Financial Fragility and Its Impacts on International Trade and Economic Growth: New Evidence From Fragile Five and Troubled Ten Countries

Introduction

International trade has a very important place in literature. Many models have been developed to analyze imports, exports and the trade balance. According to Mercantilists, the main purpose of international trade is to have foreign trade surplus. On the other hand, the theory of absolute advantages revealed by Adam Smith and the theory of comparative advantages developed by David Ricardo approach international trade more complicated. The Heckscher-Ohlin Model focuses on natural resources, labor force and capital factors affecting net exports.

Along with the acceleration of globalization, economies of countries have become more open to global effects and thus more dependent on each other. Financial markets are at the top of the areas where this impact is felt the most. Associated with the internationalization of capital flows, financial markets have become very sensitive to foreign capital. In this context, countries have initiated liberalization processes in many areas, particularly financial markets, in order to attract more foreign capital, especially in the post-1980 period.

Fragility has been used in quite different meanings in disciplines that focus on different components of risk (Gnangnon, 2012; Naude et al., 2009). The concept of fragility usually consists of the vulnerability of economic units such as states or households. The fragility of these units manifests itself as the deterioration of the economy against economic crises and financial shocks (Andrews and Flores, 2008; Loayza and Raddatz, 2007). In summary, the definition of fragility differs according to the economic unit examined and according to which events these units may be under risk.

Financial fragility can be explained as a situation that is sensitive to the development of sudden shocks, which may occur in the markets and to show its effect on the economies of the country as a financial crisis on a large scale. While evaluating fragility in terms of the structure of the financial system, it is necessary to evaluate the crisis as the result of the interaction between fragility and some external shocks (Leviastuti, 2020; Allen & Gale, 2004). Financial liberalization is seen as an important factor increasing fragility. Financial fragility shows its effect as instability in the financial markets.

As a result of the global developments in economic integration, capital flows have reached the international level. Therefore, capital flows are exposed to the effects of current account deficit, exchange rate, foreign exchange reserves, public domestic debt stock, inflation, money supply and many other financial factors. In the context of imports and exports, international trade is also affected by variables such as a country's trade policies, trade barriers, current account deficit, exchange rate, foreign exchange reserves and inflation (Gopinath et al., 2020; Nwachukwu, 2019; Shousha, 2019; Itskhoki & Mukhin, 2017; Okore & Onoh, 2013; Radelet & Sachs, 2000). Financial crises is emerged in developing countries due to budget deficits, poor execution of exchange rate policies, international unexpected financial events, financial liberalization practices in inappropriate times and insufficient conditions and weakness of the domestic banking sector (Sachs et al., 1996). As the level of globalization increases and countries become more integrated with each other, their vulnerability to international financial crises increases. Accordingly, it is observed that global financial fluctuations have led to a break in the financial and macroeconomic structures of these countries (Neaime, 2016). These breakdowns can lead to economic crises due to the effects of important factors such as the increase in the current account deficit, fluctuations in exchange rates, the diminishing of foreign exchange reserves and the increase in inflation.