Dynamic development accounting and relative income traps

Abstract Recent work suggests that cross‐country convergence has strengthened over time. Here we explore mobility and convergence in relative income and relative total factor productivity (TFP) using finite state Markov chains. We find that low‐income countries rarely improve their position relative to the US. Since capital‐output ratios have approached or exceeded the US level and human capital is converging, the persistence of low relative income seems to originate in low relative TFP. We study the dynamics of relative TFP, how they have changed, and how they interact with absolute levels of human capital, casting new light on the future of convergence.