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Iraqi Kurds have formed a regional government despite Baghdad's threats and placed the seat of self-rule in this city of 1 million people, the main Kurdish center in northern Iraq.

The Kurds elected a parliament in May and the trappings of a de facto Kurdish state abound.But the euphoria that came with their experiment in democratic self-government has turned to frustration. The people struggle to make it economically, theft is rampant and the government lacks money and experience.

Iraq, unwilling to challenge a coalition air force patrolling the skies of Kurdish-dominated northern Iraq, has been trying to stifle the de facto state by blockading food and fuel. Shortages have sent prices soaring.

"I don't know how the people survive. They have no valuables left to sell," said Jemil Jamal Ibrahim, a shopkeeper selling Turkish beverages and homemade sweets laid out on large round trays.

"The government is doing nothing for me. As I get robbed in broad daylight, ministers fight among themselves."

Ibrahim said that even with a monthly profit of $180, he was better off with a pension one-tenth of that as a retired accountant under Iraq. "This money is not enough for my wife and eight children," he said.

Law and order are in short supply.

Machinery and municipal vehicles are stolen, smuggled to Iran and sold.

"Perhaps this is the only place where everyone is armed but the police," said Kemal Kirkuki, a Kurdish official coordinating relief work with international organizations.