HONOLULU -- Southeast Asian politicians and business professionals continue to insist that China's rise is "an opportunity, not a threat" to their future. That sounds a lot like whistling past the graveyard. The Chinese market is so big and has such a wealth of human and material resources that conventional remedies won't afford Southeast Asian business a future. Rather, their governments need to radically readjust their thinking and their policies to deal with the new economic order that China is creating.

Thailand is doing just that. In a little noticed experiment, the government of Prime Minister Thaksin Shinawatra is mobilizing resources to embrace a new development strategy, one that turns its back on head-to-head competition with China in mass export markets and focuses on its comparative advantage in smaller-scale production. The Thai program has won applause from analysts despite initial skepticism (and concern about the way funds are used).

Southeast Asia has depended on an export-oriented mass manufacturing model as the engine of its economic development. The model is drawn from the Japanese experience and has been remarkably successful -- at least until China began its meteoric rise.

Daniel Lian, Morgan Stanley's Southeast Asia analyst, says the region's growth potential has been halved -- from 7 percent to 3.5 percent -- since 1997 chiefly as a result of the rise of China, and growth will continue to be cut between 2 and 4 percentage points from its pre-97 potential: "Southeast Asia will lose some $150 billion to $400 billion of output (measured in 2001 prices) over the next 15 years taking into account the contribution of growth generated by China's demand."

If Lian is correct, then Asia has to find new drivers for growth. Among the options are domestically generated demand and the creation of manufacturing niches. Prime Minister Thaksin has embraced a two-track strategy, one that achieves both ends. His government has applied fiscal stimulus to boost homegrown consumption, rationalized spending on traditional export industries, and used indigenous resources to spur the creation of new exports and service industries. The key point is shuffling the components of economic growth. Thailand currently relies on exports for about two-thirds of its growth; Thaksin wants to reduce that to about one-third.

Thaksin campaigned for office promising to get his country moving forward. He pledged 1 million baht ($23,300) for each village and a three-year debt moratorium for small farmers. While many viewed the promises as mere pork, fiscal stimulus has managed to stimulate domestic demand, allowing Thailand to mark 5.2 percent growth in 2002, making it one of the most robust economies in the region.

An Australian government assessment concludes that Thailand's performance has "exceeded all expectations," and the Asian Development Bank forecasts continued expansion.

The key to Thaksin's long-term economic strategy is shifting the focus of the Thai economy: Rather than court huge multinational corporations looking for cheap labor to use as export platforms, he will develop small- and medium-size enterprises, or SMEs, that exploit local skills to create new products and services or expand underdeveloped niches.

As Lian explained, "Thailand's comparative advantage does not lie in abundant cheap labor, but rather a population and workforce endowed with an aesthetic culture and tradition. . . . By encouraging skill-driven enterprises that organize workers who excel in their local skills, Thaksin's paradigm will bring new products and services to the international market on improving terms of trade and pricing power, based on flexible production capacity." Candidates for Thai development include food processing, alloy toys, textile and ceramic products. Services would focus on tourism and health care.

This strategy gives Thailand "pricing power" without rejecting globalization. The policy has won high marks among investors and analysts -- the growth figures are hard to ignore. More recent figures show Thai exports increasing 11.3 percent in real terms in 2003. More to the point, SMEs accounted for about 40 percent of those exports, and their growth outpaced that of the mass-manufacturing sector.

The real work is to come, however. Success depends on the creation of a legal infrastructure for the SMEs. That means defining assets (such as intellectual property, land, and other rights) that these new businesspeople can buy and sell (and use for collateral) and setting up a legal system that protects them.

Thaksin's strategy has a number of important implications. First, it holds out some hope of insulating the Thai economy from external shocks. (This is only partial: Remember, there is still some mass manufacturing, and even if all goes according to plan, one-third of growth will depend on exports.) Second, it could check, to some degree, the spread of Chinese economic influence in the region. The Thai approach is the product of concern about the impact of Chinese development.

If fears of an economic "China threat" are correct, economic integration along the lines of the proposed China-ASEAN free trade agreement would leave Southeast Asian nations fighting over the crumbs. The Thaksin strategy gives Southeast Asian governments more control over their future by playing to their own strengths.

Finally, there is a more subtle and important long-term effect of this approach. The shift to internally generated demand would alter international capital flows: Less money would be available to finance U.S. borrowing (which is usually used to finance purchases from these same countries). Of course, Thailand alone won't have much of an impact. And even if other countries pick up on the strategy -- and there are signs that others, such as the Philippines, are beginning to study the Thai experiment -- the 10-member Association of Southeast Asian Nations alone just isn't a big enough global player to have an effect.

But if China and India embrace the domestic-demand component of the strategy then things get interesting. Those two countries alone represent about one-third of global population. Add Southeast Asia and a decade or so of economic growth, and the numbers start looking significant. If Japan embraces real reform and quits exporting its capital surpluses, then basic assumptions undergirding the international economy are in for a reassessment -- and the basis of long-term American power might be equally susceptible to challenge.