This paper examines the relationship between structural transformation and the inclusivity of growth using the case of Indonesia. In the past two decades, Indonesia has become a service-centred economy; manufacturing sector’s capacity to generate employment and lead productivity growth has deteriorated compared to during the two decades prior to the Asian financial crisis. A multidimensional analysis of Indonesia’s structural transformation shows that productivity growth since the crisis has been higher than the long-term average, driven both by within-sector productivity gains and labour movement to higher productivity sectors. Also, Indonesia has not experienced a rising level of informality that is increasingly a concern for other developing countries going through service-led structural change. We argue thus that structural transformation has offered sustainable opportunities to the Indonesian workers in general. However, Indonesia’s economic growth is unlikely to as dynamic as during the high growth period (1986–1996) if the service sector continues to lead structural transformation. Compared to the industrial subsector, the service subsector with large employment absorptive capacity, has low productivity. Indonesia face challenges of recovering economic dynamism as well as managing the consequences of structural transformation.
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