The South, traditionally America's most illiterate region, is on the edge of a dramatic reformation of public education intended to raise the region from its rock-bottom ranking.

The movement is championed by a group of progressive governors, such as Lamar Alexander (R) of Tennessee, Mark W. White Jr. (D) of Texas, Bill Clinton (D) of Arkansas and Richard W. Riley (D) of South Carolina and former governors William F. Winter (D) of Mississippi and James B. Hunt (D) of North Carolina.

In most cases, it is fueled by an understanding that the region's economic future is linked to the ability to attract high-technology firms, which in turn requires a skilled work force and a good educational system.

Also involved are intense regional pride and friendly interstate competition. The South has always ranked last in student test scores, teacher salaries and per-pupil expenditures on education, and first in dropout rates and illiteracy. The scramble to improve has become competitive, with no state wanting to be left behind.

"In the South right now, education reform is kind of like the Holy Grail," said Paul Hubbard, president of the Alabama Education Association. "All the politicians in the southeast have been chasing the reform movement. There is a recognition in the South now that education and economic development must go hand-in-hand. A lot of governors sense that."

In many cases, governors pushed through education-reform packages despite objections of teachers, who dislike merit-pay plans and teacher-competency tests.

And in almost every instance, the governors were forced to confront the entrenched racism that still influences much of the region's political debate. Desegregation led many white parents to enroll their children in private schools and to all but abandon public education. This made it all the more difficult to persuade southerners, traditionally adverse to tax increases, to pay more in taxes to support public schools.

The young reform movement, nevertheless, has produced some significant changes:

All but one of the 14 states in the Southern Regional Education Board require tough certification tests for people who want to become teachers. Maryland, the exception, is considering a similar measure.

Last spring, Arkansas became the first state to test practicing teachers for competency, in an effort to weed out the unqualified. Georgia and Texas have approved similar tests.

Nine southern states have increased the number of credits needed for high school graduation, usually by requiring more mathematics and science.

Tennessee, Texas and Florida have started merit-pay plans for teachers over strong objections by teachers' unions. South Carolina, North Carolina, Arkansas and Virginia are experimenting with merit-pay plans, and Georgia and Alabama are developing such plans.

Most southern states posted 8 percent to 10 percent salary increases for teachers. Tennessee, Arkansas and South Carolina passed sales-tax increases to cover them. Also, the South led the nation in raising per-pupil expenditures during the 1983-84 school year, with Alabama having the nation's largest increase, 34.8 percent.

Most education analysts agree that the most sweeping reforms have come in South Carolina. A recent survey of states by the Rand Corporation rated its education-improvement package as the nation's most comprehensive and a help in easing political bitterness engendered elsewhere by merit-pay proposals and teacher testing.

Although 49th in per capita income by some estimates, South Carolina has an unemployment rate below the national average, a viable tourist industry and a strong U.S. military presence. It was never quite as poor as Mississippi, hence the oft-heard expression here, "Thank God for Mississippi!" But it also lacks the natural economic lure of neighboring North Carolina, which boasts a major high-technology area near Raleigh and Durham.

South Carolina's 1984 Education Improvement Act was supported by an unlikely coalition of business leaders, moderate legislators, the state education association and Gov. Riley. He stumped statewide for education reform and appeared on television in slick paid advertisements asking citizens to give "A Penny for Their Thoughts" in the form of a one-cent sales-tax hike.

Riley was armed with his own statewide poll that showed voters unusually supportive of a tax increase if it would be earmarked for educational improvement, and he set out to create grass-roots pressure on a recalcitrant legislature. He placed key businessmen and legislators on an education commission and urged them to create a strong but politically acceptable package of reforms.

"It was all the governor's doing. He built all the coalitions," said John Sullivan, executive director of the South Carolina Education Association (SCEA).

The reform act in South Carolina was a carefully crafted compromise, offering carrots and sticks to encourage and force school improvement.

For example, the teachers were given an across-the-board, 16 percent pay raise and a legal guarantee that their salaries will keep pace with the average for Southeast. They were also told to swallow a merit-pay plan, although its exact nature has not been decided.

Three separate merit-pay plans are to be pilot-tested in nine school districts this fall. The SCEA said it will monitor them closely. "If we don't think they work, we will come out against them," said Betty J. Cunningham, SCEA president. "The SCEA and the National Education Association are still opposed to merit pay. But we know it's out there, so we have to get the best plan that we can."

Other provisions in the package include new grants to school districts that show the most improvement according to specific criteria, such as attendance rates and test scores. For those that do not improve enough to meet minimum standards, there is an unusual "intervention" provision allowing the state to withhold funds and even fire the local school superintendent.

Six of this state's 92 school districts have been placed on that list of "impaired" districts facing state intervention. They are predominantly black and rank highest in the state in the percentage of children in private schools, raising "some racial overtones and some socio-economic overtones," SCEA spokesman Paul DeArmond said.

Starting next year, every public school in the state will receive an annual report card on its progress.

Another "carrot" plan is for colleges. The nine that train teachers in the state can receive extra money if they demonstrate that they are "centers of excellence."

The South Carolina package has become a model for other states because, besides toughening standards at the exit end of the school system, money is provided to give remedial help to those who need it to meet the new standards.

The state has launched the nation's largest basic-skills program, along with a large early-childhood program funded at $20 million to supplement the federal Head Start program. In addition, the age of required school attendance was lowered to 5.

The package of programs has resulted in improvements after only a year. Absenteeism dropped by 30 percent last year. And, for the first time, 10th graders taking the Comprehensive Test of Basic Skills scored above the national median in reading, spelling and mathematics combined.

"We're raising standards," said Riley's aide, Terry Peterson, "but we're also raising expectations. We're saying you can learn, and we want you to learn."

Bill Page, a Greenville real estate executive, headed the panel that designed the package. "Business had finally recognized how essential a quality public education is to economic development," he said. "People who are concerned about the long-term economy of South Carolina realize that a strong public education system is essential to that."

Page, who talks to many prospective businesses investigating whether to locate here, said he found education of greatest concern to almost every site-selection committee. "They are concerned about having a skilled work force available," he said, "and they are also concerned about the quality of life for the managers they may want to locate here." Having good schools, he said, could be a double selling point to prospective businesses.

There were obstacles to reform. The legislature, still largely dominated by the rural gerontocracy, has traditionally opposed raising taxes and spending money. Also involved was the undercurrent of racial prejudice and the legacy of a dual school system not fully integrated until 1971.

"Most of the community support is going to the private schools, actually moving us back to the way things were before integration," DeArmond said.

Riley began by holding public meetings around the state, often attracting as many as 2,000 citizens. Meanwhile, the business community raised $100,000 and hired a well-known political advertising firm here to launch a media blitz, aimed not so much at persuading the public as pressuring state lawmakers.

One commercial showed a pregnant woman mailing a letter to her legislator and saying her unborn child's future was too important not to do so. Another showed a blue-collar worker deciding to skip a bowling match to go to the governor's town meeting on educational reform.

Besides attempting to co-opt the business community, Riley included teachers in the design of the package. "We were fully involved on all the committees," Cunningham said. "We didn't have a committee cram it down our throats.