The Iraqi interim government under Prime Minister Iyad Allawi was constituted on June 18, 2004, following concerted and coordinated efforts by the United Nations Special Representative to Iraq Lakhdhar Al-Ibrahimi, Iraq's Governing Council (IGC), and the Coalition Provisional Administration (CPA). On June 28, sovereignty was transferred to the interim government by the CPA. As a result, the CPA ceased to exist, the IGC was dissolved, and Mr. Al-Ibrahimi returned to his headquarters in New York. But the mechanism left behind has started to function as a de facto government. Although this government has been in power a little over a month, it has made a sufficient mark on both the internal and external policies of Iraq. The following is an interim progress report: 
The Challenges Facing the Interim Government
From the outset, Allawi has faced almost insurmountable challenges. In addition to daily acts of terrorism directed mainly against police stations, Iraq faces the threats of the unpredictable and often radical Shi'ite cleric Muqtada al-Sadr and his Mahdi Army. There are the Sunnis who feel marginalized in the post-Saddam Iraq and therefore feed into the resistance and even the terrorist movement. There are the Kurds, who remain suspicious about the intentions of the Iraqi Arabs regarding the Kurdish aspirations for autonomy within a federated Iraq, whom he must avoid alienating. Allawi has to perform a balancing act vis-à-vis the multinational forces, primarily the dominant American forces, without being seen as a tool of American policy. He has to demonstrate that Iraq has regained its sovereignty, but at the same time he cannot conceal his dependence on the American forces to keep the situation in the country relatively under control. Most of all he has to deal with a stagnant economy, a dilapidated infrastructure, and a high rate of unemployment which persists because while massive amounts of aid have been committed to Iraq by the U.S. and a variety of other donors, the security situation has prevented the government from embarking upon reconstruction programs and creating new jobs.
Additionally, Allawi is faced with pressure on Iraq's eastern and western frontiers from two authoritarian regimes, Iran and Syria, which have allowed their borders with Iraq to turn into almost open crossing points for Islamists of various degrees of extremism, committed to fighting America on Iraqi soil. These two regimes, while clearly concerned that a democratic culture in Iraq could spill over their borders and cause political ferment and instability, complain vociferously about the absence of an elected government in Baghdad, a form of government which neither of them has had for decades.
All these challenges would represent a tall order for any government, let alone a government whose members face a daily threat of annihilation by car bombs, suicide attacks, and other lethal weapons.
The Policies of Carrot and Stick 
Internally, Allawi has extended a hand of reconciliation to the young Shi'ite cleric Muqtada al-Sadr by lifting the ban imposed by the CPA on the publication of his weekly, Al-Hawza Al-Natiqa, and calling on him to join the political process. He followed the lifting of the ban with the allocation of $6.5 million for the construction of a water sewage facility in Al-Sadr City, which is one of the strongholds of Al-Sadr.  At the same time, he has implemented a process initiated by the CPA in its last days in power of ending the de-Bathification of Iraq and inviting Ba'thists, both military officers and civilian officials who have no blood on their hands, to join the rebuilding of the new Iraq. He has offered to pardon those in the resistance movement who were not involved in acts of violence and who are willing to give up their weapons. He has reaffirmed to the Kurds his government's commitment to a democratic and federated Iraq that would protect Kurdish autonomy achieved following the defeat of Saddam in Kuwait in 1991. National reconciliation has become Allawi's mantra as well as a statement of faith. 
On the other hand, Allawi's government has passed the Law for National Safety, which allows the government to declare emergency laws and curfews in areas affected by violence (Kurdish areas were excluded). He backed up the law with a rapid deployment force connected with Iraq's newly established National Guard to pursue terrorists.  He has threatened terrorists with severe punishment, including capital punishment, which had been outlawed by the CPA. In a meeting with representatives of what were referred to as "resistance" forces, Allawi warned that unless they put down their weapons he will fight them "not only from house to house but from room to room."  Displaying personal courage and demonstrating his sympathy for the victims of violence as well as his defiance of the perpetrators, Allawi has often visited sites where car bombs were detonated. Allawi's willingness to use the stick forcefully has led some of his detractors to claim that, like Saddam, he is a man who lacks democratic impulses.
Improvement in Internal Security
There is growing evidence that despite acts of terrorism, "traditional" criminal activities - thefts, kidnapping, assaults, and many other forms of crimes - are on the decline. The decline in crime rate can be attributed to three factors: first, the number of Iraqi police and national guard on the streets of Baghdad and other major cities has increased and the quality of training has improved; second, the Iraqis appear to be more willing to cooperate with, and provide information to, their national security authorities than to the coalition forces; and third, intelligence gathering services have improved. The second factor in particular is beginning to have its impact on the activities of terrorist groups as the Iraqi population increasingly condemns the random murder of civilians and the destruction of the country's economic assets. 
Allawi's Tour of Arab Countries
After barely a month in office, Dr. Allawi embarked on a visit to several Arab countries, starting with Jordan and following with Egypt, Syria, Lebanon, Saudi Arabia, United Arab Emirates, and Kuwait. There were common themes in his discussions with the leaders of these countries:
- Re-establishing diplomatic relations with Egypt, Saudi Arabia, and Kuwait, severed by Saddam following the invasion of Kuwait in 1991, and with Syria, severed at least a decade earlier.
- Securing Iraqi borders with neighboring countries and stemming the flow of terrorists.
- Trade and bilateral issues.
Apart from the general issues discussed by Allawi and his interlocutors, there were bilateral issues that were raised either by the Iraqi delegation or by its hosts.
In Jordan, his first stop, Allawi's reception was exceptionally warm because of a strong personal friendship that ties Allawi with Jordanian Prime Minister Faisal Akef Al-Fa'iz. As a matter of fact, Allawi's National Accord was the only opposition group to Saddam that was allowed to operate from Jordan.  During the Saddam regime, Jordan imported oil from Iraq at a heavily discounted price as a gesture of generosity by Saddam toward his neighbor which had refused to join the coalition that ousted his army from Kuwait. Jordan has sought to renew this arrangement. Allawi agreed, but the concessionary terms will be less generous than before and the duration more limited. In return, Jordan promised to use its experience in its war against Islamists to help Iraq fight terrorism on its soil. 
In the case of Egypt, Allawi sought, with no apparent success, to obtain a commitment from President Mubarak to join the multinational force in Iraq. The Egyptians sought a commitment from Allawi to reimburse Egyptian workers for the $200 million of losses they incurred as a result of frozen salaries during the campaign in Kuwait. Allawi is not likely to offer something for nothing.
In Syria, Allawi met with President Bashar Al-Assad and agreed to renew diplomatic relations severed in 1981 and to open a new chapter in the relations between the two countries. The two parties signed a number of memoranda of understanding regarding transportation, the sale of Iraqi crude to Syria, and the buying of refined oil products by Iraq. However, the high expectations generated by this visit did not last long. Barely a week after the Allawi-Assad meeting, Syrian Foreign Minister Farouq Al-Shara' questioned the legitimacy of the Iraqi government.  Allawi retorted: "By the standards of legitimacy in the Middle East, the Iraqi government is legitimate."  Earlier on, Allawi denied Syrian claims that Israelis are operating from northern Iraq. An Iraqi daily argued that there are enough Iranian spies in Kurdistan that if there are Israelis present, the Iranian spies would have spotted them, and that the Syrian allegations are intended merely to upset the relationships between the Kurds and the Arabs. 
In Lebanon, the main focus was the role of the Lebanese private sector in revitalizing the trade relations between the two countries and the payments due to Lebanese industrialists and traders for goods delivered under contracts to the previous regime.  Allawi has raised the question of the $500 million in deposits in Lebanese banks by the Saddam regime. It became evident from the joint press conference by Allawi and Lebanese Premier Hariri that the Lebanese are not keen to part with this money any more than the Syrians are with Iraqi deposits in their banks, which are also estimated at $500 million.
In Saudi Arabia he received a commitment of aid in the form of $1 billion, half of it in loans on concessionary terms and the other half for export guarantees.
In the United Arab Emirates, the visit appeared to be of a courtesy nature and the local press had little to report about it.
In Kuwait, the visit was primarily of historical significance because of Iraq's invasion of Kuwait in 1990. Allawi has gone to Kuwait to mend fences as well as perhaps to curb Kuwait's insatiable appetite for compensations from Iraq for the damage caused by Saddam's invasion.
In all of his official visits Dr. Allawi was received in accordance with the rules of the diplomatic protocol, giving further credence to the legitimacy of his government.
Criticism of Allawi's Government
Writing in the Iraqi daily Al-Zaman under the title "Rationalizing the Government's Message," Samir Ubaid finds that the absence of a diplomatic language toward Syria and Iran coupled with heavy handedness internally are far from being a prescription for peace and order. Ubaid writes: "We sincerely call for the rationalization of the interim government's message. The threatening language [toward Iran by two of Allawi's cabinet members]  will not serve the interests of Iraq and will not frighten Iran. On the contrary, it may increase its arrogance… It may also harm the relations with the neighboring countries. These countries have become fed up with the threats and menaces against them by Saddam's buried regime. The threats by the minister of defense to move the battle ground to these counties is very amusing because there is not the least symmetry [of power] between these countries and current Iraq suffering from the melting away of its borders." 
There is also a sustained criticism about the failure of the government to alleviate the severe shortage of power, particularly for the difficult summer months in Baghdad. Above all, the perceived failure of the interim government to establish security and order is on everyone's mind.
On balance, the interim Iraqi government and Allawi in particular can be credited with the following:
- Gaining acceptance for his government both internally and externally, and asserting himself as the Iraqi leader to be reckoned with.
- Backing up the Law for National Safety with a rapid deployment force connected with the National Guard to pursue terrorists. 
- Acting upon a policy of national reconciliation by co-opting various political groupings, including representatives of the Ba'th Party, into the political process.
- Establishing a Supreme Council for Oil and Gas which will oversee the pricing and marketing of Iraqi oil. 
- Mending relations with neighboring countries and re-establishing diplomatic relations that were severed by Saddam Hussein.
However, the interim government will have to pay greater attention to the linkage between economics and terrorism. A high rate of unemployment is a cause of despair for the young, which could turn them into a source of ready recruits for the resistance movement.
* Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.
 Dr. Iyad Hashem Allawi, MD, was born in Baghdad in 1946 to a distinguished Shi'ite family. His father was a physician and his mother was the daughter of Mr. Adil Ussayran, the speaker of the Lebanese parliament, a post held by the Shi'ite community under the constitutional system in Lebanon. He studied medicine at Baghdad University where he became active in the Ba'th Party. After a falling-out with Saddam Hussein, Allawi escaped to England in 1971 where he resided until the fall of the regime in April 2003. While in England, Saddam's agents broke into his house and stabbed him several times, leaving him for dead. He survived the attack and established an opposition group to Saddam, the Iraqi National Accord (Al-Wifaq Al-Watani). Once selected for the post of interim Prime Minister, Allawi moved on many fronts with determination, purposefulness, and personal courage despite the determination by terrorist groups to undermine and even to eliminate him. Most chilling were the words posted on the internet site of arch terrorist Abu Mus'ab Al-Zarqawi, leader of the Islamist movement "Al-Tawheed wal-Jihad" (Monotheism and Jihad). After failing a first attempt to kill Allawi through firing missiles at his home, Zarqawi raged on the internet: "I announce that which will harm you, oh Allawi. If you have survived the missiles of death which have poured demise on your home the quiver, thanks to Allah, remains full with the arrows of death." Al-Sharq Al-Awsat (London), July 15, 2004.
For a more detailed biography of Dr. Allawi, see MEMRI The New Leaders of Iraq (2): Interim Prime Minister Iyad Hashem Allawi and the Interim Government, June 18, 2004, "The New Leaders of Iraq (2): Interim Prime Minister Iyad Hashem Allawi and the Interim Government."
 There are two articles on the subject. The first one by the columnist Nidhal Al-Leithy, "The Iraqi economy and the Fight against Terrorism," Al-Zaman (Iraq), July 13, 2004, and "The Iraqi Prime Minister Adopts a Policy of the Stick and the Carrot," Al-Sharq Al-Awsat (London), July 22, 2004.
 Al-Sabah (Iraq), July 25, 2004.
 Al-Hayat (London), July 15, 2004.
 Al-Sharq Al-Awsat (London), July 15, 2004.
 Al-Sharq Al-Awsat (London), July 13, 2004.
 Al-Sharq Al-Awsat (London), July 24, 2004.
 Al-Shira' (Iraq), July 12, 2004
 Al-Hayat (London), July 20, 2004.
 Baghdad (Iraq), July 25, 2004. Baghdad is the official daily of Al-Wifaq Al-Watani.
 Al-Sharq Al-Awsat (London), July 28, 2004.
 Al-Mu'tamar (Iraq), July 24, 2004.
 Al-Nahar (Lebanon), July 27, 2004
 See MEMRI Iraqi Defense and Interior Ministers Accuse Iran of Terrorism Against Iraq, Threaten Retaliation within Iran, July 20, 2004, " Iraqi Defense and Interior Ministers Accuse Iran of Terrorism Against Iraq, Threaten Retaliation within Iran."
 Al-Zaman (Iraq), July 23, 2004
 Al-Sharq Al-Awsat (London), July 15, 2004.
 Al-Sharq Al-Awsat (London), July 17, 2004.