Is Structural Transformation-led Economic Growth Immiserizing or Inclusive? The Case of Indonesia

Abstract

This chapter discusses the relationship between the recent pattern of structural transformation in the Indonesian economy and poverty reduction. In the past two decades, Indonesia has become a service-centred economy while its manufacturing sector has ceased to act as the driver of structural transformation. Further, the manufacturing sector’s capacity to generate employment and to lead productivity growth has deteriorated compared to that during the two decades prior to the Asian financial crisis. Since the late 1990s, Indonesia has also experienced a slowdown in poverty reduction and a rapid increase in inequality. This chapter argues that Indonesia’s economic growth will struggle to be as dynamic as that during the high-growth period if the service sector in its current form continues to lead structural transformation. This is because Indonesia’s service subsectors with large employment absorptive capacity have low productivity compared to the industrial subsectors. Without recovering dynamism in structural transformation, Indonesia’s fight against poverty and inequality is expected to be difficult.