Have you noticed filling up your car is getting expensive? How about an added pinch from rising interest rates? Or maybe you’ve seen some panic buying in the local shops. We’ve all felt it in recent weeks: conflict in the Middle East is no longer distant. It is already reverberating across the Indo-Pacific as a real-time stress test of economic resilience and stability.
The Middle East sits at the heart of global energy and trade flows, with roughly 20% of the world’s oil and gas passing through the Strait of Hormuz. Disruptions in the region since 28 February are already pushing up energy prices, with evidence suggesting that a 10% rise in energy prices could increase inflation by 40 basis points and slow global economic growth by 0.1-0.2 percent.
Some analysts warn that these shocks could compound existing vulnerabilities—raising costs of living, straining public finances and increasing risks to stability, particularly in more fragile contexts. Others, however, caution against overstating the impact, noting that many economies have become more resilient to external shocks and may be able to absorb short-term volatility without major long-term disruption.
The conflict is still unfolding in real time, and its second-order effects remain uncertain. For governments across the Indo-Pacific, the challenge is not only managing immediate pressures but anticipating how global shocks might interact with longer-term development.
So, this week, we asked three experts: “will escalating conflict in the Middle East trigger shocks that reshape development challenges in the Indo-Pacific?”
The Middle East conflict could reshape development challenges in the Indo-Pacific in three ways.
Firstly, the conflict in the Middle East may result in a more insular approach to development issues that emphasises short-term resilience over long-term gains. Resilience and national security are, of course, important contributors to development. Yet in countries with limited fiscal space, there is a temptation to sacrifice long-term productive investments, like infrastructure and education, for near-term spending on defence equipment. This would be costly. Research shows that compared to higher income countries where defence spending can have some spillover economic benefit, rising defence spending in developing economies can contribute to increased public debt and inequality.
Secondly, many heads of state resort to war metaphors – even during non-military crises – to justify increased control over social and economic activities in an effort to boost national security. Before the recent conflict, Indonesia had seen the militarisation of social and economic activities for the sake of “better coordination”. The military is already heavily involved in running populist programs like the free school lunches and the food estate, and it is further tasked to produce medicines for the population. The onus to boost resilience amid global insecurity may lead to a further blurring of the military-civil boundaries in Indonesia, as just one example.
Finally, international trade and investment are no longer assessed on their economic potential, but on their sovereignty risk. As trade and investment are weaponised, international development cooperation is also facing new dynamics. With the resources, attention and risk appetite of traditional development partners stretched, there’s a question of who may become the new leading partners in development cooperation in the region, and how much investment they can bring to the table.
Andree Surianta is a public policy researcher and practitioner with over 15 years of experience across Southeast Asia. He is currently an Asia Freedom Fellow at the London School of Economics and Political Science (LSE) and a Senior Research and Policy Specialist at the Center for Indonesian Policy Studies (CIPS). Holding a PhD in Policy and Governance from the Australian National University, his research expertise is deeply rooted in geoeconomics. He specifically examines global value chains, technology transfer, and how geopolitical tensions reshape trade and diplomacy in Southeast Asia. At the Lab, we admire how Andree works to bridge academic rigor with real world insight.
Escalating conflict in the Middle East is generating two development challenges for the Indo-Pacific. The first is immediate: economic shocks transmitted through energy markets and global supply chains. The second is the interaction of these shocks with underlying drivers of fragility.
Across Southeast Asia, energy price spikes are feeding into inflation, fiscal strain and difficult policy trade-offs. Governments are already seeing rising subsidy burdens as they try to shield households from higher fuel and food prices. In the Pacific, these shocks are often more severe: high import dependence, small domestic markets and limited fiscal buffers mean that increases in fuel and shipping costs can quickly translate into higher food prices and disruptions to essential services.
Economic shocks of this kind do not operate in isolation—they interact with existing vulnerabilities. In parts of Southeast Asia, rising living costs have previously triggered public protests and heightened political contestation, particularly where inequality and perceptions of unfairness are already present. In more fragile Pacific contexts, fiscal stress can translate directly into reduced service delivery, compounding challenges in health, education and infrastructure and reinforcing cycles of vulnerability. There is also a timing issue. Many governments in the region are still managing elevated debt levels following COVID-19, limiting their ability to absorb new shocks. And when governments are unable to cushion these impacts, it can erode trust and strain state–society relationships.
For Australia, crisis response should not detract from prioritising the underlying drivers of resilience in its development partnerships: trust between states and citizens, the perceived fairness of government responses, and the strength of social cohesion in the face of stress. In an era of repeated external shocks and increased internal contestation, resilience will depend as much on the quality of these relationships as on economic fundamentals —and will ultimately determine whether faraway shocks translate into instability closer to home.
Martina Zapf is the Lab’s General Manager, and is a leading expert on peace, conflict, and fragility. Having spent the previous decade or so in places as far and wide as Afghanistan and Chad, she’s landed in Australia tackling fragility and conflict in our region. At the Lab, we love Martina for the global perspectives she brings and for bringing together different actors to arrive at better solutions.
Escalating conflict in the Middle East is already triggering shocks that are reshaping development challenges in the Indo-Pacific. Over the short period of only a month, the surge in global prices for oil and LNG, coupled with significantly increased costs for food and shipping, of course, would have that effect.
Yet, where are these impacts being felt most acutely — and what are the broader implications?
Smaller, import-dependent, remittance-reliant economies with limited fiscal buffers (Pacific Island countries in particular) will likely fare worse than larger, export-driven economies. Budgets will only be further strained by demands to subsidise food and energy, and with repayment stress as debt costs rise.
There are also challenges in donor countries.
You need only to look at electoral outcomes in the more than 60 countries that went to the polls in 2024 to see the longer-term impact of rising prices. In a period of higher inflation —at rates not seen in decades— incumbent politicians around the world were decisively punished. Such punishments also led to key policy choices— most notably, a significant decrease in global aid and development spending in the last couple of years.
It is a well-known phenomenon that public support for foreign aid decreases in periods of economic crisis. But for such periods to precede an even more acute increase in costs will have an even greater impact. Donor countries to the Indo-Pacific were already shifting from long-term development projects to emergency responses and security-driven aid. The increased prices resulting from conflict in the Middle East will likely only decrease appetite for any aid spending in the months and years ahead.
Jared Mondschein is the Director of Research at the United States Studies Centre. Previously, Jared was a Research Analyst at Bloomberg BNA in Washington, DC. Prior to joining Bloomberg BNA, Jared was a Research Associate in the Asia Studies program of the Council on Foreign Relations, an editorial assistant at Foreign Policy magazine, and an assistant editor at a policy journal in Beijing. At the Lab, we love Jared’s ability to link international affairs to domestic political trends, and his commitment to objectivity and no-non-sense analysis.
