We are now fighting a war intelligently in Iraq. The only problem is, it's the last war, not the present one. The United States has gambled all its efforts on a troop surge that tackles the conflict that defined Iraq from 2003 to 2005 -- the insurgency -- rather than the civil war raging across the country. Worse, in trying to solve yesterday's problem we are exacerbating today's.

In Baghdad, the Shiite militias have melted away. Almost all U.S. military operations are now directed against Sunni insurgents. If those are successful, the picture could look less violent in six months, but it will be a dangerous stasis. A senior U.S. military officer, who is not allowed to speak on the record about these matters, said to me, "If we continue down the path we're on, the Sunnis in Iraq will throw their lot behind al-Qaeda, and the Sunni majority in the Arab world will believe that we helped in the killing and cleansing of their brethren in Iraq. That's not a good outcome for the security of the American people."

We don't intend to side with anyone. We're trying to be evenhanded and to build a single, democratic nation. But this attempt at neutrality is collapsing in Iraq's bloody sectarian reality. Last week's uproar{vbar}http://www.washingtonpost.com/wp-dyn/content/article/2007/02/20/AR2007022000092.html over allegations{vbar}http://www.washingtonpost.com/wp-dyn/content/article/2007/02/21/AR2007022100225.html that Shiite policemen in Baghdad had raped a 20-year-old Sunni woman vividly illustrates how trust between the two communities has been shattered. Prime Minister Nouri al-Maliki, a Shiite, first ordered an investigation, then 12 hours later declared the woman a liar, freed and rewarded the alleged rapists and later fired a Sunni official who had called for an unbiased investigation. Meanwhile, we're stuck in the middle, promising to uncover the truth while both sides are convinced we've betrayed them. This is the definition of a no-win strategy.

The United States needs to find fresh approaches that won't feed the sectarian dynamic and will address the needs of ordinary Iraqis, not the political elites jockeying for power. Most important, we need to find a strategy whose costs are sustainable. Militarily this means drawing down our forces to around 60,000 and concentrating on al-Qaeda in Anbar province. The surge we should be pushing is a political one and, even more critically, an economic one.

An economic surge is long overdue. One of the less-remarked-upon blunders of the Coalition Provisional Authority was that -- consumed by free-market ideology -- it shut down all of Iraq's state-owned enterprises. That crippled the bulk of Iraq's non-oil economy, threw hundreds of thousands of workers into the streets and further alienated Sunnis, who were the country's managerial class. The economic effects of this decision have been seismic. For example, Iraq's agricultural productivity has plummeted because fertilizer plants were closed. Unemployment in non-Kurdish Iraq remains close to 50 percent, which helps explain why so many young men are joining gangs, militias and insurgent groups. For the moment at least, democracy in Iraq has sharpened the country's divisions. Capitalism and commerce can make them less relevant. That is the lesson of conflict-ridden countries from Northern Ireland to Mozambique to Vietnam.

Paul Brinkley, a talented deputy undersecretary of defense, is trying to get the bulk of these state-owned factories up and running. He's already restarted a bus factory in Iskandariyah, south of Baghdad, and the experience has been telling. Hundreds of workers still in the area showed up for jobs, and the machines are humming. There have been no attacks on the factory. "The insurgents attack people working for the police, army or the Americans. They do not want to alienate locals trying to make ends meet," said one official working on the project.

Of the original 193 state enterprises, 143 could be restarted soon, Brinkley says. Managers and workers are desperate to get jobs. The problem is money. Brinkley points out that his next target, a ceramics factory in Ramadi, is just waiting for two generators before it can reopen. They cost $1 million each. But funds for this purpose are hard to find. Washington has pledged more than $18 billion for "reconstruction" in Iraq but will not appropriate a cent to start up state-owned Iraqi companies. The Iraqi government has billions in oil revenue but is so dysfunctional that it cannot move a new project through the system. So the factory is idle. A major global consulting firm has reviewed Iraq's state-owned enterprises and estimated that it would cost $100 million to restart all of them and employ more than 150,000 Iraqis. That's as much money as the American military will spend in Iraq in the next 12 hours.

The writer is editor of Newsweek International. He co-hosts, with The Post's David Ignatius, PostGlobal, an online discussion of international issues at http://blog.washingtonpost.com/postglobal. His e-mail address is comments@fareedzakaria.com.