The U.S. and Iraq will work together next year to shift Iraqi resources from unproductive subsidies to productive uses that enable Iraqis to earn livelihoods.

I don't believe that military intervention is always the right approach. What we need is a comprehensive strategy, one that advances democratization, economic reforms and equal rights for women.

Americans have eliminated Iran's worst enemies, the Taliban in Afghanistan and Saddam [Hussein]. I occasionally threatened my Iranian counterpart in Kabul that one day I would send him a big bill for what we did. But, seriously, Iran is pursuing a dual strategy in Iraq. On the one hand, the Iranians, after decades of hostility, are now interested in good relations. On the other hand, they want to keep the country weak and dominate the region.

Besides, many Islamic movements will change as soon as they gain political responsibility. I'm not at all pessimistic in this regard. Just think of Turkey, where the Islamists are now behaving like a sort of Christian Democratic party in Europe.

The terrorists want civil war. Al-Qaida is attacking Shiites. The Shiite militias are taking revenge on the Sunnis. And the Sunnis are become more extremist, with some joining al-Qaida.

We're dealing with such enormous problems today that we have no other choice but to work together. If Iraq fails, if a religious civil war breaks out and the neighboring states are drawn into this conflict, if the Kurds declare independence and al-Qaida takes over an entire province - that's when the consequences will be dramatic.

I consider the modernization of the Middle East the central challenge of our time. This region behaves as if it were disturbed, if you'll excuse the clinical expression.