The Shaikh, the federation and life on the frontline of conflict

It was one of the most remarkable moments in the history of the UAE. Before more than 1,000 people - including four other rulers of the federation and the representatives of two too sick to attend - UAE Vice-President and Prime Minister Shaikh Mohammed unveiled his government's strategy in a speech in Abu Dhabi broadcast live on national television. It combined jokes with unprecedented admissions of public service failings.

Breaking with the Arabian convention of always being publicly polite, Shaikh Mohammed criticised three federal ministries. Despite huge increases in spending on education, the federation's schools were not improving. The Justice Ministry was not delivering timely justice. The Labour Ministry was failing to get to grips with illegal immigration and the imbalance between nationals and foreigners in the workforce. Shaikh Mohammed noted that some UAE homes had more house servants than family members.

Listeners were impressed. Federal ministers seated behind the rulers looked thoughtful. The position of several may have been made untenable.

A UAE cabinet member since the federation was created in 1971, Shaikh Mohammed stepped up as head of government in February last year, after the death of his elder brother, Shaikh Maktoum. Some wondered whether he wanted the job. Almost 15 months later, Shaikh Mohammed has delivered his answer. He is taking a new broom to the institutions of federal government.

The UAE is one of the world's most successful small nations. It has the second largest economy in the Middle East and per capita GDP that places it among the wealthiest countries in the world. Stable, prosperous and tolerant, the federation provides a compelling vision of what the new Gulf might be.

But it should be doing better. Its performance in some areas, particularly in engaging its young people in the labour market, is poor. The dependence on foreign workers is comprehensive.

Shaikh Mohammed says the answer must come at a national rather than a local level. That means improving the effectiveness of federal government, for which there is now a masterplan.

The second big challenge is the UAE's international reputation. The row last year over Dubai Ports World's takeover of six US ports, as part of the acquisition of P&O, showed that Dubai and the UAE had fewer friends in America than supposed. Negotiations over a free trade agreement with the US have focused Washington's attention uncomfortably on issues previously considered to be mainly of domestic concern.

They include conditions experienced by foreign labourers, particularly in construction. This has attracted the interest of US labour unions, which are more influential now that the Democrats are in the majority in the Senate and the House of Representatives. There are suggestions that a minimum wage may be introduced to appease international critics.

A more delicate issue is, what is passing through Dubai's ports? They are the busiest in the region due to transhipment. With international sanctions ratcheting up, goods entering Iran via the UAE are coming under greater scrutiny.

The connection between the UAE and Iran highlights the third issue: the federation's regional position. It punches below its economic weight diplomatically and prefers to keep a low profile in international affairs. But this may no longer be good enough.

The brewing crisis over Iran's nuclear plans threatens the UAE's carefully nurtured neutrality and could place the federation on the frontline of a new Gulf conflict. There are more than 300,000 Iranians living in the federation. At the same time, it is one of the US' most important centres for naval operations. It seems likely it will become harder to square that circle in the months to come.

This is, nevertheless, a good time for the UAE. The pace of federal development has quickened in the 30 m