External Debt Service, Foreign Direct Investment, Trade Openness, and Unemployment: Evidence from Vietnam Using a Vector Error Correction Model (VECM)

Understanding the factors associated with economic growth remains a major policy concern for developing economies. Although external indebtedness, foreign direct investment (FDI), trade openness, and unemployment have been widely examined, relatively limited attention has been paid to external debt-service obligations and their joint relationships with economic performance. This study investigates the short-run and long-run relationships among these variables and real GDP in Vietnam using 34 annual observations from 1991 to 2024. A Vector Error Correction Model (VECM) is employed, alongside an extended specification incorporating a pulse dummy variable for 2007. The results indicate positive and statistically significant long-run associations between real GDP and the external debt-service indicator and trade openness, while unemployment exhibits a significant negative association. The FDI indicator is statistically insignificant in the baseline specification but becomes positive and significant after incorporating D2007, indicating sensitivity to model specification. In the short run, lagged changes in trade openness and unemployment exhibit positive and negative associations with changes in real GDP, respectively, both statistically significant at the 5% level. Short-run Granger causality tests further indicate that these variables contain significant predictive information for changes in real GDP. However, the positive error correction coefficient in the GDP equation does not support a convergent adjustment through this equation. The findings highlight the importance of prudent external debt management, improving FDI quality and domestic linkages, enhancing domestic value added in trade, and strengthening labor market efficiency to support sustainable economic growth in Vietnam.