The Green Structural Transformation: Climate Change, Industrial Policy, and Development in a Fragmenting Global Economy

Abstract

This study examines the relationship between green industrial policy, climate change, and structural transformation in emerging market and developing economies (EMDEs) amid rising geoeconomic fragmentation. Using panel data from 85–95 EMDEs for 2013–2025, it develops a Green Structural Transformation Index (GSTI) and applies System-GMM, Fixed Effects, Method of Moments Quantile Regression, and Fully Modified OLS estimations, supported by comparative case studies of Vietnam, South Africa, Chile, and Nigeria. The findings show that green industrial policy is positively associated with green structural transformation by promoting renewable energy adoption, cleaner production systems, industrial upgrading, and climate-compatible diversification. By contrast, geoeconomic fragmentation constrains transformation outcomes by disrupting technology transfer, weakening trade linkages, increasing financing uncertainty, and limiting access to green value chains. Institutional quality significantly enhances the effectiveness of green industrial policy, indicating that credible governance, administrative capacity, regulatory consistency, and coordinated public investment are essential for translating policy ambition into structural change. The adverse effects of fragmentation are also weaker in economies with stronger regional integration, suggesting that cooperative markets, shared infrastructure, and regional financing mechanisms can partially offset global disruptions. The results further reveal substantial heterogeneity across income levels and resource dependence, with lower-income and resource-based economies facing deeper constraints. The study concludes that resilient green development in EMDEs requires coherent industrial policy, strengthened institutions, regional cooperation, inclusive transition strategies, and targeted support for countries most exposed to climate risk, external shocks, and structural dependency.

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