At the height of Iraq’s civil war, it took a strong constitution to brave the arrival into Baghdad International Airport. Once past the heart-plunging corkscrew landing, the better to evade surface-to-air missiles, you had to contend with the 11km highway into Baghdad. The route had earned its moniker after countless roadside bomb explosions and daylight shootouts between religious militias as “the most dangerous road in the world”. Private security companies charged $5,000 for a one-way ride. When he was fortunate enough to get a passenger, Hashim Ouda, a young taxi driver and father of four, would say a quick prayer and race his Toyota sedan down the highway towards the smouldering capital at 170km/h.

These days, the road to Baghdad looks quite a bit smoother. The concrete barriers separating once-warring neighbourhoods from traffic are painted bright colours. At the few remaining checkpoints, flowerbeds have been freshly planted. Thousands of palm trees are now growing, restoring the once-lush roadside that was bulldozed to keep insurgents from taking cover. “This is very good work,” says Ouda, 35. “It should be done. This road is the face of the country.”

Baghdad is striving to remake itself in 2011, and not just physically. Last year saw the lowest number of violent deaths since the war began. By December the US military is expected to finally withdraw, pulling its 48,000 remaining troops from their sprawling bases and – it is hoped – ending the spectre of foreign occupation that has bedevilled both the US and Iraqi governments since 2003.

After arduous negotiations that left Iraq adrift for most of last year, Prime Minister Nouri al-Maliki has embarked on a second term with a government that includes the main segments of Iraqi society: fellow Shia Muslims, Sunni Arabs and northern Kurds. The southern oil fields, where major companies such as BP and ExxonMobil are developing some of the world’s most promising crude ­deposits, are poised for the kind of growth that could help finance Iraq’s colossal ­reconstruction needs. Commercial districts are bustling again, and business owners are daring to invest in renovations. Many who knew Iraq in the bad old days say that the trajectory is pointing upward for the first time in a generation. “It’s all vastly different to what we have been seeing through most of the period since 2003, and even before 2003 – going back to the early 1980s and the war with Iran,” says Ad Melkert, the UN special representative to Iraq. An affable Dutchman whose prefab office deep inside Baghdad’s heavily fortified Green Zone is plastered with maps, Melkert ticks off the reasons for optimism with the precision of a political scientist: “Nothing is self-evident for the future,” he says, “but that we are talking here about change and, in quite a number of ways, progress – that in my view is undeniable.”

It’s one thing to hold that view when your office is guarded by a phalanx of armoured military vehicles and coils of razor wire. But the capital’s regular neighbourhoods feel different, too. On weekend nights, streams of hair-gelled young men and middle-aged couples flow elbow-to-elbow through the garishly lit shops and roasted chicken stalls of Karrada, a middle-class section of central Baghdad that was long in the firing line of rockets aimed by insurgents at the Green Zone.

“It’s started to come back,” says Salah Mehdi, 37, an electrical wholesaler who recently returned to Baghdad with his family after three years in Oman. In 2007, Mehdi’s father-in-law was kidnapped from his home in Dora, a fierce sectarian battleground in southern Baghdad. When his tortured body was found dumped in a nearby yard, the fighting was so intense it couldn’t be retrieved for 10 days.

In January, Mehdi’s wife finally put that nightmare behind her and returned to Iraq. What cemented the decision? On a visit last year, their 10-year-old daughter was walking with them through Karrada and declared Baghdad nicer than Muscat. “Iraq has improved day by day,” Mehdi says. “There’s opportunity here now.”

This is true for a salesman of circuit breakers and other electrical parts, since the national power grid remains a shambles. Many Iraqis receive fewer than eight hours of mains power a day. Even in the capital you can’t escape the drone of private generators, powered by costly diesel fuel and constantly breaking down. That is not to say more adventurous investors aren’t taking chances on Iraq. The $2.5m (€1.8m) Lebanese Club, a glittery restaurant-lounge overlooking the Tigris, opened last year and has brought a little of Las Vegas to Baghdad. With its plush red carpeting, faux-neon palm trees and giant-screen TV playing Arab music videos, the clientele of government officials, ambassadors and oil executives can almost imagine the view across the water is of something more interesting than the fortress-like walls of the US Embassy.

Not everyone, however, has the same idea of progress. In recent months, some Baghdad residents have begun to feel a growing Islamic conservatism creeping across the capital. It began in December, around the start of the Shia holy month of Muharram, with a mysterious crackdown on social clubs and shops selling alcohol. Then came vague directives from education officials against teaching music and drama at Baghdad’s fine arts college. The source of the instructions was never clear but many suspected conservative Islamists within Maliki’s State of Law coalition party, which dominate the Baghdad city council.

“There is this fear [within some sections of the government] that liberalism is taking over the Iraqi streets,” says Maysoun al-Damlouji, a secular lawmaker who hails from an aristocratic Iraqi family. “I think we are going to face a big struggle because the Iraqi public is not happy with these kinds of measures. Iraqis are Muslims, I mean the vast majority of them, but they do not like to have religion imposed on them.”

Damlouji was nominated for a cabinet position but was rejected by Maliki because, some said, she is seen as too secular. Her small but well-appointed apartment in the Green Zone features pieces by the late Iraqi painter Ismael Fattah and a little dog called Mishmish. During Muharram, though, Damlouji bowed to ritual and wore dark clothes to mark the martyrdom of Imam Hussein, a grandson of the Prophet Muhammed, one of the most revered figures in Shia Islam. “I know, this is the way society is heading at the moment,” she says.

The cabinet that Maliki unveiled in December of last year included only one woman – a fact that seemed a remarkable step backwards considering that for decades Iraq led the Middle East in promoting women’s rights, beginning in 1959 with the appointment of the first female minister in the Arab world. Artist Qasim Sabti thunders against the capital’s new conservatism, epitomised by the growing number of women he sees covering themselves in headscarves and the full-length Islamic cloak known as the abaya. “Baghdad used to wake up and have breakfast to the songs of Fairuz [the iconic Lebanese singer],” says Sabti, who looks like a lion with his silver mane and intense gaze. “Iraqi women used to go out in the mornings in their modern clothes and fill our lives with beauty and gaiety. Now you go out in Baghdad and you will see barbarism.”

Yet even Sabti acknowledges that the discussions taking place in the garden behind his gallery – one of the quietest, leafiest spaces in a chaotic city – are far different from those of a year or two ago. Security is no longer the overriding concern, and fellow artists and intellectuals can gather there until late in the evenings now to share songs and stories (and alcohol, when they can find it).

There is a little-discussed fear about Iraq’s security improvements: that the US occupation froze in place a society even more divided by sect than it was under Saddam Hussein. In forming his cabinet, Maliki was careful to include members of each group, and the tussle over ministerial positions came down to ensuring that one sect or the other wasn’t seen as over-represented. Some worry about the emergence of a Lebanon-type state, although Shias form a clear majority in Iraq and their political predominance figures is ­expected to last for years to come.

“Sectarianism didn’t come from nowhere,” says Mehdi, the wholesaler. In the 1990s, he says, Saddam’s Sunni-dominated dictatorship prevented him attending medical school because he was a Shia. “That was how it was before. So I think it will continue like this for at least another 10 years, until we have a government that does something about it.” For Iraq’s few remaining Christians, Baghdad has become increasingly dangerous. Since last October there has been a series of attacks on churches which have killed dozens. Many have left their homes and moved north, to Kurdistan, or abroad.

Along the airport highway, the neighbourhood of Amil, several blocks of squat buildings fringed by palm trees, has ­remained divided by sect. One side of the main road is mainly Shia, the other mostly Sunni. Rafid Abboud Jabar, an estate agent, says families trying to leave areas where they are outnumbered get terrible prices because buyers view them as desperate. “People lose all their savings this way,” says Jabar, whose narrow, dusty office on the main road is lined with generic photos of Muslim holy sites, but nothing that betrays his Shia affiliation.

Still, says Jabar, few Baghdadis want to look back. He remembers a day in 2005, when a man on a motorcycle rode past his office window, stopped near the intersection, cocked a rocket-propelled grenade and fired it in the direction of a rival neighbourhood. Those fighters have vanished, with Iraqi police checkpoints keeping a lid on the violence. The new order in Baghdad, he says, is to mind your business and try to rebuild the economy. “Sunnis are going to Sunni neighbourhoods and Shias are going to Shia neighbourhoods, and that is the fact,” Jabar says. “People don’t look for trouble. The security forces here have to make a lot more improvements. But we can focus now on other things.”