This paper assesses the ability of a country to adjust to shocks and capacity for convergence on development in the presence of heterogeneities and volatility. A sample of data for 73 countries covering the period 1950-2004 shows that structural parameters and policy quality would largely help to account for such countries’ capacity for adjustment to shocks in the short term. The speed of convergence across nations would further be determined by structural conditions and policy quality. In this context, financial development would help to reduce volatility and promote growth. However, if shocks are adverse enough, credit markets are incomplete and volatility increases.