Restless Egypt Seeks to Adjust to New Era : Mideast: Discontent abounds despite moves toward greater democracy. And Muslim militants inspire fear.

The 43rd anniversary of the revolution that brought Gamal Abdel Nasser to power and changed the face of Egypt passed quietly the other Sunday, marked by President Hosni Mubarak’s laudatory speech but otherwise little noted in this city’s teeming streets.

Josef Shaheen, an internationally acclaimed film director, was busy working on a new script, though a good part of his time these days is spent defending his creative voice from government censors and Islamic militants. When extremists expressed displeasure with his latest movie, “The Emigrant,” an allegorical portrayal of the biblical Joseph and his sojourn in Egypt, he hired a bodyguard. The film was briefly banned by the government, as was his most recent documentary, in which Egyptians showed little enthusiasm for their country’s participation in the Persian Gulf War.

“For the moment, I still take creative risks,” he said. “But you know what? I don’t give a damn. If they want to put me in jail, I will go to jail. . . . What bothers me most, though, is that we are living in an age of mediocrity, not just here but throughout the world. I want to look up to something, and I can’t find anything worth looking up to.”

Yusuf Badry, a militant sheik and religious scholar, was poring over stacks of documentation--material that led to an extraordinary order that a Muslim professor whose writings insulted Islam, the judge said, must separate from his Muslim wife. The couple fled Egypt for a “rest” in Europe.

“We have lost our way,” the sheik said. “Women do not dress as Muslims. You see men and women going together with no social rules, as if we lived in a jungle. Yet these bad times will be replaced by victorious ones and Islam will rise. A godly promise in the holy Koran assures us this will be true.”

This is Egypt’s summer of discontent. Voices of dissent and expressions of dissatisfaction are everywhere. Two million Egyptians are unemployed, and college graduates must wait four or five years for $35-a-month government jobs. The privatization of the economy has turned into a slow and painful process. The gap between super-rich and super-poor is growing. Militant Muslims are espousing a vision of the future that frightens most Egyptians.

And President Mubarak, 67, now in his third term and showing every sign of being a president for life, is moving, at best timidly, toward granting the individual liberties inherent in democracy. Critics complain that he has sidestepped Egypt’s traditional role as the leader of the Arab world.

Nasser electrified Egypt for 18 years with his vision of a great Arab union stretching across the Middle East and with his passion for sovereignty, which led to the nationalization of the Suez Canal in 1956. Then Anwar Sadat got back the last of the Israeli-occupied Egyptian land and made peace with Israel in 1979. And now Mubarak, his policies focused inward, is promising stability and economic repairs. It is a transition into a quieter, less dramatic era that Egyptians have never felt entirely comfortable with.

Although Egypt’s 60 million people still face daunting economic hardships, their country’s crumbling infrastructure and stagnant economy are being transformed under Mubarak. The number of phone lines has increased from 500,000 to 4 million in the past decade, electrical output has risen fourfold, the mileage of paved roads has doubled, and the world’s largest sewer system is being constructed in Cairo.

“All this is important and in time will create jobs and a healthier business environment,” an Egyptian newspaper editor said, “but my concern remains that society is exclusionary--too many people are cut out of the democratic process, and Mubarak seems to understand only the economic aspects of democracy, not the political ones.”

To a large extent, Mubarak has staked his future on selling himself as the Arab leader who confronted, and triumphed over, Islamic extremism. After initially moving cautiously against the militants, his government has responded to the threat with arrests and police raids that have brought condemnation from human-rights organizations. Nearly 800 people--mostly young militants and police officers--have been killed in the three-year conflict, which the government has succeeded in generally isolating to a region 200 miles south of Cairo.

“These terrorist acts are against the nature of our society, and they will end,” said Nabil Osman, director of the State Information Service. “Any violence will be met with the harshest possible reaction.”

Last month the government stunned Egyptians by arresting, along with 18 members of the banned Muslim Brotherhood, Sheik Sayed Askar, the influential director of Al Azhar University in Cairo. The 1,000-year-old university is widely seen as the most influential institution in the Islamic world and had been considered off limits by both the Sadat and Mubarak governments.

Ironically it was Nasser, the Arabs’ great hero, who recognized the potentially disruptive force of organized religion and who moved ruthlessly against it. He arrested and had executed countless members of the Muslim Brotherhood and undermined the sheiks’ strength at Al Azhar by secularizing the university and introducing non-religious courses.

Sadat, who held the unpopular view that church and state should be separate, freed Nasser’s prisoners and encouraged the growth of fundamentalism as a counterbalance to the political left. When Sadat was perceived as having strayed too far from Islam in 1981, he was assassinated by a group of fundamentalist soldiers.

In Egypt, as well as in other Middle Eastern countries, militant Islam has become the religion of survival--the place people turn when they feel abandoned by the failed promises of all the “isms” their leaders have tried unsuccessfully to graft on to society: communism, socialism, pluralism, Arabism.

Mubarak believes he can diminish the appeal of religious militancy by cracking down on the extremists while elevating the hopes and living standards of the Egyptian majority, who are by nature a moderate lot, a senior Egyptian official said.

It is a tall order. Though its foreign policy has changed from bold to steady under Mubarak, and peace between Israel and the Arabs is considered a done deal here, Egypt retains its significance, particularly to Washington, as a country that can influence Middle East policy.

Egyptian officials bristle when asked if recent events have diminished the importance of Egypt’s role.

“Questions like this,” said a senior official in the Foreign Ministry, “reflect a very narrow Western perspective, in fact, an Israeli perspective, really. We have been here for 5,000 years, long before you started worrying about communism. We have always had a role to play, and that has not changed just because there is no more Berlin Wall, no more war with Israel.”