National Agenda : Shrinking Fortunes in Iraq : Three years of sanctions have rewired society and devalued the dinar. Many lost out; a few made out.

The dance floor of the Palestine Hotel’s main ballroom was packed as Iraqi women dripping with sequins and gold jewelry swayed to the rhythms of the country’s hottest pop group with petty traders and even some farmers in new, imported tailored suits. Arabic and American rock, amplified through a state-of-the-art sound system, blasted until well after 3 a.m.

Iraqi beer and imported Scotch flowed like water, and customers pulled out bricks of 25-dinar bank notes to pay tabs that soared into the thousands, all under the watchful eyes of a towering black-and-white portrait of Iraqi President Saddam Hussein.

Meanwhile, outside in the parking lot, a few young boys from what were once comfortably situated families were begging for money to buy food.

It was the Palestine Hotel’s “Evening Family Party,” admission 200 dinars--small change for Iraq’s nouveau riche but half a month’s salary for the country’s million or so newly poor civil servants and a veritable fortune for what was once a solid middle-class of Iraqi professors, artists and intellectuals now on the brink of economic ruin.

The bizarre Thursday night scene in a nation struggling for survival after nearly three years of harsh U.N. trade sanctions was more than a mere peek inside one of the most secretive and now twisted societies on the globe.

It was a powerful illustration of how deeply the sanctions and Hussein’s efforts to survive them have rewired the very fabric of Iraqi society.

Long ranked among the world’s richest, oldest, and most resourceful cultures, Iraq and its 18 million people stand today as a case study of the social impact of economic isolation. At a time when the United Nations and Washington increasingly are turning to economic embargoes and trade sanctions to contain renegade regimes, it shows how such actions can hurt a people far more deeply than the leaders whose actions invited international sanction.

Nearly three years after his invasion and occupation of neighboring Kuwait set the stage for the devastation of Operation Desert Storm, Hussein appears stronger than ever--not despite the sanctions, many Iraqis claim, but in large part because of them.

The sanctions have been “a blessing in disguise,” forcing the Iraqi regime to reorganize its economy toward self-sufficiency, Hussein’s minister of information and culture, Hamid Youssef Hammadi, told The Times in an interview.

But he also conceded that there has been a severe impact on Iraqi society. Crime, he said, is up as much as 40%. At a time when a single piece of furniture costs a civil servant more than two years’ salary, many young men and women have been forced to postpone marriage. And, despite his assertion that “we are coping,” the minister added that he could not estimate how much longer the nation can last before it explodes from within.

“Of course, life is different than it was before 1990. That’s for sure,” he said. “But you see, it is the kind of difficulty that came suddenly for a prosperous country. And now it’s three years. In the first year, people didn’t bother. The second year was the most difficult. Now, the third year, people are coping, although some of them find it difficult.”

Hammadi admitted that it is the one class that traditionally brings political change in society that is finding it most difficult to cope--the intellectual middle class. Once the Iraqi dictator’s most serious potential threat from within, that group essentially no longer exists, having been wiped out by an annual hyper-inflation rate nearing 10,000%. These people have been forced to sell off their possessions, scrape for each meal and, in some cases, quit their jobs because transportation costs far outstripped their salary.

The Iraqi regime has further strengthened its base by maintaining an efficient, though costly, food-rationing system that covers up to 60% of the basic needs of its people but simultaneously increases their dependence on the regime.

To keep the food flowing, Hussein’s government has been forced to pay extortionist prices to the once-poor farming class and to a previously insignificant class of petty traders, who have become overnight millionaires by arranging legal and illegal import deals. These newly powerful families actually would prefer to see the sanctions--and the regime--remain in place forever.

All the regime has to do to finance this sanctions-bound nightmare of a national economy is to print more money--billions and billions of new dinars, so worthless that one-dinar coins officially worth $3.33 apiece just three years ago are now sold for pennies per kilogram to metal workers who melt them down to make keys.

But such creative uses of a currency that is now worth about one U.S. cent per dinar is just one of the many examples of the irrational that abound in Baghdad’s cultural and economic isolation.

A gallon of gasoline, for example, now costs the equivalent of a tenth of a cent.

Expressed in dinars, the price of a pound of sugar was one-fourth the price of a gallon of gasoline three years ago; today the sugar costs 160 times as much. The average civil servant’s monthly salary, which would have bought 220 pounds of lamb or 600 cans of Pepsi-Cola before the invasion of Kuwait, will now buy a little under 3 pounds of lamb, or seven cans of the soft drink.

The typical government employee would exhaust an entire month’s wage on a single can of powdered milk and a pair of shoes today. Few eat meat more than a few times a month, and even fewer eat sweets. They can’t. Under Hussein’s decrees to conserve sugar, it’s illegal to buy candy, sell a chocolate bar or even bake a cake.

The incongruities of everyday life are striking in what was a proud and wealthy land--sitting atop a claimed 112 billion barrels of oil reserves barred from international markets since August, 1990--and rooted in the ancient city of Babylon. Consider these facts, gathered during a recent trip to the Iraqi capital:

* An illiterate dirt farmer, now among the newly rich class that has been vastly overcharging the government for the wheat and barley that drives the regime’s food-ration system, dumps nearly a million dinars in bank notes onto the floor of a used-car dealer’s office to buy a 1990 Mercury Cougar. It takes the staff two hours to count all the notes, which would pay the salaries of 167 civil servants for a full year.

* A celebrated university professor now survives only by working for 100 dinars a night outside a swanky new club, where he moonlights washing the luxury cars of college dropouts--former students of his who abandoned their education for the fortunes they now make buying and selling the smuggled goods and spare parts that are banned by the U.N. trade sanctions.

* A family of 12 is living in a house bare of furniture and window glass near a rebuilt factory used by the government as a showpiece of postwar reconstruction. The family still cannot afford the $80 it would cost to replace the 24 windows blown out of their house when American cruise missiles destroyed the plant.

* A government employee angrily shakes his head as he explains that day laborers are earning three times his monthly salary to build a new regime showpiece--a double-decker suspension bridge over the Tigris River that will consume thousands of tons of cement at a time when the government says it cannot afford to build new housing for its people.

Then there is Salah Fawzi Ali, the organizer of the Palestine Hotel’s “Evening Family Party,” who says the sanctions-fueled economic crisis has spawned a culture of corruption so deeply ingrained that he insisted his newborn son be delivered at home. Doctors at most private clinics, he explains, now routinely administer Valium to women in labor, thereby forcing costly Cesarean operations that will augment the doctors’ meager incomes.

At 29, Ali is an accomplished concert violinist, trained by a Hungarian master in Budapest. He was one of Iraq’s brightest young musicians, a star soloist in the Iraqi Symphony Orchestra. But today, he has turned in desperation to promoting parties that cater to the nouveau riche .

“I quit the symphony for a couple reasons,” Ali explained in fluent English. “First, of course, I couldn’t afford it. My monthly salary was 500 dinars, and taxis alone, to and from work, cost 900 dinars. But it’s also the atmosphere here. For classical music, you need a very special atmosphere. You shouldn’t have anything else to worry about. You should have a clear mind. And these are difficult times.”

Ali also organizes the bands for his parties and keeps their equipment running. How can he maintain sophisticated electronic instruments at a time when all spare parts are banned for import under the U.N. sanctions regime? Ali laughed and winked.

“I don’t know. We just do it,” he said. “Listen, anything you want--and I mean anything--nothing can stop you from getting it if you have the money.”

His secret to survival, he said, is “swim with the wave. Too far ahead or behind, and you sink.”

But the new life is clearly taking a toll on the young musician turned promoter.

“I tried almost everything, but it’s not in me,” Ali finally confessed, tears welling up in his eyes. “I want something, someone, who wants only music from me. I have all of this music inside me, but I feel nobody wants it now.

“This is, I think, the hardest part of these times. It is the emptiness of it all.”