Climate Finance and Industrial Development: Empirical Evidence from Sub-Saharan Africa's Manufacturing Sector

Abstract

This study examines the relationship between climate finance and industrial development in the manufacturing sector in sub-Saharan Africa. Utilising a balanced panel dataset encompassing 49 sub-Saharan African countries from 2003 to 2022, this study employs a comprehensive methodological framework. The primary specification involves Random Effects estimation, complemented by the Arellano-Bond system generalised method of moments (GMM) for robustness analysis and dynamic panel assessment. Additionally, panel EGLS and M-estimation robust least squares were employed, with pre-estimation diagnostics confirming stationarity, the absence of multicollinearity, and significant cross-sectional heteroscedasticity.
The primary finding of this study reveals a counterintuitive relationship: climate finance has a negative and statistically significant impact on industrialisation in sub-Saharan Africa. This effect is consistent across all estimation strategies and intensifies with methodological rigor (EGLS: β = −1.813, p = 0.003; GMM: β = −2.686, p = 0.000; Robust OLS: β = −3.630, p = 0.016). Rather than suggesting that climate finance inherently harms industrial development, this finding underscores a structural misalignment in the design and allocation of multilateral funds, which prioritise adaptation and mitigation in climate-vulnerable economies over the development of productive capacity and manufacturing-linked green investments. Population growth emerges as a significant structural constraint on industrialisation, while foreign direct investment exhibits conditionally positive contributions, contingent on the host country's absorptive capacity.
This study contributes to the discourse on sustainable development by advocating the reallocation of resources by climate finance institutions towards productive green industrialisation. This further suggests that recipient governments should enhance their frameworks for absorptive capacity and integrate demographic dividend strategies with manufacturing-focused industrial policies. These findings offer valuable insights for decision-makers, investors, and stakeholders aiming to optimise the effectiveness of climate finance for sustainable industrial development and climate resilience in sub-Saharan Africa.