By Clyde Prestowitz

Sunday, December 14, 1997; Page C01

It was in 1964 that the Japanese miracle was first proclaimed. In the next three decades, this phenomenon spread through much of Asia as the smaller economies there, imitating and adapting Japan's methods, created the world's most economically dynamic region. It was an unprecedented achievement, but the force always had a dark side. With much of Asia now on life support, it is time to recognize that the Asian brand of capitalism is dangerous to the world economy's health and that it must be abandoned, particularly by Japan.

In the wake of recent financial crises, leaders and analysts alike have been quick with assurances that the problem is not systemic, but merely one of mismanagement. Thus, at the recent Asia-Pacific Economic Cooperation summit, President Clinton spoke of a few "glitches in the road." At the same time, news stories and commentary in The Washington Post and the New York Times pointed to the high savings rates and other "sound fundamentals" of the Asian economies as evidence that with a bit of help from the International Monetary Fund (IMF) and reforms of their banking systems, they would soon be back on the old growth path. In fact, the opposite is true. It is precisely the "sound fundamentals" that are the problem.

As Asia soared over the past 20 years, debate raged in the West as to whether the "tigers" had developed a new model of capitalism or were simply running the old model more efficiently. Recent events have ended that argument by demonstrating definitively that the Asian model is distinct.

Conceived by Japan after World War II, the Asian economic model was designed primarily as a mechanism for catching up to the West industrially and technologically. Consequently, and in contrast with Western capitalism, it emphasized the needs of producers over the welfare of consumers. Its initial success led to development of the "flying geese" concept under which the other Asian countries would fly in formation behind and imitate the lead goose -- Japan.

Of course, the rest of Asia did not adopt the Japanese model in every detail. In particular, the countries of Southeast Asia were much more hospitable to foreign investment than those of Northeast Asia. But certain key elements were generally applied. These included: polices and practices such as compulsory saving deductions aimed at curtailing consumption and compelling high rates of saving; large investment in industries such as steel, autos and semiconductors with high capital and technological content already established or under development in the West; allocation of capital primarily through the banking system with implicit government guarantees of very high debt levels in major industries; emphasis on exports, and cozy insider relations among businesses and between business and government.

As a catch-up machine, this model was unparalleled. But once Japan caught up and several of the other geese -- South Korea, Indonesia, Malaysia, Thailand -- reached advanced stages of development, problems began to arise. While the model was good at concentrating resources to hit targets already set by the pattern of Western development, it performed poorly at selecting new directions. The web of insider relationships, along with bureaucratic guidance and guarantees, encouraged corruption and speculation -- particularly in real estate. More importantly, it dulled sensitivity to market signals and induced continued investment in the old target industries such as electronics, steel and shipbuilding, creating enormous excess capacity that had to be disposed of at sacrifice prices in export markets.

Indeed, it was the dependence of all the geese on exports that triggered the current crisis and that could prevent its successful resolution. The export-led growth strategy worked well as long as Japan was the only major exporter and the Asian economies were relatively small in comparison with import markets. In the flying geese concept, lead goose Japan was theoretically supposed to shift the structure of its economy from an export to an import orientation as it became plump and fully developed, making way for the rising exports of the following geese.

In fact, that shift never took place, and Japan developed chronic trade surpluses. For a time in the late 1980s and early 1990s, it seemed that things might be changing, as soaring stock and real estate prices sparked conspicuous consumption in Tokyo, along with an international buying binge aimed at trophy properties such as Pebble Beach Golf Course in California. But when this bubble finally burst in 1991, it proved to have been more of an investment phenomenon aimed at keeping the old model going than a genuine shift to higher levels of consumption. Japan was left with even greater levels of capacity than before and came to derive all of its now meager growth from exports.

By this time, however, the other geese had become fairly large birds with sizable exports of their own. In addition, a new goose with enormous export potential and needs, China, had joined the flock. Now, the exporters began competing among themselves for markets. In 1994, China devalued the yuan, thereby putting pressure on other producers of the textiles, toys and electronic goods that China exports. Since 1995, Japan has periodically intervened in the foreign exchange markets and taken other steps to drive its yen down in an effort to jump-start its languishing economy. This has put enormous pressure on other Asian exporters. Indeed, in retrospect, it is clear that these actions -- the first in a de facto series of competitive Asian currency devaluations -- were the harbingers of the current crisis.

As world leaders now search for a solution, they find that Asia is more focused than ever on export-led growth, with imports falling and exports rising rapidly. At the same time, the new tigers of Latin America have also discovered the export-led growth model, and even many of the Europeans are searching for growth from exports.

Only the United States, it seems, is buying, and because it consumes more than it produces, it can only keep buying by continually borrowing from foreign lenders.

Currently, the Asians and the Europeans are lending to the United States to enable it to buy their excess goods while their high investments result in yet more capacity to produce more goods. This is not a sustainable situation to begin with, and it may be made more unstable by the IMF's prescription of austerity for Asia, which will only increase the dependence of the Asian economies on exports to the United States. The IMF may not have any alternative in the short term, but it is clear that the U.S. trade deficit will soar into the ionosphere over the next two years and that this will lead to an eventual fall of the dollar and a consequent collapse of the export business and possibly, even of the international trading system, if something is not done in the meantime to stimulate demand outside the United States.

This is where Asia's "sound fundamentals" are counterproductive. The Asian system compels citizens to save too much, which results in too much investment (often in the wrong things) and too little consumption.

To avoid a possible collapse amid deflationary pressures, the world trading system desperately needs more consumption and more importers. The IMF bailouts may be necessary, but because they have been primarily aimed at shoring up financial systems and include large doses of austerity, they could wind up simply perpetuating the old system and even exacerbating its flaws of excessive savings and export-oriented investment.

To avoid this, the IMF should include in its bailout programs requirements for the breakup of the cartels; thorough deregulation of distribution channels and services industries such as airlines, telecommunications, and retailing; trade liberalization; and privatization of state-owned or -operated enterprises.

The real key to restoring Asia's health, however, is Japan. Japan is the world's second-largest economy and leading creditor nation with massive reserves and accumulated public and private assets. It has the resources to clean up its own financial mess and at the same time become a major buyer of the world's exports along with the United States. That is why Prime Minister Ryutaro Hashimoto's recent rejection of President Clinton's request that Japan become a locomotive for Asian growth is completely unacceptable. It is imperative that Japan become an "import superpower" as former Prime Minister Yasuhiro Nakasone promised long ago.

Desirable as they may be, conventional tax cuts and other fiscal stimuli will not be nearly enough to do the job that needs to be done in Japan. It will require extensive deregulation and restructuring measures such as: open skies in aviation and complete deregulation of inland transportation, telecommunications and distribution; drastic reduction of taxes on the buying and selling of land along with removal of most land use restrictions; government decentralization; introduction of criminal and triple damage penalties along with a right of private action in antitrust cases; introduction of standard international accounting rules; the breakup of major government ministries; dramatic strengthening of the ability of Japan's prime minister and Diet to actually direct the activities of the government; and cessation of implicit governmental loan guarantees and of government-directed price support operations for financial markets.

To date, Japan has shown little inclination toward making these changes on its own. It seems to be deep in denial. To change this will require the world community to exert maximum moral suasion upon Japan. The Clinton administration should emphasize that the yen is already undervalued and cannot be allowed to fall further. The Organization for Economic Cooperation and Development should advise on what actions should be undertaken to minimize the crisis in Asia. The U.S. business community should see to it that this issue is on the agenda of every international business convention.

The U.S. government and U.S. business should seek allies in Japan and in the international community to make the case for drastic action to Japan's leaders. Finally, the IMF and the World Trade Organization must insist that Japan do its duty, which is nothing more than it needs to do to restore its own health. If Japan does not do so, it risks not only economic consequences but perhaps also severe political and social repercussions around the world.

Clyde Prestowitz is president of the Economic Strategy Institute and a former U.S. trade negotiator.