Summary
Focus
Basic macroeconomic models predict convergence: that poor countries will grow faster than, or catch up to, rich countries. The empirical evidence for these predictions has at times suggested unconditional or divergence. More recent data indicate convergence again, at least within the manufacturing sector. This paper examines what factors help to foster convergence of poor countries with rich ones, highlighting differences by industry in their reliance on human and physical capital and the role of financial development.
Contribution
We analyse manufacturing productivity in a cross-country panel over 1980–2022 at the industry level. We run standard country convergence regressions at the industry level, examining initial labour productivity and subsequent productivity growth in the following 10 years. We compare convergence in industries with different human and physical capital reliance. We then compare outcomes for these sectors in countries with higher and lower financial development.
Findings
Manufacturing industries exhibit strong unconditional convergence over time, with faster convergence seen in industries with greater reliance on human capital. Industries with 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. Greater financial development is also linked to faster convergence at the country level.
Abstract
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.
JEL classification: O11, O14, O40
Keywords: productivity, convergence, financial development, capital, human capital, structural transformation
The views expressed in this publication are those of the authors and not necessarily those of the BIS.
