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

IMF Working Papers, June 13, 2025

Source details

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

Manufacturing industries exhibit strong unconditional convergence in labor productivity over time.
There is variation in the pace of convergence across industries:
- Greater reliance on human capital in an industry is linked to faster convergence.
- Dependence on physical capital by itself has no bearing on convergence.
- Industries with greater dependence on physical capital see convergence only if there is sufficient financial development.
At the country level:
- Convergence tends to be faster as countries shift away from agriculture and toward industrial production or services.
- Agriculture typically requires less human capital, which partly explains why shifting away from agriculture is associated with faster convergence.
- 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 observed aggregate convergence.
- Greater financial development is linked to faster convergence at the country level.

Uses industry-level data from manufacturing industries across a large set of countries.
Empirical coverage spans the period 1980-2022.
Analysis documents roles of human capital, physical capital, and financial development in convergence in manufacturing labor productivity, and examines the influence of economic structure and financial development at the aggregate level.

Human-capital-intensive industries are a vehicle for faster productivity convergence; policies that bolster human capital accumulation support catch-up.
Physical-capital-intensive industries alone do not guarantee convergence; complementary financial development is necessary for these industries to converge.
Structural transformation—shifting labor and output away from agriculture toward industry and services—supports aggregate convergence, especially when accompanied by faster reductions in agricultural shares in poorer countries.
Financial development is a cross-cutting enabler of convergence at both industry and country levels.

Source: What is Needed for Convergence? The Role of Capital and Finance — Bryan Hardy and Can Sever, IMF Working Papers 2025, 112 (2025).