Impacts of financial development and economic growth matter in environmental sustainability: Empirical insights from Vietnam
Abstract
As an emerging economy with rapid growth and financial deepening, Vietnam offers a critical case for environmental-economic analysis. This study investigates the long-run relationship between financial development, economic growth and environmental sustainability in Vietnam over 1990–2020. Using two environmental indicators (per-capita CO2 emissions and the per-capita ecological footprint) and a composite financial development index together with energy consumption, trade openness, urbanisation and foreign direct investment as control variables, we estimated long-run elasticities by fully modified ordinary least squares (OLS), dynamic OLS, and canonical cointegrating regression, and tested the environmental Kuznets curve (EKC) hypothesis with a squared per-capita-income term. Cointegration was assessed using the Johansen and Engle–Granger procedures; structural breaks were tested using the Zivot–Andrews endogenous-break procedure; and a vector error-correction model was used to recover long-run equilibrium dynamics. Financial development is associated with lower CO2 emissions but with a higher ecological footprint, suggesting that the two indicators capture distinct dimensions of environmental pressure. Per-capita income remains the dominant driver of both indicators, with CO2’s elasticity above unity. Third, the EKC takes a U-shaped form for the ecological footprint, with an estimated turning point near US$2,062 (in constant 2015 prices); Vietnam currently sits above this threshold and on the rising segment of the curve. Disaggregating the financial development index shows that capital-market deepening, rather than banking depth or access, exerts the stronger environmental effect. The results support a green-finance policy mix that targets capital-market composition and energy intensity, and are of direct relevance to Vietnam’s National Green Growth Strategy 2021–2030 and net-zero-by-2050 commitment.