Is it correct to think of a divide between "nations of citizens" and "nations of inhabitants"? If yes, how useful is this division as applied to the Muslim world today?
The distinction goes to heart of the difference between democracy and other forms of government-the active participation of citizens versus the passivity of inhabitants or subjects. It works as a tool for looking at the Muslim world, where the great majority may be considered inhabitants, not citizens. In only a few countries has the notion of citizenry evolved, notably in Turkey, and even there, there is a long way to go to achieve the sort of citizenship Westerners are familiar with. That the Muslim world is filled with inhabitants should not surprise, for this reflects continuity with the historic Muslim experience, where the divide between ruler and ruled was particularly wide. Surmounting that gap will be a long-term challenge.
Are Islam and democracy compatible?
Yes, for there is nothing in Islam that necessarily contradicts democracy. The reason that so few Muslim countries today are democratic has less to do with the nature of Islam, much less the Qur'an, than with the historical experience of Muslims. Put simply, Muslims have had a particularly difficult time accepting influences from the West. This results in part from the historic hostility between themselves and Christendom, in part from the great differences between traditional Muslim ways and modern Western ways. One of Western innovations that has distinctly not flourished in the Muslim world is democracy, but it is just one of many. This situation can change in the future, for there is nothing inherent in Islam to prevent Muslims from becoming full-fledged citizens of their states.
Is there a mechanism in the Muslim world that disenfranchises people and prevents them from moving from inhabitant to citizen?
Sure, it is called dictatorship. But here one has to draw a distinction. Owen H. Kirby of the International Republican Institute has shown (http://www.meforum.org/article/52/) that the Middle East's traditional monarchies are considerably more open to political enfranchisement and civil society than are the republics, the revolutionary states, and other modern or more modern-seeming polities. This reflects the unhappy fact that the Muslim world has absorbed more the radical ideologies from the West than its liberal ideas. One finds a history of attraction to the Nazi movement in its heyday, then to the Soviet Union, and now to anti-globalization. Muslims have tended to look west for extremist ideas rather than mainstream ones.
What would it take to see a democratic citizenry come into existence in the Muslim world?
It requires a coming to terms with the West, an acceptance that, whether it be in the realm of economics, technology, or political structures, the West has evolved in new directions that give it strength and are worth emulating. Muslims must accept that the West has discovered ideas and methods that they must learn, adopt, and apply - that ignoring or rejecting them is a major mistake. Mustafa Kemal Atatürk, the founder of modern Turkey, understood precisely this and imposed a top-down form of modernization in the 1920s and 1930s. He is the great exception, as is Turkey more broadly.
The ideal would not be more top-down imposing of modernity, but a change of heart among Muslim peoples and a willingness to learn from the West. The current reluctance to do so has costs that are self-evident; the Muslim world is today in crisis. Only when Muslims on their own turn toward secularism, democracy, free markets, private property and personal freedoms will the Muslim world make the advances that it craves and can achieve. I am optimistic that Muslims will eventually see that resistance to modernity has led to failure and will then make the kind of adjustments needed to achieve political stability, economic prosperity, and cultural florescence. That said, I don't see such a reversal of course happening any time soon.