AirAsia, the Malaysian no-frills airline, has tapped into demand from the fast-growing middle class in south-east Asia with its slogan: Now Everyone Can Fly.

But, in a region where state-owned behemoths and favoured oligarchs still dominate in many domestic air-travel markets, it is not always so easy to get off the ground.

The budget carrier pulled out of Vietnam last month, after four years of wrangling with the government, which refused to let it fly under the AirAsia brand, the key to its business model.

Analysts believe the government was acting in defence of Vietnam Airlines, the well-connected state-owned flag-carrier, and that Vietnamese consumers will suffer as a result of the failure to open up the market to international competition.

Such non-tariff barriers to the expansion of trade and services are widespread within the 10-member Association of Southeast Asian Nations, despite an optimistic plan to turn this loose bloc into an integrated, free-trading “economic community” by 2015, complete with “open skies” for the region’s airlines.

There is no doubt that south-east Asia has vast potential as an integrated market. Its 620m people and forecast gross domestic product of $1,800bn for this year, makes it the third-largest economy in Asia, behind China and Japan.

Asean’s GDP has risen by 170 per cent over the past decade and the region accounts for 6 per cent of global trade, with intra-regional trade on the rise.

But this politically and economically diverse bloc – composed of Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam – is a long way from turning the lofty rhetoric of economic integration into reality.

“Asean as an entity is probably far too diverse to bring about such a shift,” says Tai Hui, head of south-east Asian research at Standard Chartered bank in Singapore.

Not only is there a wide array of political systems, from communist dictatorships to democracies, but also, unlike the European Union, Asean members are at very different stages of development, from desperately poor Burma, Cambodia and Laos, to the gleaming city-state of Singapore.

And within south-east Asia, says Mr Hui, regionalisation tends to take a back seat to domestic politics during elections or times of political change.

Economists say that, faced with stiff competition for foreign investment from China and India, south-east Asia has the potential to leverage its diversity to become an alternative production base and an attractive regional market for goods and services.

The region’s strategic location between Japan, China and India, in an area that encompasses many of the world’s main trade routes, leaves it well placed to capitalise if it can get its house in order.

Some pioneers have already begun this journey, including Piaggio, the Italian scooter manufacturer, which has set up a factory in Vietnam and is exporting around the region.

“I see potential synergies for south-east Asia, with Singapore operating as a service hub, Thailand and Malaysia as advanced manufacturing centres and Indonesia and Vietnam as bases for low-cost production, with all sides making use of the region’s com­modities and natural resources,” says Mr Hui.

The key to this vision is establishing free circulation of goods, services, capital and, to some extent, people.

The more advanced economies of the so-called Asean Six (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) have done the most to bring down regional tariffs under a series of phased free-trade agreements that date back to 1992.

But utilisation of preferential tariffs on offer to Asean members remains low because of the complex administrative procedures that companies must complete before they can benefit, according to Claudio Dordi, an Italian law professor, who is advising the Vietnamese government on international trade issues.

The predominance of stodgy bureaucracy points to a big hurdle in Asean’s path: the lack of solid institutions to implement and police liberalising trade rules.

The “Asean way” is based on consensus. The motley assortment of Marxist-Leninists, retired generals, technocrats and demagogues who rule the region have long agreed not to interfere in each other’s internal affairs.

However, as Prof Dordi points out, it was only when the EU developed robust intermediary institutions, such as the European Court of Justice, that it was able to push ahead with deeper economic integration.

This institutional weakness was one reason why the EU abandoned plans to negotiate a potentially transformative FTA with Asean, opting instead to enter bilateral trade talks with some of the bloc’s more advanced nations.

Asean has managed to conclude more limited FTAs with Australia and New Zealand, China, India, Japan and South Korea.

Surin Pitsuwan, Asean’s secretary-general, accepts that “the road to economic community is still a long one, with bumps and challenges along the way”. But he says he is “certain that by 2015 the foundations of the Asean economic community” will be there.

Prof Dordi believes that Asean has already gained a great deal from trade liberalisation and can expect many further benefits from dropping barriers in future.

But he is less sanguine about the speed with which the region can overcome challenges. “Proper integration will take years, if not decades,” he says. — FT