(FORTUNE Magazine) – AUSTRALIA and New Zealand, two daughters of Mother England perched on the Pacific's southern rim, are desperately seeking answers to two tough questions. First, who are they? Says Nobby Clark, managing director of the National Australia Bank: ''Australia has to decide whether it's a European country domiciled in Asia or an Asian country that happens to have a European heritage.'' The second dilemma is even more urgent. Can they compete in the world's fastest-growing market? Traditionally New Zealanders and Aussies have felt more comfortable doing business with the U.S. and Europe than with Asia. Increasingly they are concluding that their future lies closer to home. According to Australian Prime Minister Bob Hawke, the region's brisk growth provides ''tremendous opportunities and new responsibilities.'' The conference of regional leaders that Hawke convened in Australia in early November dramatizes his desire to play a stronger Asian role. Already, Australia is the biggest farm and mineral quarry for Asia, which buys about half the country's exports. But the Aussies add little value to their commodity bounty. Australian wool goes straight from the sheep's back to Japan, which does most of the processing. As the world's biggest coal exporter, Australia fuels not only Japanese steel mills but also those in South Korea and Taiwan. These exports of raw materials help support an expansive consumer society. But they cannot solve the basic problem facing Hawke: how to get this laid-back, leisure-loving nation in shape to run with the lean Asian sprinters. Productivity in most Australian industries is poor. At ports, activity grinds to a halt while all the mates take a tea break at the same time. An influx of Chinese, Thai, and even Japanese could help by injecting some Oriental drive and discipline into the economy. At current rates of immigration, citizens of Asian origin will account for about 15% of the population in 40 years. Hawke's Labor government, which has been in power for six years, has also wrought some impressive reforms -- deregulating banking, cutting taxes, and producing budget surpluses. A deal known as ''the accord'' struck with Australia's powerful unions has restrained wage increases. Still, labor costs remain far higher than elsewhere in Asia. Moreover, a spending spree by consumers and companies bent on takeovers has piled up foreign debt of $83.2 billion, among the world's largest. To cool the economy, which Treasurer Paul Keating terms ''a bucking bronco,'' interest rates have been raised to over 18%. That painful medicine could persuade voters to send Labor packing in the next elections. After a long decline, New Zealand, which depends on exports of meat and dairy products, has emerged as a tougher global competitor. The country's troubles started in the 1960s when Europe began shutting out agricultural exports, and worsened when the New Zealand government tried to soften the blow by subsidizing farmers. To turn things around, Roger Douglas, who was Finance Minister in the mid-1980s, began his own version of Reaganomics, which New Zealanders dubbed ''Rogernomics.'' Controls on foreign exchange, as well as extensive wage and price strictures, were scrapped. Tariffs and taxes were cut, and a host of government corporations, from Petrocorp, the state oil company, to Air New Zealand, were privatized. This festival of deregulation has had one unhappy side effect: an unemployment rate of 9%, the highest since the 1930s. The political pain has caused Labour Prime Minister David Lange, who has presided over this shakeup for five years, to decide that it may be ''time for a breather.'' But the new Labour leader, Geoffrey Palmer, a former history lecturer, gives every indication he intends to consolidate the big changes rather than roll them back. If he does, New Zealand can become the kind of exporter for which the Pacific Rim is famed.