Since the days of Sinbad the Sailor, merchant ships have brought goods up that Shatt al Arab waterway to the inland port of Basra.

This ancient city, with its dark, sweet-smelling bazaars, was for centuries an important stop on the East-West trade route.

Today, however, the ships that put into Basra are no longer laden with tea, spices and silk bound for the shops of Armsterdam and London.

Instead, the vessels unload billions of dollars worth of modern machinery and construction equipment that will be used to transform Iraq's future.

Iraq, in contrast to Iran and the other Persian Gulf states that have struck it rich on oil, is spending its billions cautiously.

Instead of joining the Gulf states in a mad race to build unneeded international airports, Iraq has been buying hundreds of new red British Leyland buses.

Instead of embarking on an effort like Iran's to become a major industrial power overnight. Iraq has been building up its agricultural base by purchasing new air-conditioned hen houses.

"We are now self-sufficient in eggs," beams a top Iraqi.

Iraqi officials are not unmindful of the need to industrialize. It is just that they seem determined to develop new industries at a rate their country can reasonably absorb.

Thus, here at Basra, Iraq's only major port, no mountains of imported machinery sit rusting away on the docks.

A Honeywell computer keeps track of the materials arriving aboard each freighter, and trains or trucks quickly haul the imported equipment off to construction sites.

The more conservative pace of change in Iraq has given less of a boom-town atmosphere to Baghdad and Basra than to the capitals and ports of other oil countries.

While new buildings are springing up in Baghdad, the ancient city's stately old Eucalyptus trees do not yet have to cope with the grey pall of pollution that a massive construction program has cast over Tehran.

Nor have those other symbols of development - Hilton and Inter-Continental Hotels with their $100-a-night rooms - yet made it to Iraq.

Here in Basra, the $10-a-night Shatt Arab Hotel - a shabby relic of the old British colonial days - remains the best hotel in town.

But Basra, which is destined to be the center of Iraqs industrialization effort, is growing. Its population has swelled by more than 70 per cent, to more than a half million, since the oil boom began in 1973.

Outside Basra, construction cranes poke up above the flatlands marking a start on the petrochemical, refining, stell, cement and paper plants that will play a major role in shaping Iraq's economic future.

The largest of the facilities currently under construction is the $1.1 billion petrochemical plant being built at Zubair, near the Rumalia oil fields, in the southern desert.

The plant, which is being erected by a consortium led by West Germany's Thyssen and America's C.E. Lummus engineering companies, will employ more than 2,000 workers when it goes into operation in the 1980's.

Like most Iraqi projects, it reflects Baghdad's step-by-step aproach to development.

"We expect to develop a local market to use petrochemicals in housing, consumer goods, and irrigation pipe first, then to compete against the major oil companies for markets in the less developed countries," says Sabah Tuaima, the British-educated Iraqi engineer.

The Iraqi government is also determined to make the most of its other resources besides oil.

North of Basra, Japan's Mitsubishi firm is expanding an unusual paper mill that uses the giant reeds found in the marshes between the Tigris and Euphrates rivers instead of wood pulp.

"Our plan is to use all our natural resources," says Abdullah Khasahab, the American-educated president of the University of Basra. "You don't want to depend on just one thing."

But the main focus of Iraq's development efforts continues to be on the country's traditional strength - agriculture.

Turkish, Yugoslav and Pakistani firms are completing work on a vast program of irrigation and reclamation projects designed to provide Iraq with additional thousands of square miles of rich farm land.

Iraqi cattle ranchers have been encouraged to import new breeding stock - including 350 pregnant Holstein heifers from Oklahoma - and emphasis is also being placed on expanding Iraq's sizable sheep population.

Baghdad's efforts to bring 20th century technology to its farmers produces some picturesque anomalies.

At the Wahida state farm outside Baghdad, an old woman wearing an abba - the ancient black peasant dress - appears strangely out of place among the automated chicken feeders.

In the southern desert, the Bedouin tribesmen have traded in their camels, and herd their sheep from Toyota pickup trucks.

But strange as it may seem in a land noted for repressing its own citizens, International Monetary Fund experts say Baghdad has one of the Third World's best records for sharing the wealth among its populace.

Through an elaborate and occasionally self-defeating system of price controls and subsidies, Baghdad has let billions of dollars in oil earnings trickle down to the masses.

State-run grocery stores sell lamb, tomatoes and melons at the lowest prices in the Middle East.

"In general, their price controls work," says one international economic expert. "That's largely because they jail violators."

Subsidized housing projects - often tied directly to state-run factories, textile mills or farming cooperatives - dot the countryside.

Peasants can ride for hours for the equivalent of 20 cents on government-subsidized buses and woodpaneled jitneys.

Medical care, while still primitive by American standards, is available free of charge or for a nominal fee - and is fast reducing what two decades ago was one of the world's highest infant mortality rates.

The government has also installed thousands of miles of high-voltage power lines, bringing electricity to even the smallest Iraqi villages.

And with the rrival of electricity, television has not been far behind. The government has made sure that the open-air tea rooms in even remote Iraqi villages have television sets.

While most Iraqis-seem to favor the Egyptian soap-opera "Smoke Without Fire," they are also treated to newscasts proclaiming the latest heroic feats of Vice Chairman Saddam Hussein and President Ahmed Hassan Bakr.

The six million Iraqis under 20 years of age are also eligible for a free education right up through university.

Baghdad, in fact, has launced a national program under the personal direction of President Bakr to wipe out illiteracy.

"If we were truly repressive," argues one Iraqi official, "why would we be educating our people?"

The program, however, retains a uniquc Iraqi flavor: anyone refusing to participate will be jailed.

On the whole, relatively little of Iraq's new oil wealth seems to have been siphoned off into the pockets of government officials - although one top Iraqi has recently begun collecting vintage cars.

Remarks one international economic analyst: "The lowest rung has done well."

While Iraq seems off to a promising start, the big question is the course Baghdad will chart for future economic development.

A lot rides on the answer.

Iraqi planners say privately they hope to be pumping seven million barrels of oil a day by 1985 - a figure almost triple their current production that would probably bring Iraq more than three times its current $12 billion annual income.

This kind of money would give Baghdad the potential to finally realize the predictions of two decades ago that Iraq would become the first Arab country to attain a Western standard of economic development.

To achieve that, however, would require a political decision by the government in Baghdad to seek the advanced technology and vast markets that can only come with an ever closer relationship with the United States and the West.

How far Baghdad will move in this direction remains unclear and how fast.

Analysts looking for auguries, however, not that President Bakr smokes Kents and takes his holidays in the south of France.

NEXT: The future.