ON FRIDAY AFTERNOON, October 31, a low-key ceremony is to take place on the fourth floor of a pastel-pink palace in the new Malaysian capital of Putrajaya. In the privacy of his inner chambers, Prime Minister Mahathir Mohamad will hand over his "job manual"--a largely symbolic binder of documents--to Abdullah Badawi, his deputy prime minister. Sporting the drab, long-sleeved safari suits the two wear around the building, they will shake hands and say goodbye. Then Mahathir will stroll across the marble floor, place his thumb on the biomechanical security lock on the front door, and leave Malaysia in the care of its first new prime minister in 22 years.

The retirement of the 77-year-old Mahathir, whose political tenure ranks third in the world behind that of Fidel Castro and Robert Mugabe, will initiate a period of uncertainty, not only for Malaysia, but also for Washington and its war on terrorism.

Under Mahathir, Malaysia has become the most stable, prosperous, and democratic country in the Islamic world. While most Muslim countries are ruled by theocrats, autocratic dynasties, or the military, Malaysia's 22 million people live in a parliamentary democracy with a constitutional monarch. Though the majority of the population consists of Malay Muslims, the ruling National Front coalition also includes political parties that represent Chinese and Indian interests. In Malaysia, women hold positions of influence in all the professions and wear scarves only to accessorize. On Friday afternoons, mosques in Penang, Johor, and Kuala Lumpur are packed, but so are hotel bars and taverns.

Back in 1981, when Mahathir came to power, Malaysia largely was a rural backwater dependent on the export of rubber, petroleum, tin, and palm oil. Today it has a GDP of $210 billion, a world-class telephone system, the region's best railroads, highways equal to any U.S. Interstate, and the third highest per capita income in Southeast Asia after Brunei and Singapore. Major investments by Microsoft and other IT companies have given the country a strong middle class and made it America's tenth largest trading partner.

Still, there is cause for worry. The son of an Islamic cleric whose academic training also is rooted in Islamic studies, Badawi is a colorless bureaucrat who comes to power at a time when Muslims throughout the region are questioning the nature of their religion and its role in government. Badawi clearly wants to be a transformational leader, not a 62-year-old bureaucrat who only serves a transitional role. But he has little room for maneuver. Support for al Qaeda runs deep among pockets of Malays, who constitute 58 percent of the population. Many of the leaders of Jemaah Islamiyah (Islamic Community), the terrorist organization behind the recent bombings in Indonesia and the Philippines, went to school in Malaysia or are themselves Malay. More alarming is the fact that in the last national election, 65 percent of the Malays who went to the polls voted for fundamentalist candidates belonging to the Pan-Malaysian Islamic party (PAS).

How did Mahathir for more than two decades keep devout Muslims happy while maintaining an atmosphere conducive to Western investment? By constantly tacking between the two constituencies. He respected the heritage of the country's sultans, but limited their authority in all but religious matters. He allowed Muslim fundamentalists to contest elections, but arrested and detained without trial those who advocated change by anything other than legal means. He constantly championed the rights of Malays, but always insured that the country's Chinese and Hindu communities got their fair share of the economic pie.

At the international level, Malaysian diplomacy is intricately balanced. After the World Trade Center attack, Mahathir was among the first world leaders to denounce al Qaeda and support America's war on terrorism. Washington was so pleased with Malaysia's response that it selected Kuala Lumpur as the location for the U.S.-funded Southeast Asia Regional Center for Counter Terrorism. But the relationship has cooled significantly since the invasion of Iraq, a misadventure Mahathir repeatedly has denounced as a senseless war on a country not involved in 9/11 or the spread of global terrorism.

To his credit, Mahathir has been equally critical of Islamic radicals who regard scientific and industrial development as secular evils. "Our salvation will not be achieved by Muslim scholars who believe there is merit only in studying religion," Mahathir recently told a meeting of Islamic leaders. "We accord no merit to people who study science, mathematics, and engineering. Nor are the people who industrialize and enrich a country given any consideration. Yet all these people help strengthen the Muslim ummah [Islamic community] and prevent them from being humiliated the way they are now."

This willingness to stand up to the West, while confronting embarrassing flaws in Islamic societies, has made Malaysia a leader in the developing world. It heads the non-aligned movement, an organization of 116 nations, and this year hosted the Organization of the Islamic Conference. The country's diplomatic corps contains as many Chinese and Indians as it does Malays. This multiethnic mix makes the country a trusted friend of China, which worries about Xinjiang's Muslim Uighurs, and a close ally to India, whose Muslim population of 130 million ranks second in size only to that of Indonesia.

Until recently, this ability to act as an honest broker has made Mahathir the leading candidate to become chairman of the OIC following this week's retirement from government service. But his recent assertion that "Europeans killed 6 million Jews out of 12 million, but today the Jews rule the world by proxy" may have made Mahathir too controversial for even the OIC. The comments certainly tarnished Mahathir in the eyes of the Bush administration, which issued an immediate and altogether appropriate rebuke.

Mahathir is no friend of Israel. He repeatedly denounces Jews for their occupation of Palestine and supposed manipulation of international currency markets. He says the IMF and WTO are instruments created to serve Jewish financial interests. Several years ago, he allowed distribution of a book called "The International Jew," an anti-Semitic screed.

In between intemperate statements, however, Mahathir has closed religious schools he believes to be seedbeds for terrorism and prevented the fundamentalist PAS from imposing hudud (Islamic criminal law) in the two Malaysian states it presently controls. After spending time in a country where beer, pork chops, and Madonna CDs exist alongside minarets and mosques, one is left with the notion that perhaps vocal anti-Semitism is part of the cost of doing business in a Muslim country.

Abdullah Badawi will confront a number of issues the moment he becomes prime minister, not the least of which is whether to release Anwar Ibrahim, the former deputy prime minister and heir apparent whom Mahathir arrested four years ago on specious charges and continues to keep in prison. Breaking the pattern of cronyism and corruption resulting from government meddling in economic development will be difficult. And keeping the lid on political Islam may be impossible if Badawi also restores a measure of press freedom. Badawi has vowed to rescue Malaysia from the "malaise of its First World Infrastructure, Third World Mentality" that was the hallmark of the Mahathir era. It may be the hardest challenge of all.

East-West News Service editor David DeVoss covered Mahathir Mohamad's rise to power as a Time magazine correspondent in Southeast Asia.

Next Page