MACDONALD'S hamburger shops, an Inter-continental Hotel and swish office blocks alongside the wooden shacks and dirt roads of the barrios, or shanty towns; a difficult contradiction for the first-time visitor to Managua, capital of the Central American state of Nicaragua. If you believe Washington's official rhetoric Nicaragua is now a Marxist state run by cigar-smoking gentlemen in military fatigues and sporting Caribbean accents. The western-world-as we-know-it should no longer exist there.

July of this year will mark the third anniversary of the overthrow of the brutal dictatorship of Anastasio Somoza, whose family dynasty was installed 43 years earlier with help from the US Marines. By 1979, Somoza had so concentrated the economic and military power of the state around his personal empire that he was universally unpopular. His final defeat was the result of an alliance of committed and disciplined revolutionaries - some of whom had been fighting for 18 years with the FSLN (the Sandinista Front for National Liberation) - together with trade unionists, peasants organisations, the church and even, in the final stages, disaffected businessmen and Christian Democrats.

The FSLN took control after the ignominious flight of Somoza's National Guard, who hijacked everything from Red Cross aircraft to tractors to escape the victorious Sandinistas.

But winning the civil war was just the beginning of an even longer struggle for the Sandinistas. Only a minority of Nicaraguans actually carried arms during the insurrection, and uniting people behind the new government was likely to be even more difficult than ousting Somoza. One former guerrilla, now an overworked planning official, recalled her commander's words after an especially arduous hike through the mountains: 'This is the easy part The hardest work will come after the victory'.

The civil war cost $500 million in damage. Another billion dollars in production was lost and Somoza robbed the Central Bank of all its reserves - leaving the country with debts totalling $1.6 billion. Economic aid was cut off by the Reagan administration in 1981 and assistance from multilateral agencies like the Inter-American Development Bank has been blocked by the US. According to Nicaraguan government sources 4,000 counter-revolutionaries are encamped over the border in Honduras and at least another 600 are active inside Nicaragua. The US government is also making available some $19 million for 'destabilisation activities' against Nicaragua.

The government is now performing a delicate balancing act. The Sandinistas seem anxious to avoid the Cuban mistake of nationalising everything in sight only to find managers and skilled technicians packing their bags for the next flight to Miami. Over 60 per cent of business is still in private hands.

Nonetheless, the flight of capital is still a problem. 'The private sector didn't like Somoza. He took everything for himself' says Emilio Baltodano, Controller General of the Republic. 'But neither do they like too many changes and we have to punish those involved in capital flight from the country'.

Scores of professionals and others from the educated middle classes have left Emigrés in Miami say their main reason for leaving is economic - the lure of better salaries and less taxation in the US. But their loss will not be mourned in the barrios and the peasant farms. The huge turn-out for the second anniversary of the revolution brought 500,000 people (one-fifth of the population) to Managua from all over the country. They were there to call for blood - action against 'decapitalisation' and further control over the private sector.

The reasons for this overwhelming display of support are not hard to find.

In a village near Cusmapa, in the north of the country near the Honduran border, reached only on foot or horseback, the people still live in earth-floor and wattle huts. From mid-afternoon, young and old men gather at the militia hut and organise the nights guard duty over the trails leading across the border that may bring counter-revolutionaries and bands of ex-Somocistas. Many lives have been lost and much property destroyed by these marauding contras trained in both Honduras and the United States.

There is no doubt in the minds of these people about what they are defending. Education and health services have reached the village, there are guaranteed prices for their coffee crop and agricultural produce. A few miles away bulldozers have been at work cutting a new road through to the village. And the electricity line is due to be extended to them later this year.

Several hundred kilometres away, at the base of the picturesque Momotombo volcano, is the future source of their electricity supplies. For miles around steam can be heard roaring forth from geothermal wells. These will be connected to a 35 mega-watt power plant later this year as part of a programmes that will eventually bring electricity to every Nicaraguan home.

Roger Arcia is the project's senior engineer. He started work before Somoza's fall and since the revolution his salary has dropped by half to $1,000 per month the maximum now paid to any government employee. 'Sure it was hard at first', he says. 'my family and I had to make some changes to our lifestyles. Some engineers refused to live without the luxuries they enjoyed under Somoza, but I wanted to stay and work for the independence of our country. The day the first geothermal power station comes on line will be a very important one for me.

Many of Nicaragua's civil servants worked under the Somoza regime. In the highest echelons, those not committed to the revolution have either left of their own accord or been replaced. Lower down however, old working habits are proving resistant to change. In some Ministries bored clerks still chat idly with feet propped on desks, while more senior officials, bags permanently under their eyes, are rushed off their feet. A common Sandinista boast is that they haven't had a holiday since the revolution, and barely a day off.

Last year complaints about the civil service bureaucracy were widespread. Spare parts and materials were not reaching factories. Foreign exchange shortages were partly to blame, but the civil service - expanded to cope with new social and economic programmes - and the inexperience of the new administrators caused many problems. 'Much of the equipment we need was destroyed during the insurrection,' says Moises Ohassan, a leading FSLN member and Minister of Construction. 'But besides that we had to learn how to run a country. We had to learn everything from scratch'.

The temptation to make appointments on political leaning as much as on administrative competence is strong. And Sandinistas and their supporters will be found in important positions in most Ministries and government agencies. From below, the view is not always sympathetic. 'We now have young political activists ordering our supplies and planning our production; says one disgruntled engineer in a government-run factory near Masaya. 'What do they know about the steel industry?'

Eden Pastora, an FSLN hero during the revolution, disappeared in 1981 with a message to the Nicaraguan people that he 'was following the stench of gunpowder' and would join a revolutionary struggle in another part of the world. He resurfaced recently, accusing the Nicaraguan government of corruption and totalitarianism and of seeking 'luxurious lifestyles'.

Sandinista leaders do not live in shacks in the shanty towns, for sure but neither is there evidence of any Somoza-style opulence in their lifestyles. In their may TV and public appearances, they dress in simple khaki fatigues, usually looking tired and overworked.

But similar criticism comes from La Prensa, the widest-read daily paper in Nicaragua. Once the leading opposition paper under Somoza's rule, it has now taken a vitriolic line against the Sandinistas. Sometimes it prints outright lies, leading many to believe that its role is similar to Chile's El Mercurio before Allende's downfall.

La Prensa has been closed five times since the revolution, sometimes for essentially petty reasons - although the Sandinistas regard insults of Carlos Fonseca, one of the founders of the FSLN, in much the same way as the British Conservative Party might regard a personal insult to the Queen Heads would be expected to roll. On one such occasion last July, the paper suggested sarcastically that the government junta should send a gift of the works of Carlos Fonseca to the Royal Wedding couple in England. No heads rolled, but La Prensa was closed for five days.

The Sandinistas also fear that the church may be used to foment dissent against the government. A slogan, 'Christo Viene Pronto', was sprayed on many walls around Managua and other cities last summer and was interpreted as the rallying cry for a counter-revolution. Stickers bearing the same slogan could be seen in taxicabs whose drivers are part of that fiercely independent and cynical band of self-employed who express a bemused curiosity at why so many foreigners are interested in the Nicaraguan revolution. Despite attempts by the US diplomatic corps to portray Nicaragua as the next Soviet missile site, the country has a long way to go before becoming another Poland, Hungary or Cuba. Elections are scheduled for 1985, political parties are legal and opponents of the Sandinistas - although wisely wary of being too outrageous in their public statements - are highly vocal and exert a genuine leverage on the government. The Sandinistas have taken control of the private sector by controlling its financial channels, and have no apparent wish, or need, to go further.

An American lawyer in Miami, who works exclusively with Nicaraguan emigres in their attempts to get political asylum in the US (with near-zero success) say's with some perspicacity. 'Oh, they're clever Marxists these Sandinistas. They're making the capitalists work for them by giving them enough space to survive. They know they couldn't survive without them.' But ask a Sandinista if he's a Marxist and you are likely to be met with a long-suffering smile, an understanding pat on the back and the enigmatic reply, 'My friend we are Sandinistas'.