Question

In 1990, the Dominican Republic (DR) and Egypt had similar saving rates (around 15% of GDP), similar population growth rates (around 2%) and similar levels of income per capita (around $6000 in 2005 dollars). In the 1990-2017 period, the saving rate stayed about the same in DR but decreased to below 4% in Egypt, while the population growth rate stayed the same in Egypt but decreased to about 1% in DR. Assume that multifactor productivity increased the same in both countries over this period.

a) Use the Solow model to predict the effects on the steady-state income per capita for both countries and compare.

b) In 2017, income per capita was around $14,600 in DR, and $10,500 in Egypt. Is this consistent with your theoretical predictions from (a)? The prime minister of Egypt calls its population growth “the single largest challenge facing the state” (The Economist, February 20, 2020). Is this justified?

Answer 1