The Association of South-East Asian Nations (ASEAN) is set to declare itself a common market at the end of 2015, in a move that will create new opportunities for investors in a region that boasts not only some of the world’s fastest-growing economies, but also an expanding middle class. “ASEAN and South-east Asia are one of the few really bright spots in the world economy,” said Teoh Kok Lin, the founder and owner-fund manager of Singular Asset Management in Kuala Lumpur. “We still have a young population so the demographics are positive. We also have a huge emerging middle class; people are buying their first television, their first mode of transport. It is a sweet spot.”

SHIFTING DYNAMICS: In the past decade, the economies of emerging Asia have expanded by over 7.5% a year, according to the IMF. The combined GDP of ASEAN is already valued at $2.3trn and is expected to reach $10trn by 2030. The regional body, now home to over 600m people, was formed in 1967 as a bulwark to the communism that had begun to spread through South-east Asia. The original members – Malaysia, Indonesia, Singapore, Thailand and the Philippines – made economic growth a priority from the start.

Historically, member countries have competed in the same industries, focusing on the potential outside of ASEAN, rather than within the region itself. Even today, intra-ASEAN trade is just 25% of the region’s total trade. Thailand, for example, has become known as the “Detroit of the East” and a hub for global automobile manufacturers. Those same manufacturers also have bases in Indonesia, South-east Asia’s biggest market for automobiles, and the Philippines. The organisation’s 10 members also compete in areas such as food processing, telecommunications, tourism and business services, while those with higher levels of English – the Philippines, Singapore and Malaysia – have generally held an advantage over their peers within ASEAN in the global economy.

The original five are now at the core of what has grown into a highly diverse organisation. As well as differing political systems – from the vibrant democracies of the Philippines and Indonesia to the communist regimes of Laos and Vietnam – there are also vast disparities in economic management, culture and wealth. Singapore is the richest but also the smallest.

The city-state’s per capita income (in purchasing power parity, US-dollar terms) might be 45 times that of Myanmar. However, the island has less than 1% of ASEAN’s population. Myanmar, in contrast, is home to more than 60m people.

CLOSER INTEGRATION: The ASEAN Economic Community (AEC) was launched in Bali in October 2003, as the region emerged from the Asian financial crisis.

Six years earlier, the collapse of the Thai baht ricocheted across the region, triggering deep recession in many countries and bringing an end to the long-term rule of Indonesia’s President Suharto. In the aftermath, leaders sought a way to rebuild their economies on a more secure foundation.

“Asians did not draw the wrong lesson from the Asian crisis; they did not hunker down, pull up draw bridges or withdraw from the world,” the IMF’s managing director, Christine Lagarde, said in a speech in Kuala Lumpur in November 2012. “Asia’s economic foundations became safer, sounder and more resilient, but still open to the world and open for business,” she added. The AEC is designed to transform ASEAN’s 10 member countries into a single-production base allowing for the free movement of goods, services, investment, skilled labour and capital. Initially set to take effect in 2020, the AEC is now expected to come into force on December 31, 2015.

ASEAN has also championed closer economic integration as a way to bridge some of the developmental differences within and among ASEAN nations, deepen the region’s economic ties with the rest of the world, and compete more effectively with a rising China. The group has set itself key targets in a binding blueprint that tracks each of the AEC’s four pillars and was agreed in 2007. An “AEC Scorecard” keeps track of each country’s compliance. Lim Hong Lin, the deputy secretary-general with responsibility for the AEC, notes that as of August 2012, 72% of measures for the period 2008-11 had been implemented. Still, other than peer pressure there are no penalties for those countries that miss their targets and no way to ensure measures take effect at the national level.

A WORK IN PROGRESS: With the AEC built on the foundation of the existing ASEAN Free Trade Agreement, it is perhaps not surprising that most progress has been made in trade liberalisation. But efforts to integrate Customs procedures to create an ASEAN Single Window, namely to liberalise services and harmonise crucial regulations and standards, have been slower. Indonesia’s trade minister, Gita Wirjawan, acknowledged in November 2012 that the archipelago was finding it challenging to deal with the crossborder measures. Other member states, including Thailand and the Philippines, have also struggled.

Local corporations, fearful of competition in their home markets and often politically well connected, have made it difficult for governments to effect the policy changes that the AEC demands. Indeed, a report by Global Trade Alert, an organisation that monitors policies affecting world trade, notes that in 2011 Indonesia adopted more potentially restrictive trade measures than any other country in South-east Asia, ranking it among the top 10 protectionist nations, not only in the number of tariff lines affected, but also for industries and trading partners.

Jayant Menon, the lead economist for trade and regional cooperation at the Asian Development Bank (ADB), has been tracking the implementation of the AEC. He doubts that the core countries will meet their 2015 target for implementation – though they will declare the AEC in existence anyway – and admits that the poorer nations of Cambodia, Laos, Myanmar and Vietnam are even further behind, perhaps by as much as a decade. Nonetheless, he stresses that the 2015 target should be seen more as a milestone than a hard target. “One should not expect in 2015 to see ASEAN suddenly transformed, its nature and processes abruptly changed and its members interests substantially altered,” he told OBG. “2015 should be viewed more as a milestone year – a measure of a work in progress. The journey remains relevant even if the destination takes longer to arrive at.” Menon estimates the region’s core members will achieve AEC implementation by 2020, their original target.

REGIONAL DIFFERENCES: ASEAN officials are also mindful of the region’s vulnerability to economic uncertainty worldwide. “The intensification of global risks puts into question the credibility of globalisation and casts some doubts on the region’s ability to manage its own integration,” Lim told delegates at a forum on the AEC in September 2012. “Of particular concern are the potential pullbacks in trade and capital flows into the region as global conditions deteriorate, and the possibility that some ASEAN countries may revert to protectionist measures and inward-looking policies The poorer nations, Cambodia, Laos, Vietnam and Myanmar – the latter only just opening up to the world after decades on the international sidelines – officially have until 2018 to reach their targets, but even richer countries have been able to negotiate exclusions for what they deem to be “sensitive” industries such as automotive manufacturing and agriculture.

Malaysia, for instance, has long sought to protect its national carmaker, Proton, from outside competition. Indonesia and the Philippines are seen as among the most restrictive countries in ASEAN and are highly cautious about opening their vast domestic markets, even to regional rivals.

POSITIVE MOMENTUM: Still, while data suggests policy implementation has been slower in some areas than it should be, trade between ASEAN and the rest of Asia, as well as within ASEAN itself, has risen considerably in the past decade. Most recent data shows trade within the 10-member grouping rose to $520bn in 2010, compared with $121bn in 1998. There are signs that countries within ASEAN appreciate the benefits of convergence and cooperation.

Increasingly, electronics factories in ASEAN are making components that are then shipped to production centres in China for assembly and export to the wider world. Japanese carmakers have taken advantage of the ASEAN Industrial Cooperation Scheme to set up an integrated ASEAN-wide production system.

The importance of trade to the region is reflected in the proliferation of free trade agreements either on a bilateral basis or between ASEAN and its major trading partners, including China, Japan and the Republic of Korea. ASEAN is now trying to streamline these group-level agreements under the Regional Comprehensive Economic Partnership (RCEP).

The RCEP, as it is known, is designed to put ASEAN back at the heart of this trade machinery. Among other aims, it is an effort to harmonise the widely differing rules of origin and investment protections among the 10 members, and with their trading partners. The group agreed to commence negotiations in November 2012, although at the time of writing it was not clear when any final agreement would be made.

GETTING A SLICE OF THE PIE: In the past few decades, the region’s impressive growth rates have helped millions out of poverty and transformed what were once largely agrarian economies, such as Malaysia and Thailand, into centres for manufacturing and industry. The richer members are now looking to develop more sophisticated service industries and move up the manufacturing value chain. As a result, ASEAN’s poorer members have taken hold of low-level manufacturing: factories on the outskirts of the Cambodian capital, Phnom Penh, now produce clothing for some of the world’s most high-profile brands, and Cambodia’s garment industry is one of the region’s biggest.

All this is putting more money into the hands of ordinary people and raising the ranks of the middle class, defined as those with an annual income of at least $3000. In Indonesia, for example, at present ASEAN’s biggest economy and the source of around one-third of the bloc’s GDP, some 163m people are expected to be middle class by 2020, greater than the combined population of the UK and Germany. At that level, discretionary spending becomes easier, and demand for motorbikes and cars, electrical appliances and gadgetry, as well as banking and financial services, rises.

LARGE POTENTIAL: Companies within ASEAN have begun to see the potential. AirAsia, a low-cost airline that started flying in Malaysia a decade ago, now has operations in three more ASEAN countries and an ASEAN headquarters in Jakarta. Its Indonesian rival, Lion Air, is planning to establish a Malaysian operation in 2013. ASEAN leaders have listed “open skies” as a priority for the AEC, recognising air transport as an important element of the modern infrastructure necessary to support its economic development plans. Telecommunications services, food manufacturers, and even health care and education providers are looking to tap into regional demand as well.

Banking and financial services, including trade financing, insurance and microfinance, is another area where economists see considerable potential. The IMF estimates about 60% of people in the region are excluded from the financial system often because they lack enough money to open or maintain a bank account, branches are too far away or they do not possess the proper documentation. In Cambodia, less than 5% of people have bank accounts. In Myanmar, such figures are hard to come by. And that is merely the data for commercial banking. Access to more sophisticated financial products such as pensions and insurance is currently even more limited.

BUILDING ASEAN BRANDS: As part of the AEC, ASEAN officials have been working to develop and integrate the group’s diverse banking systems. While Singapore has turned itself into one of the world’s leading financial centres and Malaysia has carved a niche for itself in Islamic finance, other ASEAN jurisdictions are significantly less developed, partly because people in countries with lower GDP levels are poorer and have less interest in a formal banking system. Central bankers endorsed the ASEAN Financial Integration Framework in 2011 in an attempt to harmonise regulations across the region and identify the ASEAN banks most ready for regional expansion, but progress has been slow.

Nevertheless, institutions such as Singapore’s DBS, Malaysia’s Maybank and CIMB, and Thailand’s Bangkok Bank have expanded regionally. The chief executive of CIMB, Nazir Razak, has sought to develop the group as an “indigenous ASEAN investment bank”. With total assets of more than $100bn, CIMB employs over 43,000 staff across the region and provides financial services in nine of ASEAN’s 10 member states. Meanwhile, Maybank operates in Indonesia, Singapore, and Cambodia and plans to open over 100 branches across ASEAN in the run up to the AEC. “We believe for ASEAN to prosper, it is important for the region to be supported by a number of well-capitalised, well-run and well-networked banks that can facilitate trade and investments,” Abdul Wahid Omar, president and CEO of Maybank, told reporters in November 2012.

BARRIERS: Still, as Maybank, CIMB and even global lenders such as HSBC, Citi and Standard Chartered have learned, financial services remains a highly protected industry across much of the region.

Despite its enthusiasm for Islamic banking, for example, Malaysia places considerable restrictions on the operation of foreign banks in the conventional sector. Foreign banks can open only a limited number of branches and ownership of local lenders is restricted to 30%. Singapore also ensures outsiders – including from ASEAN – have only limited access to its commercial banking sector, although it is encouraging those with large local deposits to incorporate locally, a move that would give them the right to open more branches. Indonesia allows foreign institutions to acquire as much as 40% of domestic lenders, although this can be raised for publicly listed, financially-strong banks.

Infrastructure is one area where there seems to be less resistance to outsiders. ASEAN governments are only too aware that creaky transportation networks – whether in the air, on land or at sea – threaten their ability to move goods and people smoothly around South-east Asia. The ADB estimates the cost of developing infrastructure in the region to be around $60bn per year over the next 10 years. Indeed, the $500m ASEAN Infrastructure Fund, which is backed by the ADB and based in Malaysia, is currently ASEAN’s largest funding initiative, and the fund is designed to leverage public-private partnerships to meet some of the demand for financing.

STARK DIFFERENCES: Again, there are vast differences between members with respect to transport and infrastructure. Regarding the former, while Singapore boasts a highly efficient public transportation system and an airport that is frequently voted among the best worldwide, Cambodia has next to no public transport, dangerous and pot-holed roads, and limited air links. Its plans to rebuild a railway destroyed by years of conflict have run into trouble over the relocation of those living along the route, although Toll, the Australian company in charge of the project, is confident a freight route linking the capital, Phnom Penh, to a modern port at Sihanoukville on the southern coast will commence operations in early 2013.

There are acute differences in power provision as well. In Cambodia, just over a quarter of the population currently has access to electricity in their home – one of the lowest rates globally – and many people do not have access to clean water. Conditions are similar in Laos and Myanmar. The ASEAN Power Grid (APG), the Trans-ASEAN Gas Pipeline (TAGP) and other initiatives are designed to address such power deficits. The APG involves 14 electricity interconnection projects; the TAGP, seven gas connections.

OUT FROM THE COLD: When the AEC was conceived, few imagined that Myanmar would, less than a decade later, start political and economic reforms that would open the door once again to foreign investment. But even as business leaders beat a path to Yangon eager to secure first-mover advantage in an economy long off limits to outsiders, the challenges are undeniable. Indeed, Myanmar’s per capita GDP is one of the lowest in South-east Asia, and 26% of its largely rural population lives in poverty. Without access to everyday basic services, many rely on wood and charcoal to light their homes and cook.

Changing course, the government of Myanmar is now welcoming foreign investors, with recently released legislation on foreign direct investment (FDI) among the most liberal in the region. With its vast, untapped resources of timber, oil and gas, and hydropower, most analysts see the biggest opportunities in the energy sector.

A recent report from the ADB notes that economic sanctions ultimately hindered the country’s development and ensured that the energy sector lagged well behind its potential. That is now changing. Offshore gas fields are the most important source of export revenue, with a pipeline to Thailand already in operation and a route to China under construction. One-third of the country’s $13.6bn in FDI was in oil and gas in 2011, according to the ADB. In addition, an ASEAN report notes that exports in Myanmar rose from $6.3bn in 2009 to $7.6bn in 2010.

Myanmar is set to take the chairmanship of ASEAN in 2014 in what will be an historic moment for the country. The quasi-civilian government will likely still be grappling with its own internal reforms though – their success far from assured – and given the challenges faced by the region in reaching its AEC targets, many wonder whether it will be possible to translate ASEAN’s talk of the past decade into lasting policy change. That task may, in the final instance, fall to Malaysia, which takes the chair in 2015. As the world’s 25th biggest exporter, Kuala Lumpur has made no secret of its support for the AEC, which it sees as an opportunity for its homegrown corporations to escape the confines of a relatively small domestic market.

Having made significant progress towards its own AEC targets, Malaysia may ultimately have a better chance than most to convince its regional neighbours to embrace the common market and to ensure ASEAN’s 10 disparate members achieve the economic ambitions to which they have long aspired.

OUTLOOK: With Brunei Darussalam taking on the ASEAN chair in 2013 at a crucial moment for the 10-member organisation, the country with a population just a fraction the size of most of the region’s capitals will need to marshal all of its skills in diplomacy and artful negotiation to ensure that member states – some considerably poorer than others – advance further down the road toward economic integration.

Arguably, more challenging, the Sultanate will also need to address strategic differences over how best to deal with rising tensions in the South China Sea, an issue that was made apparent in Cambodia in 2012. With the issue still high on the agenda, and Brunei Darussalam remains a claimant, the bloc will have to work hard to make progress on resolving the situation diplomatically as well as raise the “spirit of ASEAN”.