CAIRO -- When Ahmed Nazif was appointed prime minister of Egypt last year, it came as a surprise. Mr. Nazif, 52 years old, was the youngest of 32 ministers in the previous government. His name hadn't appeared on any of the internal U.S. embassy briefs handicapping the leadership race.

What Mr. Nazif did next was even more surprising: He introduced the most far-reaching economic changes in Egypt's modern history, cutting customs tariffs by 40%, signing a trade deal with Israel and the U.S., and chopping income taxes in half. Now he's planning more painful steps. He wants to slash the government payroll and scale back subsidies on everyday goods.

The moves are designed to spur foreign investment and coax Egypt's long-dormant economy to life. "Egypt is open for business," says the Canadian-educated prime minister.

In a region desperate for a successful economic model, Mr. Nazif and his agenda represent something new. From Iran to Saudi Arabia to Egypt, strident anger toward the U.S. and Israel often masks problems closer to home: soaring unemployment, hidebound bureaucracies and rampant corruption.

Egypt, a nation of more than 70 million people, suffers these problems more than most -- and it doesn't have the vast oil revenues other Middle East nations use as a salve. Since the 1950s, autocratic rulers including the current president, Hosni Mubarak, have kept private business on a tight leash, discouraging trade and promoting state-owned companies. As the Egyptian economy stagnated in recent years, the government has responded by boosting social subsidies and expanding the government payroll. Despair over the future has helped fuel the rise of fundamentalist Islam -- a trend the government has countenanced and sometimes encouraged in the hopes of deflecting attention from its own failings.

Egypt's population has almost doubled since 1980 but economic growth hasn't kept up, even though the country gets about $2 billion a year in U.S. aid. That has left as many as 15% of working-age citizens unable to find jobs. Foreign investment last year shriveled to $200 million, its lowest point in more than a decade. The state employs roughly a quarter of the work force, and the government budget deficit is nearly 8% of gross domestic product.

The rise of Mr. Nazif suggests Mr. Mubarak may have fundamentally shifted his view of Egypt's economic woes. Senior government officials say Mr. Mubarak, in power since 1981, now believes that economic problems pose a greater threat to his rule than the pain that would be caused by a tough Western-style economic overhaul. These officials say the president has been influenced by his son, Gamal, a former banker who holds a senior post in the ruling party.

The 76-year-old Mr. Mubarak has said little in public about Mr. Nazif's changes, leaving open the possibility that his commitment to reducing state control of the economy is weak and could be overturned if a different set of advisers captures his ear.

Economic change doesn't necessarily mean political change. In the wake of Iraq's election, in which voters chose freely from a wide range of candidates, attention is turning to Arab states such as Egypt where the government keeps a leash on political competition. Mr. Nazif argues that if Egypt gives full rein to democracy before prosperity spreads, an "organized minority" -- referring to Islamic fundamentalists -- might take over. He says "nobody in his right mind today would be against democracy" but "when and how is the real challenge."

Egyptian intellectuals and government officials speculate that Mr. Mubarak is hoping for an economic revival to pave the way for his son to take over from him one day. The president has repeatedly denied that he wants to hand power to his son. He has also ruled out significant changes to the political system.

Whatever the political subtext of the new economic message, businesses seem to be responding to it. Procter & Gamble Co.'s Egyptian unit is gearing up for "a significant expansion," a company spokesman says, declining to provide details. Textile manufacturers are building factories to take advantage of the free-trade pact with Israel and the U.S.

The changes are designed to help people like Sayad Saad Eddin. A 43-year-old machinist at a government steel plant, Mr. Eddin earns $70 a month after taxes. With that, Mr. Eddin supports his wife and five children in a dilapidated, three-room walkup apartment about an hour outside of Cairo. Their home furnishings include a color television and small refrigerator, both more than a decade old, and a chipped wood couch with thin cushions. Outside, a rutted dirt street abuts the local mosque where Mr. Eddin and his family pray each day.

With his full-time job and steady salary, Mr. Eddin counts as solidly middle class in Egypt. The problem, he says, is that food prices -- meat, eggs, vegetables, cooking oil and milk -- are soaring so quickly that his family is now slipping toward poverty. Wholesale-price inflation nationwide is running around 15%. Mr. Eddin now has to borrow money from his sister from month to month to make ends meet, he says.

Last month, during the traditional Muslim holiday of Eid al-Adha, the pain was worse than usual. With the price of mutton having nearly doubled in a year, Mr. Eddin allowed his wife to buy about four-and-a-half pounds of holiday meat, less than half the usual amount, and he couldn't afford new clothes for his children. Most unnerving of all, he says, there is talk the government may sell its stake in his factory to private investors. "Life is getting more and more difficult," Mr. Eddin says.

Mr. Nazif says he empathizes with such Egyptians -- up to a point. "People have been shielded and protected for so long," he said in a recent interview at his office. "You can't just say things will improve. You have to tell them the truth...and they have to take responsibility." People like Mr. Eddin, he said, "should have two" children. Such views are rarely expressed in Egypt, since devout followers of Islam generally forswear birth control. More than 90% of Egyptians are Muslims.

This year, Mr. Nazif hopes to accelerate his overhaul. He plans to privatize some of Egypt's biggest state-owned companies -- including Bank of Alexandria -- and scale back pervasive government subsidies on basic goods such as bread, sugar and fuel. By some estimates the subsidies cost over $5 billion a year.

Mr. Nazif's main goal is to spur economic growth, which in recent years has ranged around 3% to 5% -- too slow to improve living standards significantly because of the rapidly growing population. If companies are freed from red tape and given more leeway to import and export, he hopes hiring will pick up and the government won't have to spend so much propping up the economy.

Some of Mr. Nazif's austerity measures resemble those that caused a backlash in troubled Latin American countries, and Egyptian interest rates have been kept high to restrain inflation. But Mr. Nazif says he wants to protect the most vulnerable Egyptians from the pain of his cutbacks. He plans to eventually replace the government subsidies with electronic "smart cards" available to only to the poorest.

The biggest roadblock to these plans may be the six-million-strong bureaucracy Mr. Nazif himself directs. For years, Egypt's government has acted as employer of last resort, absorbing up to one-third of the 650,000 Egyptians who enter the labor market each year. Now, Mr. Nazif has begun talking openly about slashing the government payroll, a process he calls "right-sizing" instead of "downsizing." Already, he has frozen government hiring, a first for Egypt. "We have to be very bold, very abrupt and very tough," he says.

One symbolic step that has proved popular: He scaled back processions of official cars that used to force other vehicles to the roadside.

A tall, imposing man with wavy white hair and a thick mustache, Mr. Nazif is the son of an Egyptian navy sailor and a housewife. He came of age during a time when secular nationalism trumped Islamism in Egypt. Women often wore short dresses. Dance clubs and alcohol were common forms of evening entertainment. In the mid-1970s, Mr. Nazif enrolled at Canada's McGill University.

Eight years later, after completing a doctorate in computer science, Mr. Nazif joined Egypt's premier government think tank, the Information and Decision Support Center, and soon embarked on his first major project: issuing electronic identification cards to all Egyptians. The program was a success. Among other things, the government figured out for the first time how many Egyptians there were.

Mr. Nazif was tapped by President Mubarak in 1999 to create a new Ministry of Communications and Information Technology. There he tackled Egypt's relationship with Microsoft Corp. Cairo's computers ran mainly on Microsoft software. Mr. Nazif found that individual ministries were buying this software on their own. That cost more than lumping purchases together and it spawned piracy.

Mr. Nazif cut a deal with Microsoft to bundle these orders into one purchase, worth about $10 million. In return, he asked Microsoft to consider boosting investment in Egypt. Some ministers weren't pleased to lose control of part of their budget, but Mr. Nazif won out by waving the prospect of a higher-profile relationship with Microsoft and stressing the cost savings.

Not long after, Mr. Nazif and Microsoft signed an agreement under which the company would help build a new software platform enabling Egyptians to apply online for drivers' licenses and ID cards. The deals caught the eye of Microsoft co-founder Bill Gates, who visited Egypt in January 2004 and again this year.

In the spring of 2003, Mr. Nazif faced a challenge over whether to grant the state phone company, Telecom Egypt, a license to enter the mobile-phone business. Mr. Nazif decided it was a bad idea: If Telecom Egypt got the license free, it would undercut two private operators who had paid for theirs. But if the state company had to buy a license, it had little hope of profiting in the competitive business, Mr. Nazif concluded. He recommended against letting Telecom Egypt into the mobile business and went on vacation.

Other officials lobbied Mr. Mubarak to issue the license anyway, and the president agreed. An aide called Mr. Nazif and broke the news. Moments later, Mr. Nazif was on the phone with Mr. Mubarak, requesting an urgent meeting.

Back at Mr. Mubarak's palace the next day, Mr. Nazif spoke for nearly two hours, explaining why he thought the decision made no economic sense, according to Mr. Nazif and others familiar with the matter. Mr. Mubarak reversed himself on the spot: Telecom Egypt wouldn't get a license after all. That decision, Mr. Nazif says now, "provided me with a lot of credibility with the president."

Just how much became apparent in July 2004, when Mr. Mubarak called in Mr. Nazif and told him he would be the next prime minister. Mr. Nazif and his economic team immediately set to work slashing tariffs on foreign goods. They huddled daily in secrecy, fearful that a media leak could ignite pushback from customs officials. Fewer than a dozen people were involved.

When the plan was ready, Mr. Nazif delivered it to Mr. Mubarak and asked him to sign it as a presidential decree. That allowed him to avoid a potentially lengthy debate in parliament. The next day, the new rules were implemented. With a single stroke, Mr. Nazif eliminated the jobs of some 5,000 officials who were enforcing regulations that no longer existed. Customs officers learned about it via media reports. "It was a bypass operation," Mr. Nazif says with a wry smile.

The impact was immediate for Magdy Tolba. For nearly two decades, Mr. Tolba has run the Cairo Cotton Center, a textile company employing 1,750 workers who stitch together garments carrying the Liz Claiborne, Nike and Tommy Hilfiger brands. In recent years, as government bureaucracy grew ever more tangled, Mr. Tolba and his Lebanese partner drew up plans to relocate elsewhere. Now that tariffs on cotton, buttons and other materials have been greatly reduced, they are building a new factory that will employ 3,500 more workers.

In December Egypt signed a trade agreement under which products made in certain zones can get duty-free access to the U.S. market if they contain at least 11.7% Israeli content. By importing clothing dyes and other Israeli products, Mr. Tolba's factory will soon be eligible to export to the U.S. duty-free, he says.

Mr. Tolba, 48, says some lower-tier customs officials haven't fully implemented the new regulations and requests for kickbacks persist. He says Mr. Nazif's colleagues have given him their mobile-phone numbers and asked him to report irregularities. "The government," Mr. Tolba says, "is now moving even faster than we are."