at the oil-rich islands of So Tome and Principe, and to permanently deploy a large force of U.S. troops there.

Some analysts even suspect that the deliberate way in which the United States lifted sanctions on Libya earlier this year was a move to check China's growing influence in Africa. If China sees energy security as a zero-sum game, so, it appears, does its American rival.

Freeze-out the Arabists

Ronald Schlicher is a senior official in the State Department's Bureau of Near Eastern Affairs, an enclave for America's Arab specialists. He is the kind of Middle East expert who would presumably be in the vanguard of officials bound for Baghdad to run the US Embassy there. A twenty-two-year veteran with experience in places like Cairo and Jerusalem, including a six-month assignment in postwar Iraq, Schlicher was this year presented one of the most distinguished honors among foreign-service officers.

Schlicher was awarded the American Foreign Service Association's annual prize for producing the year's best "dissent channel" cables--tightly written and cogently argued memos to Washington taking issue with particular aspects of US foreign policy. In effect, Schlicher was recognized for his constructive criticism of President Bush's policies in the Middle East, a region Schlicher, a fluent Arabic speaker, knows as well as anyone in government.

But Schlicher, now Iraq desk officer in Washington, is not boasting about his prize. In fact, like the State Department's other Arab hands, he's not even giving interviews. American diplomats, both active and retired, say he is outraged at the way America's most talented Arab experts were until recently blocked from playing any meaningful role in the administration of postwar Iraq.

"This administration doesn't like naysayers," says Edward Walker, a former US ambassador to Egypt and Israel and now the president of the Middle East Institute in Washington. "Ron challenged US policy and they shut him out."

American Arabists are an embattled priesthood within the nation's foreign policy elite. Like the China hands of the 1950s, who were purged by McCarthyites, the State Department's Middle East experts have been marginalized over the years for "going local"--associating themselves too closely with host governments and being critical of Washington's wholesale support of Israel. It was Arabist denial of the true character and ambition of Saddam Hussein, their critics say, that caught Washington off guard when the dictator invaded Kuwait in 1990.
"Arabists," said Francis Fukuyama while a Reagan Administration appointee on the State Department's policy planning staff, "are more systemically wrong than other area specialists in the foreign service." Such comments could easily be applied to the neoconservative cabal that continues to pilot Bush foreign policy despite the mess it has made of Iraq--after dismissing prescient State Department advice.

Although junior State Department officials have enrolled in Arab-language courses in record numbers over the past three years, it could take years to restore the Arabists' ranks. The US Embassy in Baghdad will have fewer Arab specialists relative to its size and importance than any other American mission in the Arab world. John Negroponte, the current ambassador, had never served in the region before his recent appointment. The Bush Administration is so short on Middle East expertise that Christopher Ross, a veteran Arabist and former ambassador to Syria, was summoned to Baghdad out of retirement.

"Chris is a rare entity with his language skills," says Robert Keeley, a former US ambassador to Greece and a member of Diplomats & Military Commanders for Change (DMCC), a group committed to Bush's re-election defeat. "Yet the Pentagon took such charge of the occupation of Iraq that people like him are few and far between."

An Arabist exodus is part of the price Americans are paying for Bush's destructive hurtle into a needless war. Weeks before the invasion, John Brady Kiesling, who has been posted both to Israel and the Arab world, resigned in protest against US foreign policy along with two other State Department veterans. "Why does our President condone the swaggering and contemptuous approach to our friends and allies this Administration is fostering, including among its most senior officials?" Kiesling wrote to Secretary of State Colin Powell. "Our current course will bring instability and danger, not security." The subtext was clear: By listening to fabulists in the Pentagon and White House, instead of his eyes and ears in the nation's outposts abroad, the President was leading the country into disaster.

Kiesling left behind a foreign service that would reap the whirlwind he prophesied. "I spend all day writing memos, fighting dumb ideas," says a State Department official. "We fought the turfing-out of the [Iraqi] military tooth and nail, and [former US proconsul in Iraq Paul] Bremer wouldn't listen. We warned them again on the need for a more transparent rebuilding process, and they did nothing." Says a top Arabist who recently left the Near Eastern desk but requested anonymity because he remains in government: "I never felt like a pariah except in Washington."

In an Administration that penalizes those who see The World as it is versus what the President wishes it to be, it was inevitable that the Near Eastern Bureau would be attacked as an obstacle to the New Crusade. When, in the run-up to war, Powell tried to dispatch a team of Arab specialists to help rebuild Iraq's government ministries, Defense Secretary Donald Rumsfeld and his aides vetoed the list of names. The State Department's Future of Iraq Project, which accurately predicted widespread looting and insurgency after Saddam's removal, was intercepted and buried by the Pentagon.

"It is a peculiar feature of the Bush Administration and neocon ideology to treat foreign policy issues largely in military terms," says Charles Freeman, US ambassador to Saudi Arabia during the first Gulf War. "It is a diplomacy-free foreign policy, and this has cost us dearly in terms of our image and influence abroad." Freeman, who is also a member of DMCC, laments how "Powell's enormous talents have been squandered in favor of numerous military adventures." Even if a re-elected Bush were to clean house, he says, the damage done to the mechanics of American diplomacy has been all but irreversible. "So long as an important part of our body politic believes that security can only be established at gunpoint, an assumption that is belied by history, the United States will remain in international isolation," Freeman says.

The Arabists are used to watching from the sidelines as events unfold. Under Richard Nixon, the United States cemented its pro-Israel bias despite State Department warnings that it would fuel growing anti-Americanism in the region. Their frustration grew during the Middle East peace process of the 1990s, which became a policy colossus that smothered Washington's other interests in the region.

The Arabists' nemeses are familiar to anyone concerned about the integrity and direction of US foreign policy: Deputy Secretary of Defense Paul Wolfowitz, Under Secretary of Defense for Policy Douglas Feith, Deputy Under Secretary of Defense Bill Luti, National Security Council senior director Elliott Abrams, former Defense Policy Board member Richard Perle--all of whom have since the Reagan years counseled a get-tough approach to the Arabs and unconditional support for Israel that explicitly excludes input from the State Department.

Officially, the State Department disputes that there is any tension between the Near East desk on one side and the White House and Pentagon on the other. Adam Ereli, the department's deputy spokesman, said it would be "splitting hairs" to suggest Iraq would be more stable today had the Future of Iraq Project's report been given a serious hearing.

Arabists acknowledge that the Pentagon and White House have been belatedly reaching out to the same diplomats they so recently undermined. With Washington isolated diplomatically, US troops mired in Iraq and the November presidential election around the corner, Bush aides have been frantically plundering the Near Eastern desk for advice, with some positive results.

At the State Department's urging, Iraq's interim Prime Minister, Iyad Allawi, was given the authority to divert reconstruction funds away from large contracts tendered to big US firms and toward smaller projects to boost employment (that authority has been seriously impaired, however, by the US government's decision to allocate $3.5 billion in reconstruction funds to training and equipping Iraqi police and other security forces, protecting oil supplies and preparing for the January elections). Iraq's minority Sunnis now have a larger voice in the interim government after months of ill-advised Pentagon backing of Ahmad Chalabi's Shiite-dominated factions. Yet Arabists harbor few illusions about the future. A second Bush Administration would mean another four-year quarantine for the Arabists, at least on the policy-making level.

True, the State Department is the primary US representative in newly "sovereign" Iraq. But just as Bush aides neglected postwar Afghanistan to focus on its real priority--Iraq--they now seem to be resetting their sights on the gold ring: Iran. Widely overlooked in the investigation of alleged Pentagon espionage involving Israel is that it reportedly revolved around a presidential directive that prescribes a tougher posture toward Iran. The Bush Administration's call for a Security Council resolution to short-circuit Tehran's nuclear ambitions looks ominously like the force majeure it triggered for regime change in Iraq.

Paul Hughes, a US Army colonel, remembers a remark made by senior Pentagon official Harold Rhode, prominent among the neocon faithful, as the two men were on a flight to Kuwait just before the US invasion of Iraq. The battle for Iraq, Rhode de-clared to Hughes and a detail of British officials, was the first step in the battle for Tehran. "We all exchanged glances and rolled our eyes," said Hughes. "The Brits couldn't believe it." Rhode denied through a spokesman he has ever made such a remark, though State Department and Pentagon officials say the neocons have made it clear they would target Iran in a second Bush term--particularly if Wolfowitz or Condoleezza Rice run Foggy Bottom.

The Arabists' biggest fear is that a re-elected Bush would not call for the customary resignation of his senior-level policy-makers, which would allow them to remain in government without having to go through the Congressional confirmation process some of them would not survive. That, say officers on the Near Eastern desk, would all but extinguish the last line of official dissent against the Administration and its ruinous agenda for the Middle East.

Rebuilding Iraq / Baghdad's Jews; Woman Seeks a Voice for the Few who Remained

BAGHDAD - She is a small woman with bright eyes and jet-black hair swept back and tied in a bun. She is embarrassed by her poor teeth, but smiles easily with strangers as well as old friends. She lives in poverty, and is nearly all that is left of Iraq's once-robust Jewish community.

It is a responsibility Samira Yacoub, 50, wears lightly. She is unafraid to draw attention to a handful of Iraqi Jews who have craved anonymity and isolation for generations. In a country buffeted by competing religious sects vying for position in a new government, Yacoub declares Iraq's Jews - all 35 of them - should not be left out.

   "The Americans should give us a voice," Yacoub says. "I am an Iraqi and I should be able to enjoy the rights of all Iraqis."

The subject of Iraq's depleted Jewish community is a delicate issue in the aftermath of a war many Iraqis believe was waged in the interests of their nemesis, Israel. In Iraq's newly liberated press, news articles report rumors of Zionist groups conspiring to steal the country's oil and purchase blocks of real estate.

A colony of foreign Jews was said to be staying at Baghdad's Ekal Hotel, which emptied out two weeks ago after security officers warned that an attack on it was imminent; in fact, according to Ekal manager Anan Jamil, the guests were officials from DynaCorp, a US company hired by the State Department to train Iraq's fledgling police department.

Yacoub makes an unlikely mouthpiece for her people. She has been effectively disowned by the remnants of Iraq's Jewish establishment because she married a Muslim and converted to Islam, though she divorced her husband years ago. Many Jews married outside the faith under Saddam Hussein's reign, often as a means of protection, and many others assumed Muslim names.

"Samira does not speak for the Iraqi Jews," says Emad Levy, Iraq's only rabbi. "She is not one of us."

Levy, like many of Iraq's younger Jews, says he will leave Iraq as soon as he can sell his home and car. He is responsible for his 82-year-old father and ailing uncle and hopes to emigrate to Israel.

"I have no future here," says Levy, who keeps passages of the Koran rolled up in a fountain pen, a habit nurtured under Hussein's regime to blend in. "I am responsible for an old man and if I stay here I'll grow old with no wife and no children to take care of me."

Yacoub plans to stay. She says she never lost her Jewish identity and prays in the synagogue in Betaween, a neglected district in Baghdad where most of the few remaining Jews live among Muslims and a smattering of Christians. It is Iraq's last functioning synagogue, down from the 56 that flourished a half-century ago.

"I don't distinguish between Jews, Christians, and Muslims," she says. "We all come from the same roots."

The US officials managing the occupation of Iraq have not said whom they will appoint to the committees now being formed to build an interim government and write a constitution. Under the Iraqi monarchy that was overthrown in 1958, the country had nearly a half million Jews, many of whom were prominent in politics as well as businesses; the country's first finance minister was Jewish and Jews were a vital part of Iraq's large and prosperous middle class.

That changed in the late 1960s with a series of coups that climaxed with Hussein's rise to power. Official harassment of Jews turned to persecution in 1969 when the government arrested seven of them as alleged Israeli spies. They were hanged in Baghdad's Liberation Square, their bodies left dangling for days.

Within a decade, Iraq's Jewish population - a pillar of Iraqi society since King Nebuchadnezzar II conquered Jerusalem in the sixth century BC and evicted many of its inhabitants to Babylon - had all but vanished. Those who remained were tolerated but confined to the margins of Iraq's state-dominated economy. Many survived on the patronage of a small endowment allowed the Jews under Hussein - and by keeping a low profile.

"Saddam once referred in a speech to 'Zionist Jews,' " said Nidal, 36, who despite Hussein's ouster prefers not to give her last name. "Then people started calling me a Zionist while I shopped in the market. I didn't respond."

Until the war, Yacoub lived on a monthly transfer of $50 from her mother, who emigrated to the Netherlands 10 years ago. But the war disrupted communications, and she has received nothing since.

Yacoub lives in a tiny room next to an old synagogue where her family once worshiped. She sleeps on a bed with a cast-iron frame and often tucks leather strips printed with passages from the Torah under her pillow. They are printed in Hebrew, a language she does not understand.

"I keep it with me to ward off the evil eye," she says. "My son had nightmares recently so I put these under his pillow and they went away."

The old synagogue, stately and austere, is now a furniture factory. It has a gabled, crenelated roof line and is entombed inside a 10-foot high wall that appears to have been hastily built. As a girl, Yacoub attended weddings, celebrations of holy days and circumcisions, when guests would drink wine and feast on rakak, an unleavened bread.

Asked why the Jews left, Yacoub shrugs. "They all had their reasons," she says. "But when they left they took so much of Iraq with them."

Inside the synagogue, Samira is greeted warmly by furniture makers Ali and Hassan. It is dark - the electricity has just gone off, a common occurrence in postwar Iraq - and the air is acrid with the smell of turpentine. Where a congregation once prayed there are table saws and work benches.

Yacoub shuffles her way through stacks of unfinished chairs and loveseats and points to a framed, hand-printed scroll with Hebrew letters woven around a menorah. It proclaims God as the God of Israel and of the world, and is all that remains of a once-vibrant house of worship.

As Yacoub departs, she is teased by Ali and Hassan, who joke they will send her to Israel if she doesn't behave. Yacoub says she will remain in Iraq, to greet any Jews who return.

"Maybe the Jews will come back," she says. "It is their right. And I do hope they come."

Rebuilding Iraq / Kut; British Troops' Burial Site Offers History Lesson to US on Postwar Iraq

KUT, Iraq - The cemetery is overgrown with reeds similar to the ones that clutter the nearby Tigris River. Headstones lean at ghoulish angles, are broken like chipped teeth, or have collapsed altogether. Residents treat it as they would an empty lot, although it is filled with more than a hundred reasons why great powers administer Iraq at their peril.

It is the graveyard for British soldiers killed here during World War I, when London opened a Mesopotamian front against Ottoman Turkey, Germany's ally. While Britain ultimately prevailed and went on to exercise influence on Iraq for four decades, the costs of subduing the country were considerably higher than expected. Iraqis fighting as an Ottoman colonial militia and under German leadership inflicted tens of thousands of casualties on British troops, about 150 of whom are buried here in this city between Baghdad and the southern port city of Basra.

   Iraqi resistance to the British invasion, and its subsequent occupation, is well-studied history and to many Iraqis offers a vivid lesson to US officials now responsible for postwar Iraq.

"No one can govern Iraq but Iraqis," said Mualoom Farham, a history professor at Kut University. "The Persians, Mongols, Turks, British. Many foreigners have tried. Now it's the Americans' turn. Their liberation has turned into an occupation."

Resistance against US troops now managing a country still impaired by a lack of basic services like electricity and clean water has been on the rise. At least 26 American and six British soldiers have died as a result of hostile acts since May 1, when major combat in Iraq was declared over.

Sustained counterinsurgency raids have yet to neutralize a web of Saddam Hussein loyalists and religious fundamentalists. Grass-roots bitterness over what is perceived as American designs to rob Iraqi oil wealth and share it with Israel is widespread, and US officials worry it could worsen unless postwar shortages are addressed.

"At least the British had a plan," said Mohammad Taher, 78, a retired military officer in Baghdad. "They had a lot of experience with foreign occupation. The Americans don't have a policy."

Britain's World War I experience in Iraq, beginning with its costly first campaign that ended in disaster at Kut, offers a valuable study in the limits of great-power influence. After quickly taking Basra in 1914, an Anglo-Indian expeditionary force pushed toward Baghdad and occupied the city a year later, only to be driven back to Kut. A Turkish-led Ottoman force surrounded the city and squeezed it for 146 days.

British attempts to break the siege failed at the cost of thousands of men. A ransom of 3 million lire was offered the Turkish commander and rejected before the British surrendered, having lost scores of troops to starvation, disease, and exposure to temperatures that reached 120 degrees Fahrenheit. The defeat at Kut was among Great Britain's most painful setbacks in World War I and one of its biggest embarrassments in three centuries of empire-building. Iraqis regard the British capitulation as one of their proudest achievements. It has been immortalized in a song that celebrates how the Iraqis and Turks beat one of the most powerful armies.

The British regrouped and - with the Ottomans distracted by incursions in the east from Russia and Persia - reoccupied Baghdad in 1917. A triumphant Major General Stanley Maud, according to Kut University's Farham, declared to the people of the city the British had fought to liberate Iraq from autocratic rule, not to occupy it.

"The British remained for the next 40 years," said Farham. "More Iraqis know who General Maud was than the English."

Historically, foreigners had coveted Iraq for control of the land bridge linking the markets of Europe and Asia. With Britain's naval fleet now burning oil instead of coal, Iraq became a geological prize as well as a geographic one. In 1925, the British set up the Iraqi Oil Co. with US participation and aggressively developed the country's petroleum fields.

Britain also installed a pliant emir, King Faisal I of the Hashemite Dynasty, and ruled Iraq by proxy until 1958, when mobs of Arab nationalists murdered the then-king and his court. By the early 1960s, Britain and France were in full retreat from their Arab protectorates, leaving a vacuum to be filled by a fraternity of dictators that would count Saddam Hussein as a member.

The US government has said repeatedly it has no imperialist designs on Iraq. Iraqi oil is for the Iraqis, occupation officials say, and there will soon be established an interim authority that will choose a government elected by Iraqis, for Iraqis.

Soon after the fall of Baghdad, a delegation of British officials came to visit the cemetery. A maintenance crew had cleared away the rubbish that was obscuring many of the headstones, and a flagpole was installed on which the Union Jack was raised during a memorial. Members of the delegation viewed the few names on the headstones that had not been worn away or vandalized. They included Private W.J. Melton of the Norfolk Regiment, killed at age 22 on Jan. 13, 1916; gunner W. Hart of the Royal Field Artillery, who fell on Jan. 14, 1916; and Private J.W. Cuthbert, Royal Army Service Corp., dead Oct. 20, 1918.

A day after the ceremony, someone broke into the cemetery and pulled down the flagpole.

An Ordeal in Hussein's Blood; Koran Order Put Calligrapher in Conflict with his Beliefs

BAGHDAD - Abbas Baghdadi clearly remembers the day in 1999 when Saddam Hussein's agents gave him the order that would burden him and his faith.

"They came to my office and told me I would write a Koran for our great president," Baghdadi said from behind the desk where he worked as Hussein's official calligrapher. "They didn't tell me I would write it in Saddam's blood."

   So began the clash of Baghdadi's piety and his art during the two years it took to complete the project. Writing in blood is heretical to Islam, an insult to the Prophet Mohammed, who preached that blood, like anything else from the human body, can decompose and is therefore impure.

Celebrated calligrapher Abbas Baghdadi displays his work in his home in the Baghdad suburbs.

At 7 a.m. each day, often for 16 hours at a time, Baghdadi dipped a metal nib into what he was told was a jar of Hussein's blood and painstakingly reproduced the verses of Islam's holy book. He worked under a lamp held together with duct tape, as a security officer sat quietly but menacingly in a nearby chair, a handgun resting on a coffee table for emphasis.

When Baghdadi took breaks for exercise or to visit the mosque across from his small office, he was required to enter the time and destination in a logbook.

"Even then, they followed me everywhere," he said of Hussein's henchmen. "Even when I left to pray."

Committing a sacrilege for Hussein's vanity was the most profound of many slights Baghdadi, 54, suffered as a senior member of the dictator's Bureau of Culture. He is one of the most celebrated calligraphers in a region where the mingling of florid writing and painting is a high art. HIs work is bought and sold for thousands of dollars and displayed in royal courts and salons throughout the Arab world. He has been invited to give lectures and open galleries from Istanbul to the Persian Gulf.

Yet Baghdadi, a gracious, garrulous man who during a recent interview wore a short-sleeve, checked shirt and trousers rolled up just above his ankles, has never ventured beyond Baghdad. Under Hussein, he was on 24-hour call to write up the odd presidential order, thank-you note, or state proclamation.

As he embellished the words of the Koran for the leader, Baghdadi commanded the regime's undivided attention. Every two weeks, someone would arrive with a set of freshly filled vials. His work was delayed at times when the United States launched airstrikes while policing the no-fly zones against Iraq, and Hussein apparently felt compelled to hoard whatever spare blood he had available.

At first, Baghdadi said, he was unaware he was working with anything other than red ink. "But I became suspicious after it kept clotting," he said.

To thin the blood, Baghdadi stealthily added distilled water to the vials when the security officer was preoccupied. He said he sometimes worked for days without sleep, hunched over a tinted glass table that illuminated each page from a fluorescent light below.

Before completing the Koran in 2001, Baghdadi was instructed to add the following clause - in black ink - on the final page: "May God forgive us for writing in blood." Apparently, according to Baghdadi, someone at the palace summoned the courage to educate the dictator about a key point of Islamic law. The Koran was then taken to Hussein, who signed it.

A few weeks later, Baghdadi was whisked to the palace for a brief audience with Hussein. The two men shook hands. "It was over in a minute," Baghdadi said. "That was good, because I was having an anxiety attack."

He never saw Hussein again in person.

Baghdadi's profane work was unveiled at a formal ceremony in 2001; whatever outrage it may have provoked was smothered by the peals of state-run acclamation. The Koran was displayed under glass in a museum of Hussein iconography in the capital - a trove of elaborate gifts, bejeweled weapons, and enormous paintings received by the dictator. It vanished in the looting that gripped Baghdad after the city fell to US forces.

Since scripting Hussein's Koran, Baghdadi has been lecturing and running an impoverished institute for young artists that he formed in the 1970s. He is keen to write another Koran - this time in his favorite black ink made from soot and tree resin - and hopes to qualify for an endowment under a new government.

Sitting in a restaurant that also was looted and burned, with electrical wires dangling from the charred ceiling, the Baghdad native talked about taking up the calligrapher's pen at age 16, at a brother's urging. He said he taught himself the craft with the help of master calligraphers who often invited him into their homes to study.

He showed a visitor "A Short History of Calligraphy," which he wrote 14 years ago and is widely studied. It diagrams Arabic letters with pinhead-sized circles that measure the length of each ascending and descending stroke and every undulating curve.

"There is no greater artistic experience than to write a Koran," he said. "I have written several Korans, and each time I learn something new about the science of its verses, its unique meter and rhyme."

While he is grateful to the United States for removing "the great devil," he said he resents an occupational authority that has yet to restore electricity and other basic services more than two months after the fall of Baghdad.

"Because there is no electricity, I don't have enough light to write," he said. "I have to leave my office by 7 p.m. because the streets are not safe after dark. How can you work like this?"

Baghdadi still can't travel outside Iraq. Essentially grounded under Hussein, he had no use for a passport. With Iraq's former government dissolved and nothing to replace it, he has nowhere to apply for one. Two months ago. he was invited by the governments of Egypt and Syria to open galleries of his work, but with no travel documents he was forced to decline.

"I want nothing more than to see my work displayed in other countries," Baghdadi said. "But I still can't leave."

Rebuilding Iraq; Hope is Flowing Again for Marsh Arabs

QAL'AH SALAH, Iraq - Something strange has surfaced in Iraq's once fertile southern marshlands: water. And much of it comes courtesy of Saddam Hussein, the very man who drained the region in the first place.

"I haven't drunk from the marsh for a decade," said Hashim Saeed Mohammed, dipping his cupped hands in a shimmering tributary. "This is a result of the war and freedom. Thank God for the Americans."

A Marsh Arab drinks from a replenished tributary in Iraq's southern wetlands.

After enduring years of oppression that included a methodical campaign to destroy their ancient habitat, Iraq's so-called Marsh Arabs are rejoicing in one of the great ironies of the US-led invasion of the country: Hussein, in a futile attempt to check the coalition advance on Baghdad, opened the same canals he dammed a decade ago to deprive the region of the river waters that once nourished it.

That has delighted an entire population of the Ma'dan people, as the Marsh Arabs are also known, but it concerns aid workers who were caught flat-footed by Hussein's maneuver. Having spent years appealing to the international community to reverse what the United Nations Environment Program called "one of the world's greatest environmental disasters," marsh specialists say the wetlands' snap revival could do more harm than good.

Encouraged by flooding in the Basra region, some marsh communities farther north are flooding their villages by destroying dikes.

"We're telling them not to do this," said Ali N. Muthana, who is conducting a survey of Iraq's marshlands for The AMAR International Charitable Foundation and confirmed it was the former regime that replenished the marshes. "If they all start flooding at once, it could destroy their agricultural lands. We're in danger of losing control of the situation."

Muthana said that salt deposits have calcified around the dry wetlands and that some reflooded areas already show high levels of salinity. The rising tide also imperils villages and farms built over the past decade in desiccated areas, he said. "It's OK for one group to flood their communities, but if they all do it at once it's a disaster."

That means little to a people rebuilding an economy they cultivated for thousands of years along the Tigris and Euphrates rivers before losing it to a generation of Hussein's tyranny.

The Ma'dan, historically among Iraq's most independent people, have always had brittle relations with the state, and it was no different under Hussein, who began persecuting them once he consolidated power in the early 1970s. Before then, Iraq's marshlands covered about 12,000 square miles, from the southern province of Basra to the cities of Nasiriyah and Kut. According to AMAR, Ma'dan communities stretch from Iraq to central Iran and are estimated to have included nearly a half-million people in the middle of the last century.

At their peak, the marshes produced a bounty of fish, sugarcane, papyrus reeds for paper stock, and livestock for every major city in Iraq. It was a prosperous biosphere, a constellation of villages as isolated from one another as they were from the rest of Iraq.

Villagers live in clusters of mud huts with thatched, arched roofs and navigate from one community to another in dugout canoes. In summer they cool themselves with electric ceiling fans, a rare concession to modernity; in winter they warm their homes by burning cakes of dried cow dung. A village consists of about a hundred people on average - largely extended families - with 50 mud huts or so and just as many water buffalo.

"The presence of the marshes is like air conditioning for the region," said Taleba Taha Radi, a Qal'ah Salah-based anthropologist. "It freshens the air and balances the climate. And it was a pivotal part of the Iraqi economy."

Over the past 10 years, the marshes had been all but extinguished. After his 1991 defeat in Operation Desert Storm and the full-scale rebellion that followed, Hussein intensified his persecution of the Ma'dan into a sustained ethnic cleansing.

Many of the rebel militias opposing the regime found sanctuary among the labyrinthian streams and high papyrus reeds of the marshes. So Hussein ordered the construction of enormous dams to seal the wetlands from the waters of the Tigris and Euphrates. He also deployed thousands of troops to subdue the Ma'dan by conducting mass arrests and bulldozing, bombing, or shelling entire villages. The population of Iraq's Marsh Arabs, depleted by urban migration, has dwindled to an estimated 40,000.

"We were attacked with chemical weapons," said Sayeed Hazem Al Husnawi, a spiritual leader in Hamara, a small, predominantly Shi'ite village in Nasiriyah Province. Husnawi lifts his pant legs to reveal a ribbon of scar tissue around both ankles. "I was hung upside down and had a screwdriver jammed into my leg, but I was fortunate. A lot of our Muslim brothers have been killed . . .without a fair trial."

Hussein is gone, the marshes are percolating back to life, and some Ma'dan are returning to their homes, according to Muthana. In Geir Mathali, the most heavily flooded wetland area, fishermen are bringing in daily hauls.

In the nearby village of Beit Nasrallah, fishermen are casting their nets for the first time in decades. The high salinity levels are of little concern to them. The water tastes fine, they say, and the fish are healthy. Faqhir Yaseem, alongside a gurgling fountainhead riddled with leaping young fish, said: "Just look . . . Next year they'll be fully grown."