Occam’s Toothbrush has an interesting post about dividing Iraq into federal districts in order to ease reconstruction.
Indeed the political, security, and economic conditions of the Kurds in the North (who were essentially independent of Baghdad thanks to the northern no-fly zone) and the Shi’ite South are far more functional than the middle Sunni section which contains the "Sunni Triangle" where most of the violence against Iraqis and coalition troops has occurred.
A federal system has several advantages by encouraging active competition for governmental quality and ensuring that local leaders have a greater say in local issues. Furthermore, it allows for power concentrated in many hands rather than a few, which is the most important bulwark against tyranny.
There have been several strong arguments for such a federal Iraq, and there do seem to be obvious benefits in terms of increasing accountability, minimizing ethnic tension, and fostering more democratic liberty. Countries that tried to shoehorn disparate and sometimes conflicting ethnic groups into one nation have often degenerated into massive violence and fratricide – Lebanon and Yugoslavia being bloody examples of that theory in action.
Given that our primary goal is a democratic Iraq, it seems that federalism may well be the best way of achieving that end.