Environmental policy effectiveness and industrialisation in low- and middle-income countries

Developing countries face a critical challenge in balancing industrial development with environmental sustainability. Given this high opportunity cost, this study investigates the non-linear relationship between Environmental Policy Effectiveness (EPE) and industrialisation in low- and middle-income countries (LMICs), with attention to moderating role of regulatory quality in the relationship as well as testing regional dynamics. The study employed the two-step system Generalized Method of Moments (GMM) and Fixed Effect models using a 19-year panel dataset covering 104 LMICs across Asia, Latin America and the Caribbean (LAC), and Sub-Saharan Africa (SSA). Results reveal a U-shaped relationship: EPE initially suppresses industrialisation, but beyond a threshold, stronger EPE significantly promotes industrial development. The estimated turning point is 36.2 globally, 43.47 for Asia and 51.85 for LAC. However, SSA shows an inverted-U pattern, where industrialisation initially benefits from stronger EPE but declines beyond a threshold of 41.99 due to structural and institutional constraints. Regulatory quality significantly moderates the EPE–industrialisation link in Asia but not in SSA and LAC. Policy implications include tailoring environmental strategies to regional conditions, strengthening institutional capacity, and supporting SMEs through financial and technical assistance to ensure green growth does not undermine industrial progress.