A theory of aid as trade ; A theory of aid as trade: with special reference to small island countries

Abstract

International audience ; This article presents a theory of aid as trade. I assume that aid is a payment for an invisible export of strategic services to a large donor country seeking diplomatic goodwill and exclusive strategic use of a small country's territory, oceanic space and airspace. In a formal two countries-two goods model, the strategic service is produced with a higher productivity in the small country/island because of its geographic location (close to a potential enemy of the large country, for example). The other good is a composite manufactured good produced with higher productivity in the large country. There are gains from international trade that can be obtained by both countries, and divided between them. The citizen of both countries are better off: a lower cost for defense of the large industrial country, and a geostrategic rent for the citizen of the small country, enabling them to finance a deficit of the official balance of goods and services.