COLUMN ONE : The Model Here Isn’t America : The formula of free markets and democracy is losing ground in East Asia. Malaysia, for one, favors central planning and social control--and its gains are dramatic.

Its name evokes images of monsoons, tin mines and rubber plantations, or perhaps W. Somerset Maugham’s stories about the tarnished glory of British dominion.

Small, quiet and relatively new as a nation--overshadowed by its neighbors, high-profile Thailand, gleaming Singapore and giant Indonesia--Malaysia doesn’t get much air time on CNN and a U.S. President hasn’t visited since Lyndon Johnson came in 1966.

But consider this: One in every seven semiconductors imported to the United States is assembled in workshops in Malaysia. A single Matsushita factory near the airport churns out about a million color TVs each year. A nascent auto industry is starting to export cars.

This resource-rich country is making a stunning leap from post-colonial agrarian origins to manufacturing might. Its economic growth rate has been among the highest in the world in recent years, and it still comes close to double digits. Its population of 18 million has at its core a burgeoning middle class, reflecting a phenomenon of new wealth across East Asia.

Malaysia is emblematic of the vibrant growth that has made Southeast Asia one of the hottest spots on the globe for trade and investment.

Malaysia is not without controversy, however. Its sweeping race relations policy limits rights of the Chinese minority by regulating participation in business, but it appears to have stabilized a society once shaken by race riots. The economy is manipulated by the heavy paws of state guidance, but it remains comparatively open, welcoming foreigners and offering rewards to risk-takers. The Japanese love it here.

Now, this plucky laboratory in social control and economic engineering is planning a staged ascent to fully developed status. Malaysia, which gained independence from Britain in 1957, intends to join the First World on schedule by the year 2020. And it wants to get there its own way--without being bound by traditional Western values of laissez-faire economics.

“Our concept of being developed does not simply focus on per-capita income, but on the quality of life and morality as well,” Prime Minister Mahathir Mohammed told American businessmen in New York in September. “The hedonistic materialism of present (Western) models is not for us. We hope the rest of the world will give us this freedom of choice and not harass us into conformity in the name of freedom.”

The case of Malaysia drives home the fact that as the epic face-off between communism and capitalism fades into history, the world still lacks a universally accepted model for economic development. With Malaysia and some of its East Asian neighbors, the formula of free markets and democracy prescribed by the United States is losing its influence in favor of models that stress central planning, super growth and tough political control.

Concepts such as society’s collective right to economic development take precedence over Anglo-American precepts on individualism and human rights. Onerous press restrictions are in effect in Singapore, labor rights are curtailed in South Korea, due process is a sham in many criminal cases in Japan. Riding high on success, however, Asian leaders are arguing that the ultimate results--higher standards of living and freedom from poverty--more than justify the means.

No one states that case more clearly, or provocatively, than Mahathir Mohammed, 65, a physician who became premier in 1981 and a charismatic nationalist with a reputation for tweaking noses in the Western Establishment.

He warned the United Nations General Assembly about the potential for neocolonialism in the “new world order” after the end of the Cold War. He denounced the laissez-faire development models promoted by the World Bank and International Monetary Fund. The premier chided U.S. industry for not keeping pace with the Japanese by investing more in Malaysia. And he irked Washington by proposing an East Asian trade bloc that would exclude the United States.

At home, Mahathir is a savvy politician who pulled off a landslide election victory in Parliament in 1990, routing the strongest opposition challenge since independence. But he has ruled with a little bit of iron in his fist, jailing dissidents under the Internal Security Act in the mid-1980s and taming the press--most recently shutting down a spunky political tabloid, Mingguan Waktu, for allegedly fabricating stories critical of the government.

It may not be the perfect picture of democracy, but Mahathir’s administration has been stable and essentially benevolent--two cardinal virtues in Asian politics. Comparisons are sometimes made to Lee Kuan Yew, the former prime minister of Singapore who guided his city-state to prosperity in an authoritarian reign.

Mahathir is no despot, but he’s by nature provocative.

“Dr. Mahathir has a national vision, and he has no patience with ‘muddling through,’ even less with institutions derived from colonial times which might stand in the way of his perceptions of Malay and national goals,” wrote journalist Hasan Haji Hamza, author of the fawning biography “Mahathir: Great Malaysian Hero.”

Outside observers also praise Mahathir’s leadership, with qualifications.

“He does have a vision that is quite sharp,” said Douglas A. Hartwick, economic consular at the U.S. Embassy in Kuala Lumpur. “I think he has a sense of analyzing trends and assessing their implications for Malaysia. But his execution sometimes is abysmal.”

Hartwick was referring to the shock caused by Mahathir’s proposal in December, 1990, to protect the interests of the smaller powers in the region by pooling their negotiating clout in an “East Asia Economic Caucus,” which Washington labeled as a protectionist trade bloc and denounced for excluding non-Asian trading partners across the Pacific.

Mahathir suffered a setback earlier this month when discussion of his plan was shelved at the summit of the Association of East Asian Nations (ASEAN), which groups Indonesia, the Philippines, Brunei, Thailand, Singapore and Malaysia. Support from the group would be essential to advance the idea. The ASEAN summit did, however, endorse a proposal to develop a free trade zone in the region.

Despite the obstacles to taking regional leadership, domestic economic policy is where Mahathir, his technocrats and his ruling United Malays National Organization (UMNO) party have earned high marks.

After stumbling in an effort to develop heavy industry in the early 1980s, the government opened the door wide to foreign direct investment, offering tax breaks and incentives for anyone interested in exploiting cheap Malaysian labor. Light industry, mostly export-oriented, blossomed and manufacturing rapidly overtook agriculture and mining as the core of the economy.

A decade ago, American electronics firms had built a commanding presence and continue to lead the industry here. But Japan, Taiwan and South Korea--enriched by currency appreciation since 1986--have dominated investment in manufacturing in recent years. A similar pattern has emerged throughout developing Asia.

Now, skyscrapers tower over the capital, middle-class bedroom communities are cropping up in the suburbs, and industry in the urban areas of Kuala Lumpur and Penang are suffering from a serious labor shortage. Inflation is rising and low wages can no longer provide the key to Malaysia’s international competitive edge.

New government blueprints reflect that changing reality. Conditions are being attached to the five-year package of tax breaks proffered to investors in the export sector, such as requirements that manufacturing facilities be located in the less developed hinterlands where there remain pockets of unemployment.

At the same time, a 20-year-old program of government-mandated affirmative action in the private sector has been replaced by a more informal approach to spreading the wealth to the traditionally disadvantaged ethnic Malay--and Muslim--majority.

After race riots rocked the country in 1969, the government enacted the New Economic Plan (NEP), a social reform policy intended to break up the country’s 32% Chinese minority’s virtual monopoly on economic power. It set quotas for bumiputra (“sons of the soil”) ownership of corporations and regulated such entitlements as college admissions and government jobs along racial lines.

The NEP was controversial but never became the heavy drag on the economy some critics predicted. Economic growth during the 20 years averaged about 6.5% a year, meaning the national income doubled every decade. And the number of poor families declined from one in two households to one in five households.

“If it hadn’t had a national policy of redistributing ownership of the economy, the growth rate probably would have been higher,” said Kamal Salih, executive director of the Malaysian Institute of Economic Research, an influential think tank. “But at what cost? Political instability.”

The government’s “Sixth Five-Year Plan,” covering 1991-1995, calls for further rapid industrialization, more foreign investment, more exports and targets an inflation-adjusted 7.5% annual growth rate. That would nearly double the gross national product to $75 billion by 1995.

Then there’s the National Development Policy, in which the government relaxes the ethnic quotas of the previous two decades but continues to script human resource development, social harmony and economic growth to the year 2000. And finally, the prime minister’s “2020 Vision” captures the dream of full development.

“The details are still very sketchy on what it means to become fully developed,” said Kamal, the think tank director. “But the country closest to what we want to achieve would probably be Sweden. We like their high level of education, their solid industrial base, their advanced technology and their strong social system.”

Japan might have been the model to emulate if it weren’t for its total lack of natural resources, Kamal noted. Malaysia is rich in oil reserves, rubber, tin and timber.

But Japanese influence goes far back. The downtrodden indigenous Malay population looked upon Japan’s invasion in World War II with ambivalent feelings--many saw the aggression as a form of liberation from British, and Chinese, oppression.

Mahathir’s career has hinged on the nationalist soul-searching that the marauding Japanese apparently triggered among Malays. He rose to prominence after writing the 1970 book “Malay Dilemma,” a populist manifesto on bumiputra rights, which advocated, among other measures, a “revolution” to “rehabilitate” the Malaysian character and realign the structure of society. The book was banned until he was elected premier.

Mahathir, the first leader who was not educated abroad, began his term in office propagating his “look East” policy, which shunned British and U.S. educational models and drew inspiration from the diligent work ethic of Japan. The message, underscored by training programs in Tokyo, was that Asian values of hard work could cure Malay economic malaise.

Ironically, the Malaysian student elite is still sent to Britain and the United States for advanced education and training--about 14,000 students a year to both countries--while about a thousand go to Japan. English remains the lingua franca of local business, bridging the language divide among Malay, Chinese and Indian populations.

Looking east to Japan may have been little more than a philosophical gesture, but the Japanese have responded enthusiastically to the tribute. Matsushita Electric Industrial Co. of Osaka, for one, started a manufacturing subsidiary in 1965 to sell consumer electronics and appliances to the budding domestic market, which it now dominates in every consumer product line except dry-cell batteries. Eight out of every 10 electric irons sold in the country carries one of the Matsushita brand names.

Matsushita raised the ante to build air conditioners for export in 1972, and since 1987 it has invested in 11 new manufacturing facilities, including a giant, state-of-the-art color television plant that serves the Japanese home market. The company has invested $959 million in Malaysia, a third of it over the past five years. Annual sales for the Matsushita group here are estimated at $1.6 billion, three-quarters of that in exports.

But dependence on the rapid influx of foreign capital has left the structure of Malaysian industry shallow, and thin. Making things here, without a developed substrata of suppliers and subcontractors, requires imports of a range of components, from low-tech widgets to high-value-added parts.

“One of the weakest points of Malaysian manufacturing is that there’s no local processed material industry,” complained Tadashi Akita, Matsushita’s chief representative in Malaysia. “It produces commodities, but we need half-processed raw materials, steel sheets, wires and simple parts.”

Malaysia’s “national car” company, the 70% state-owned Proton Saga, produces autos with technology and parts provided by Mitsubishi Motors, under Mitsubishi management. About 10% of the cars are exported to Britain, but from a screwdriver assembly operation.

In other areas of the economy, however, Malaysia is coming into its own. Companies went to the stock market to raise $3.3 billion in funds in 1990 and its total capitalization is on the way to overtaking the Singapore and Bangkok markets combined. The stock boom has brought a wild West flavor to a city where rubber and tin prices once provided the excitement for financial markets.

Khatijah Ahmad, chairman of the KAF financial services group, recalled how she bought a small company for $1 million a few years ago, sold 30% of it to foreign investors for $2 million and then listed the company, which now has a market capitalization of about $20 million.

Khatijah gave up a civil service job--a traditional sinecure for well-heeled Malays--17 years ago to start her own business. Her father, a landed rubber grower, opposed the move, but this wealthy businesswoman, dressed modestly the kind of long-sleeved cotton dress favored by Muslim Malay women, has no regrets. And she said her case is typical of how the economic boom has spread new opportunities throughout the population.

“I am just one tiny dot,” Khatijah said. “Across Malaysia there are hundreds of small entrepreneurs who’ve made fortunes in a short period of time.”

There is a downside to the bonanza. Analysts warn that the economy could overheat and inflation could get out of hand this year. Imports of all the capital machinery that will become the springboard to developed status is causing worries over the balance of capital leaving the country.

Manufacturing mania is bringing problems with industrial pollution. And with the government bent on sustaining 30 more years of aggressive, high-pitched growth, race relations aren’t the only challenge to Malaysian identity. Fears are rising that cultural dislocation will undermine the conservative Islamic values of the Malay majority.

“Malaysia used to have ‘rubber time,’ a more relaxed lifestyle, but we’ve gone from agriculture to industry in one generation,” said Norminsha Sabirin, deputy secretary general of the Ministry of Energy, Post and Telecommunications and one of the highest ranking women in government. “We have developed so rapidly and we’ve become urbanized so rapidly we’ve forgotten that human beings need time to change.”

Malaysia: A Country Profile (all figures 1991)

Population: 18 million (Malay 59%, Chinese 32%, Indian 9%)

Gross Domestic Product: $44.8 billion

Per capita GDP: $2,466

Growth: 8.5%

Labor force: 7.26 million

Unemployment rate: 5.6%

Land area 127,320 square miles

Resources: tin, petroleum, timber, copper, iron, palm oil, rubber

Head of government: Prime Minister Mahathir Mohamad

Type of government: Federal Constitutional Monarchy

Sources: Bank Negara, Malaysia Ministry of Finance, U.S. Commerce Department