Non-combatant nations are dismantling years of economic, environmental, and educational progress in a matter of weeks — and the worst may be yet to come.
Executive Summary
- Across South and Southeast Asia, governments are imposing wartime-style austerity measures — QR-code fuel rationing, university closures, mandatory four-day workweeks, and rollbacks of environmental standards — despite having no involvement in the US-Israel war on Iran.
- The Philippines has authorized the use of dirtier Euro-II fuel for the first time in years, Thailand is considering reviving its 1973 emergency energy decree, and Sri Lanka is reliving the trauma of its 2022 economic collapse — all within three weeks of the Hormuz blockade.
- This collective development regression represents a new category of war damage: the systematic erosion of Global South gains achieved over decades, compressed into days, with recovery timelines measured in years.
Chapter 1: The Anatomy of Collateral Development Damage
The war between the United States, Israel, and Iran is now in its 23rd day. The combatants are exchanging strikes across the Persian Gulf. But the sharpest pain is being felt thousands of kilometers away, in countries that had nothing to do with starting this conflict and have no means of ending it.
Since Iran effectively closed the Strait of Hormuz — the narrow waterway through which roughly 20% of the world's seaborne crude oil, 20% of global LNG shipments, and a third of the most widely used fertilizers transit — a cascading series of emergency measures has swept across the developing world. These are not merely economic adjustments. They represent a systematic unwinding of hard-won development milestones: environmental standards, educational access, labor protections, and fiscal stability.
Columbia University historian Adam Tooze, speaking at the Jefferies Asia Forum in Hong Kong this week, identified the core asymmetry: "Asia is at the heart of this drama, in that it is the chief area of collateral damage." Roughly 84% of crude that transits Hormuz goes to Asia, while the United States — the country that initiated the military campaign — now imports little through the strait. This geographic mismatch between those waging war and those paying for it is without modern precedent in its scale.
The price data tells the story in stark numbers. West Texas Intermediate crude, the US benchmark, sits near $100 a barrel — painful but manageable for the world's largest oil producer. Dubai crude, the benchmark for Asian buyers, has jumped past $160. The $60 spread between WTI and Dubai crude is the largest in the modern history of global oil markets, a physical manifestation of the asymmetry Tooze describes.
Chapter 2: Country by Country — The Rollback
Sri Lanka: 2022 All Over Again
For Sri Lanka, the Hormuz crisis is not an abstract geopolitical event. It is a visceral re-experiencing of national trauma.
In 2022, Sri Lanka declared its first-ever sovereign default, triggering fuel queues that stretched for kilometers, nationwide blackouts, and the overthrow of President Gotabaya Rajapaksa. The country spent two painful years under an IMF program clawing its way back to a semblance of normality. Now, barely 18 months after exiting the worst of that crisis, the island nation is reimposing the same emergency measures.
On March 16, the government announced that every Wednesday would become a public holiday, compressing the government workweek to four days. Government offices, courts, state schools, and universities close to conserve fuel. A QR-code-based system has been introduced to ration fuel sales — a digital upgrade from the paper tokens of 2022, but rationing nonetheless.
On March 22, Colombo hiked fuel prices by 25% — the second increase in two weeks. Officials stated the goal was to achieve a "15 to 20 percent reduction in fuel consumption." The country imports all of its oil and also relies on imported coal for electricity generation. With both commodities surging in price and availability shrinking, Sri Lanka's current account deficit is widening at precisely the moment it can least afford it.
The echoes of 2022 are unmistakable. But there is a cruel difference: in 2022, the crisis was largely self-inflicted through fiscal mismanagement. This time, Sri Lanka did everything the IMF asked. It restructured its debt. It reformed its tax system. It rebuilt reserves. None of that matters when the strait through which your energy supply flows is closed by forces entirely beyond your control.
The Philippines: Breathing Dirtier Air to Keep the Lights On
The Philippines' response to the crisis may be the most symbolically significant of all. On March 22, the Department of Energy authorized the temporary use of Euro-II compliant petroleum products — a dirtier fuel standard that the country had phased out as part of its environmental commitments.
The authorization applies to vehicles manufactured before 2015, traditional jeepneys, power plants, generators, and the marine sector. It is, in essence, an official admission that environmental standards are a luxury that can only be maintained in peacetime energy markets.
This comes on top of a four-day workweek for government staff, ordered in early March. Air conditioning in government offices must be set no lower than 24°C (75°F). Lights and computers must be turned off during lunch breaks. President Ferdinand Marcos Jr. described the measures as "temporary" in a video message, adding that the government is "trying to find different methods to provide subsidies."
The Philippines' vulnerability is acute: it relies on the Middle East for almost 90% of its oil supply, according to ING Think. Its Energy Regulatory Commission warned on March 21 that the combined impact of global oil price increases and summer heat would push electricity bills significantly higher, squeezing both households and industrial consumers.
The Euro-II fuel rollback deserves special attention. Environmental standards in developing countries are not abstract regulatory exercises — they are linked to public health outcomes. The World Health Organization estimates that air pollution kills 4.2 million people annually worldwide. When a country officially permits dirtier fuel to ensure supply continuity, it is making an implicit calculation: the immediate economic damage of fuel shortages outweighs the long-term health damage of degraded air quality. That calculation may be rational in the short term. But the health consequences compound over months and years.
Thailand: Reviving a Law from 1973
Thailand, which imports 70% of its oil, has responded with a suite of austerity measures that would have been unthinkable a month ago. Civil servants have been ordered to use stairs instead of elevators. Overseas government travel has been suspended. Diesel prices have been capped, and officials have been instructed to work from home where possible.
But the most dramatic signal came from the Energy Ministry, which is reportedly considering the revival of Thailand's 1973 emergency energy decree — a law dating from the original OPEC oil shock that was last invoked half a century ago. Under this decree, the government could impose fuel rationing, limit opening hours for department stores and gas stations, and even impose curfews aimed at cutting electricity and fuel consumption.
"If the price of global crude oil increases, our GDP automatically decreases," Tanawat Ruenbanterng, head of institutional research at Tisco Securities, told Fortune. A weaker baht and higher bond yields have left Bangkok with minimal fiscal room to absorb the shock through subsidies. "Because of limited fiscal space, they could not subsidize forever," Tanawat warned.
The tourism sector — Thailand's economic lifeblood, contributing roughly 20% of GDP — is taking a direct hit. With global airlines cutting routes due to fuel costs (United Airlines has already announced 5% flight cuts) and the IRGC's recent threats against tourist destinations worldwide, Thailand's visitor numbers have plummeted.
Bangladesh: Dark Classrooms
Bangladesh's response has been among the most socially disruptive. The government has imposed daily fuel purchase limits and closed universities early — sending millions of students home in the middle of the academic term.
The country signed a new 15-year LNG agreement with QatarEnergy in June 2023, with deliveries beginning in January 2026. The timing could not have been worse. With Iran's strikes on Qatar's Ras Laffan Industrial City — the world's largest LNG export hub — and QatarEnergy's declaration of force majeure, those deliveries have been suspended indefinitely.
For a country where natural gas generates roughly 60% of electricity, this is not a pricing problem. It is an availability crisis with no near-term solution.
Chapter 3: The Development Arithmetic
What makes the current crisis historically distinctive is not its severity in any single country — each nation mentioned above has faced energy crises before — but the simultaneity and breadth of the regression.
Consider what is being reversed:
Environmental standards: The Philippines is burning dirtier fuel. China has banned refined fuel exports while accelerating coal production. India is scrambling to restart mothballed coal plants. Across the developing world, emissions reduction commitments made at COP28 in 2023 are being quietly shelved.
Educational access: Bangladesh has closed universities. Sri Lanka has shuttered state schools one day per week. In both countries, the disruption disproportionately affects lower-income students who lack home internet access for remote learning.
Labor protections: Four-day workweeks in the Philippines and Sri Lanka are not worker-friendly reforms — they are austerity measures that reduce government output by 20% while maintaining the fiction of employment continuity.
Fiscal sovereignty: Indonesia is burning through its fuel subsidy budget of 381 trillion rupiah ($22.6 billion) ahead of schedule, shielding retail pump prices ahead of Eid al-Fitr. This is politically necessary but fiscally unsustainable. Every dollar spent on fuel subsidies is a dollar not spent on infrastructure, health, or education.
The International Energy Agency's unprecedented demand-side emergency directive — the first in its 52-year history — acknowledged the reality that supply-side solutions have been exhausted. "The demand-side measures highlighted in the report cannot match the scale of disrupted supply," the IEA stated. "However, they can play a meaningful role in lowering costs for consumers, reducing market strains and preserving fuels for essential uses until normal flows resume."
The key phrase is "until normal flows resume." No one knows when that will be.
Chapter 4: Historical Precedents — When Energy Shocks Reversed Development
The 1973 OPEC Embargo
The most commonly cited parallel is the 1973 Arab oil embargo, when OPEC members cut production and imposed an export ban on nations supporting Israel during the Yom Kippur War. Oil prices quadrupled in three months.
The 1973 shock primarily affected industrialized nations — the US, Japan, and Western Europe. Developing countries were affected but not yet deeply integrated into global energy markets. The policy responses (speed limits, gas station closures, daylight saving adjustments) were confined to wealthy nations with robust institutional capacity.
The 2026 crisis inverts this pattern. The United States, now a net energy exporter, is relatively insulated. The heaviest burden falls on developing Asian economies that have become deeply dependent on Middle Eastern energy over the past three decades of globalization — precisely the period during which they achieved their greatest development gains.
The 2022 Sri Lanka Crisis
Sri Lanka's 2022 collapse offers a micro-preview of what multiple countries now face simultaneously. The crisis began with energy shortages, cascaded into food inflation, triggered a currency crisis, and ultimately led to sovereign default and political upheaval.
The timeline from energy disruption to political instability was approximately four months. If the Hormuz blockade persists, multiple countries could enter simultaneous sovereign stress — a scenario with no modern precedent.
The 1997 Asian Financial Crisis
The 1997 crisis showed how interconnected Asian economies could amplify each other's distress through contagion. Currency crises in Thailand spread to Indonesia, South Korea, and Malaysia through linked banking systems and investor panic.
The current crisis has a similar contagion mechanism, but through energy markets rather than financial ones. When Sri Lanka rations fuel, it reduces economic output, weakening its ability to service external debt. When Bangladesh closes universities, it disrupts human capital formation, reducing future productive capacity. When the Philippines permits dirtier fuel, it increases health costs over the medium term. Each country's emergency response creates secondary costs that compound across the region.
Chapter 5: Scenario Analysis
Scenario A: Swift Resolution (20%)
Premise: The Trump administration's "escalate to de-escalate" strategy works. Iran agrees to reopen the strait in exchange for a partial sanctions waiver and cessation of strikes on energy infrastructure.
Trigger conditions: Iran signals willingness to negotiate through back-channel intermediaries (likely Oman or Qatar). The 48-hour power plant ultimatum expires without execution. IRGC's complete closure threat proves to be a negotiating position rather than an operational commitment.
Development recovery timeline: 3-6 months for fuel prices to normalize. Environmental standard rollbacks could be reversed within weeks. University reopenings immediate. But fiscal damage (subsidy overruns, debt widening) takes 12-18 months to repair.
Why only 20%: Treasury Secretary Bessent's statement that "sometimes you have to escalate to de-escalate" came hours after the IRGC threatened complete Hormuz closure. The spiral logic is accelerating, not converging. The US is deploying 5,000+ additional Marines to the region with three amphibious assault ships — not the posture of de-escalation. Trump has refused to rule out further strikes on Kharg Island. The Atlantic reported on March 22 that US military planners are actively considering a ground operation to seize the island.
Scenario B: Prolonged Stalemate (50%)
Premise: The war continues at roughly current intensity for 2-4 more months. Hormuz remains partially closed. Iran operates its selective passage system (the "toll strategy"), allowing some traffic through the Larak corridor while blocking others. Oil stays in the $100-130 range.
Trigger conditions: Neither side achieves decisive military advantage. Trump faces domestic political pressure from rising gasoline prices ahead of the 2026 midterms but cannot withdraw without appearing weak. Iran cannot fully reopen the strait without losing its primary leverage.
Development impact: This is the scenario in which the regression becomes structural. Four-day workweeks become normalized. Environmental rollbacks persist long enough to affect health outcomes. University closures extend into the next academic year. IMF programs in Sri Lanka and Pakistan come under severe strain as revenue assumptions collapse.
Historical frequency: The 1980-88 Iran-Iraq Tanker War, the most analogous prolonged disruption, saw 546 merchant vessels attacked over eight years. The current conflict has already seen 23 vessel attacks in three weeks — a far higher tempo. Sustained stalemate is the most likely outcome because neither side has a viable path to quick victory.
Scenario C: Escalation Spiral (30%)
Premise: The 48-hour power plant ultimatum is executed. Iran retaliates by completely closing Hormuz and striking desalination facilities across the Gulf. The US seizes Kharg Island. Oil spikes above $150.
Trigger conditions: Hardliners on both sides prevail over pragmatists. Trump executes on the infrastructure threat. IRGC follows through on its March 22 statement that it "will completely close the Strait of Hormuz." Gulf states' 56 desalination plants — which supply water to 100 million people — come under direct threat.
Development impact: Catastrophic. Multiple sovereign defaults across South and Southeast Asia within 6 months. Food crisis as fertilizer supplies collapse entirely. The $60 WTI-Dubai spread widens further, potentially exceeding $80. China's 1.4 billion-barrel strategic reserve becomes a geopolitical weapon as Beijing offers favorable energy terms to countries willing to distance themselves from the US-led coalition.
Why 30%: The escalation logic is self-reinforcing. Bessent's "escalate to de-escalate" framing explicitly endorses this approach. The IRGC has matched every US threat with a counter-threat. The 5,000 Marines heading to the region are not training forces — they are combat-ready amphibious units designed for exactly the kind of island seizure operation that Kharg would require.
Chapter 6: Investment Implications
Energy divergence trade: The $60 WTI-Dubai spread reflects the geographic asymmetry of the crisis. This spread could widen further under Scenarios B and C, benefiting US energy producers (Exxon, Chevron) while devastating Asian refining margins.
Currency pressure: The Indian rupee (93.73, all-time low), South Korean won, Thai baht, and Philippine peso are all under severe pressure. Countries burning through reserves to defend currencies will face difficult choices within weeks. The 1997 Asian Financial Crisis began with exactly this dynamic — reserve depletion followed by forced devaluation.
Sovereign debt stress: Sri Lankan bonds, Pakistan's IMF program bonds, and Bangladesh sovereign debt are all repricing. Credit default swap spreads on frontier Asian sovereigns have widened 200-400 basis points since the war began.
Coal and nuclear renaissance: South Korea's emergency pivot to nuclear and coal, Thailand's coal imports, and India's coal plant restarts create investment opportunities in thermal coal (Glencore, Adani), nuclear technology (Korea Hydro & Nuclear Power, Cameco), and grid infrastructure.
Defensive positioning: The IEA's demand-side measures — work from home, reduced air travel, speed limits — if sustained, represent structural demand destruction for airlines, hospitality, and automotive sectors. United Airlines' 5% flight cuts may be the beginning, not the end.
Conclusion
The Hormuz blockade has revealed a fragility at the heart of three decades of Asian development: the assumption that energy would always flow. That assumption was underwritten not by any formal security guarantee, but by the implicit understanding that no rational actor would close the strait because the economic consequences would be too severe for everyone — including the closer.
Iran has disproven that assumption. The IRGC's calculus is not economic rationality but regime survival. And in the gap between those two logics, the development gains of a billion people are being systematically eroded.
The most troubling aspect of the current crisis is not any single emergency measure — fuel rationing, university closures, or environmental rollbacks can all be reversed in theory. It is the temporal compression: changes that took decades to build are being undone in weeks. The Philippines spent years phasing in cleaner fuel standards. Thailand built a tourism economy over three decades. Sri Lanka endured two years of IMF-supervised reform. Bangladesh expanded university access as a cornerstone of its development strategy.
All of it is being unwound not by domestic policy failure, but by a war between three countries thousands of kilometers away, fought over nuclear ambitions and regional hegemony that have nothing to do with the lives being disrupted.
Professor Tooze's framing is precise: Asia is experiencing "collateral damage." But that clinical term understates what is happening. Collateral damage implies incidental harm from a targeted action. What the developing world is experiencing is something closer to structural violence — the systematic destruction of developmental capacity through the interruption of the energy systems on which modern economic life depends.
The question is no longer whether this damage will occur. It is occurring. The question is whether it will be temporary or permanent — and that depends entirely on decisions being made in Washington, Tehran, and Tel Aviv by leaders who bear none of its costs.
Sources: Fortune, Reuters, Business Insider, The Guardian, Al Jazeera, The Hindu, NBC News, IEA, Economic Times, Nation Thailand, Manila Bulletin
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