IMF Working Papers

What is Needed for Convergence? The Role of Capital and Finance

By Bryan Hardy, Can Sever

June 13, 2025

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Bryan Hardy, and Can Sever. "What is Needed for Convergence? The Role of Capital and Finance", IMF Working Papers 2025, 112 (2025), accessed June 14, 2025, https://doi.org/10.5089/9798229013185.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

What is needed for poor countries to catch up with rich ones? This paper first documents the role of human capital, physical capital, and financial development in convergence in manufacturing labor productivity across countries, and then examines the influence of economic structure and financial development at the aggregate level. Using industry-level data from manufacturing industries in a large set of countries over the period 1980-2022, we show that manufacturing industries exhibit strong unconditional convergence over time, but there is variation in the pace of convergence: Greater reliance on human capital in an industry is linked to faster convergence, whereas dependence on physical capital has no bearing. Instead, industries with a greater dependence on physical capital see convergence only if there is sufficient financial development. At the country level, we find that convergence tends to be faster as countries shift away from agriculture (which typically requires less human capital), and towards industrial production or services. Furthermore, poorer countries that initially have a higher share of agriculture in their GDP have been shifting away from agriculture at a faster rate, which may have contributed to the observed aggregate convergence. Greater financial development is also linked to faster convergence at the country level.

Subject: Agricultural sector, Agroindustries, Capital productivity, Economic sectors, Financial markets, Financial sector development, Human capital, Industrial productivity, Labor, Labor productivity, Manufacturing, Production, Productivity

Keywords: Agricultural sector, Agroindustries, Capital, Capital productivity, Convergence, Financial development, Financial sector development, Global, Human capital, Human capital, Industrial productivity, Labor productivity, Manufacturing, Productivity, Productivity, Sectoral analysis, Structural transformation

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