On the face of it, Southeast Asia should be an investor’s paradise. It offers a market of 560 million people, rich natural resources, skilled labor, and an export industry concentrated in global high-growth sectors—all tied together in a free-trade area created by the Association of Southeast Asian Nations (Exhibit 1). In fact, ASEAN’s $330 billion consumer market equals that of China’s booming coastal region in value and is bigger than any other market in Asia. The group’s ten member countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) control 40 percent of the oil and gas resources in the Asia-Pacific region and boast a strong industrial base benefiting from relatively low wages in attractive sectors such as consumer electronics, PCs, and semiconductors.

Yet after achieving higher economic growth than virtually any other part of the world since ASEAN’s inception, in 1967, the region has slipped dramatically in the wake of the Asian financial crisis that began in 1997. Foreign direct investment shrank by two-thirds, and aggregate economic growth dropped by 50 percent—in stark contrast to China’s surging investment, exports, and GDP growth (Exhibit 2). Although the financial crisis hit investment and growth hard, the painfully...