The referendum on the constitution is dividing Iraqis. Sunni Arabs fear it will destroy the country by breaking it up into cantons. The Shias and Kurds hope it will give birth to a new Iraq in which they will hold power. The US has put intense pressure on negotiators to reach an agreement because it is desperate to prove to ever more sceptical American voters that Iraq is fast progressing towards democracy.

But the mood in Baghdad is determined more by day-to-day considerations of survival than the upcoming referendum or the fresh elections for the National Assembly on 15 December. There is a sense that society is disintegrating. The better off districts of the capital have become ghost towns. Real estate prices have collapsed. ‘First the rich left, then the better off, but now even people who earn $300 to $400 a month are getting out and going to Jordan or Syria,’ a wealthy businessman living in Amman for fear of kidnappers told me.

It is easy to see why they leave. Rida Muhammad Jawad owns a bureau de change in Baghdad. At the beginning of the new academic year he worried that his two sons, Ali and Musa, would be abducted on their way to or from their primary school. ‘People think I am a rich man because I have an exchange shop,’ he said. ‘I am thinking of leaving Iraq because there is no security. I am afraid for my children and then myself.’

Everybody’s nerves are on edge. Nobody waits around to see if an approaching car contains a suicide bomber. The Interior Ministry is currently suing the Foreign Ministry for the cost of four blue and white police cars shot to pieces by suspicious Foreign Ministry guards. Suicide bombers have used stolen police cars in the past. American Humvees carry placards in Arabic and English warning drivers to stay 100 metres away or they may open fire. They don’t explain how anybody can keep their distance in the crowded traffic of central Baghdad.

Iraqis spend their days watching for hidden dangers. As I came in from the airport on the main highway I had my eye on a car near me that was about fifty yards from a police car. A policeman obviously thought it was too close and opened fire. We couldn’t see if he was shooting at the civilian car or in the air. We turned swiftly off the highway onto another road hoping it would be safer. But here there was another problem: a passing convoy of police commandos had heard the shooting. Once again we had to dodge down side streets: the notoriously trigger-happy commandos, thinking somebody was shooting at them, were about to open fire.

I no longer go out to restaurants. I used to go to one called The White Palace near the German Embassy where I could drive into a yard behind the building and walk in the back door of the restaurant. But I heard that a journalist from al-Arabiya Television had been shot and wounded there. I had also met the former head waiter working in a hotel in Kurdistan, where, he told me, he felt a whole lot safer. On the other side of the Tigris in the al-Mansur district there was another traditional Iraqi restaurant, called the Sumad, where I used to eat. I went there because I had some friends who owned an antique shop nearby selling everything from carpets to old photographs of Baghdad. Today the shop is closed and my friends have moved to Jordan. The reason is that a few months ago a police car drew up at the door and some security men bundled one of the owners into the back. Then, as they drove round the block, they told him that unless he could give them a lot of money fast they intended to accuse him of illegally selling looted antiquities. He handed over several thousand dollars in cash, closed his shop and fled to Amman the same night.

Eighteen months ago it was possible for a Westerner to walk along the street in Baghdad. These days, Westerners, other than US troops or heavily armed security men, are so rare that heads turn when they appear. To avoid attracting attention I sit in the back of the car with dark curtains and an Arabic newspaper to hold up to conceal my face. In the hotel where I stay, a Lebanese American businessman with a suite on the same floor has a dozen gunmen working in four-man shifts sitting permanently outside his door, even though the hotel is surrounded by walls of massive concrete blocks and every entry point is watched by a small army of 65 men. At first I resented the gunmen nervously puffing cigarettes in the corridor outside my door but I don’t anymore: the power surges as the hotel’s generators go on and off have damaged the lift machinery and more and more often I get stuck between floors. When I shout for help the gunmen pry open the doors and rescue me.

Iraqis often say that the government is bad but more often they say that there is no government, that the state doesn’t really exist except as a mechanism for extorting money from the people. This is not necessarily an exaggeration. A friend who wanted to get a new number plate sat in a queue of cars for five hours without moving. Then he went home, made a telephone call to the government office involved, agreed to pay $100 and the new plates were delivered to his office the next day. ‘The Iraqis are suffering from corruption, terrorism and occupation,’ says Mahmoud Othman, a veteran Kurdish politician. ‘The corruption is just as dangerous as the terrorism.’

With corruption at this level the state becomes dysfunctional. It is not just that commissions and backhanders are paid: whole budgets disappear. ‘What is happening to the money?’ Hussein Kubba, a businessman, asks, pointing out that Iraqi crude is selling at $50 a barrel. This means monthly oil revenues of more than $2 billion. But there are no signs of construction in Baghdad. It took Saddam Hussein six months to restore electricity supplies after power stations were hit by bombs and missiles in the First Gulf War. Thirty months after the Second Gulf War, Baghdad is getting two hours of electricity for every four hours of blackout. In their present sour mood, Iraqis on the street have no doubt about what has happened. ‘The government claims that they have projects to increase the supply of electricity, but in fact the money ends up in their pockets,’ said Haider Ali, a student.

Why is the government so weak? It is, after all, elected by the Kurds and the Shias, who make up 80 per cent of the Iraqi population. But it has inherited the problems of the old Iraqi opposition. The Kurds were always at the heart of it. They were keen to get as many Arab opponents of Saddam Hussein on board as possible. But it was almost impossible for the non-Kurdish opposition to build a base inside Iraq in the face of a regime as ferocious as Saddam’s. They became reliant on foreign governments and intelligence services from Washington to London to Tehran. This did not really change when they got back to Baghdad. The Kurdish ministers, with 12 years’ experience of running their enclave in the north, are far and away the most effective part of the administration. The rest mostly live in a fantasy world, never leaving the Green Zone except to go abroad, which they do quite frequently. The loyalty of these leaders to their foreign sponsors is often more evident than their feelings for their fellow Iraqis. At the US Embassy reception on 4 July, Iraqi leaders were fulsome in their praise for the Americans who fought and died in Iraq; but, as foreign diplomats didn’t fail to point out, they hadn’t a word to say about the tens of thousands of Iraqi dead.

There is a less obvious reason why the Iraqi state is so feeble. The US is often condemned by critics of the war for having had no plan for Iraq post-Saddam. But from the beginning it was clear that Washington wanted a weak state. The army was to be small. This was in keeping with the American policy that had welcomed the break-up of the Soviet Union and Yugoslavia. Corruption isn’t the only reason the Iraqi army is so poorly equipped. The US military has been averse to giving it heavy weapons because it fears that one day they will be turned on American troops.

The US army seems to have a greater sense of its own weakness in Iraq than the White House. The generals at least have understood that foreign occupation is never popular and naturally provokes armed resistance. The arrogance of American policy has dissipated. At the time of the invasion, the US had only limited interest in cultivating Iraqis in any of the three main communities. Even the Kurds were told to keep quiet because the US 4th Infantry Division was planning to invade Iraq from the north along with 40,000 Turkish troops. The Turkish parliament turned the plan down. The US was forced to ally itself with the Kurds. But it went on ignoring the Shias. Only in 2004, as the seriousness of the Sunni insurrection became clear, did Washington realise that it could not hold Iraq unless it had Shia support. But this Shia-Kurdish alliance has further alienated the Sunnis, whose only real card is armed resistance.

It is difficult to find many optimists in Baghdad. ‘If the constitution passes then the Sunnis will not accept it and if it fails the Kurds and the Shias will be very angry,’ said Nabil, a driver waiting in a queue outside a petrol station near my hotel. Others have a more apocalyptic view. Hussein Kubba sees the federal constitution as a recipe ‘for the break-up of Iraq and endless bloodshed: the south will be a Shia mini-state influenced by Iran and there will be Taliban-like control over the Sunni west. Baghdad will be a no man’s land. Whatever happens with the referendum the constitution will never have legitimacy.’

It is a bizarre moment for Iraqis to vote on the rules of the system under which they will supposedly live for the foreseeable future. Agreement on a constitution implies a degree of consensus on the type of government the people want and the laws they will obey. But in Iraq not only do members of the government seldom venture outside the heavily fortified Green Zone (when they do they take dozens of bodyguards), but Shia and Sunni Arabs cannot visit each other’s heartlands in western or southern Iraq without taking the risk of being murdered. An Arab, Sunni or Shia, will be lucky to find a hotel room in a Kurdish city like Arbil or Sulaimaniyah, and even then will be viewed with suspicion.

A constitution also assumes a stable balance of power. But the relationship between the three main Iraqi communities and the foreign occupiers is not stable. The Kurds are at the peak of their power. They captured the oil city of Kirkuk and intend to keep it. They want to freeze their gains under the new constitution. They also want a federal system in Kurdish regions that will allow a degree of autonomy close to independence and control of the new oilfields.

The Shias, who are also gaining in power, are to acquire a Shia canton in the south. They want Islam to play a role in all legislation and its implementation. Through the Interior Ministry they control much of the police and the paramilitary police commandos. They showed in the January election that they have a decisive majority at the polls.

The Sunnis are in theory the big losers since the overthrow of Saddam Hussein. The old regime drew its main strength from the rural Sunni towns and villages. But since 2003 they have shown that they can destabilise Iraq even more effectively than the Kurds were able to do for half a century. The US may have 140,000 troops in Iraq, but Sunni districts in south and west Baghdad are under Sunni control.

The US, for its part, would obviously like to cut its losses but does not know how to. In midsummer the US military said that just three battalions of the new Iraqi army were ready to fight without US support. By the end of September the US commander in Iraq, General George Casey, admitted that the number was down to one. American military briefers still take the stand in the Convention Centre in the Green Zone to claim, as they have done for more than two years, that they have the insurgents on the run. The Convention Centre also houses the Iraqi National Assembly; and a better guide to military reality in Baghdad is that every few months an additional line of razor wire or sandbagged fortifications – the lines now number seven – is erected to protect the Centre.

Whoever is in charge of protecting the Green Zone has probably got it right. The war against the Americans and between Sunnis and Shias is going to escalate. There is no sign yet of any reconciliation between the old regime and the new. Hatred is deeper than ever. I recently went to a meeting of nearly a thousand former Iraqi army officers and tribal leaders in a large, heavily guarded hall on the banks of the Tigris. It was called by General Wafiq al-Sammarai, a head of Iraqi military intelligence under Saddam Hussein who fled Baghdad in 1994 to join the opposition. He is now military adviser to President Jalal Talabani.

As reconciliation meetings go it was not a great success. General al-Sammarai called for support for the government and the elimination of foreign terrorists. No sooner had he finished than General Salam Hussein Ali, sitting in the audience, rose to his feet: there was ‘no security, no electricity, no clean water and no government’, he thundered. He wanted the old Iraqi army back in its green uniforms.

Other officers, making it clear that they sympathised with the resistance, denounced the way Iraq was being run. ‘They were fools to break up our great army and form an army of thieves and criminals,’ one of them said. ‘They are traitors,’ muttered another. Claims that Iraq had become a democracy were brushed aside: the government inside the Green Zone had no idea of the real condition of the country and ignored the grievances of the people.

General al-Sammarai looked aghast as things seemed to be getting out of hand. At one moment he said, ‘This is chaos,’ though later he apologised and said it was democracy. Most of the officers were probably Sunni but many were Shia. Both were deeply hostile to the occupation. General al-Sammarai promised there would be no attacks by the US army on the Sunni cities of central Iraq but the audience looked dubious. One officer demanded that he stop using the American word ‘general’ and use the Arabic word lewa’a instead.

Everybody was keen to say that Sunnis, Shias and Kurds were all Iraqis, with no difference between them. But Sunnis, who claimed to be non-sectarian, then went on to say they considered the Shias who now control the powerful Interior Ministry to be Iranians rather than Iraqis.

Sheikh Ahmed al-Sammarai, the imam of the Sunni mosque of the Umm al-Qura, the headquarters of the influential Muslim Scholars Association, called for Sunni and Shia solidarity. But then he said the Sunnis were being persecuted by Shias all over Iraq. He had just identified the body of his own bodyguard. He had also spoken to a Sunni from Fallujah who was arrested by the police and tortured. The imam claimed that the police had said: ‘For every Shia killed in Fallujah or Ramadi, a Sunni will be killed in Baghdad.’

7 October

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