Services Power Indonesia’s Economy, but Barriers Still Limit Jobs, Exports, and Growth

Indonesia’s services sector now drives most economic growth and job creation, but its potential is held back by low productivity, heavy regulation, and a policy bias toward manufacturing. Reforming services, especially ICT, transport, and professional sectors could unlock better jobs, stronger exports, and faster progress toward high-income status.

Indonesia’s services sector has quietly become the backbone of the economy, yet policy attention still largely revolves around factories, minerals, and industrial estates. A new report by the World Bank, prepared in collaboration with the World Trade Organization and Indonesian government institutions, shows that services now account for nearly half of Indonesia’s GDP and more than half of total employment, making them the country’s single largest economic engine.

Over the past decade, services have contributed more than half of Indonesia’s annual economic growth. During the COVID-19 pandemic, when manufacturing and commodities faltered, sectors such as information and communication technology (ICT) and financial services continued to expand. Services also created jobs at scale, generating more than 21 million of the 30 million new jobs added since 2014. In sheer numbers, no other part of the economy comes close.

Plenty of Jobs, But Not Enough Quality

Yet the report makes clear that not all services growth is equal. Most new jobs have been created in low-skill, low-productivity activities such as retail trade, accommodation, and food services. These sectors employ millions of Indonesians but are often informal, poorly paid, and offer limited opportunities for skills upgrading.

By contrast, high-value services, ICT, finance, and professional services pay much higher wages and have far greater productivity, but they employ only a small share of the workforce. As a result, overall productivity in services remains below the national average. The report warns that Indonesia risks a pattern of “job-rich but income-poor” growth, where employment expands, but living standards rise slowly.

Why Investment Skips the Services Sector

Investment trends reinforce this imbalance. Despite reforms under the 2021 Job Creation Omnibus Law, foreign direct investment in services has fallen sharply as a share of total inflows. While overall FDI more than doubled between 2019 and 2024, most of it went into commodity-based manufacturing linked to downstreaming policies. Services, meanwhile, saw their share of FDI drop to well below regional and global averages.

Domestic investment in services has been stronger, but it is concentrated in real estate and transport projects tied to government infrastructure spending, rather than in export-oriented or innovation-driven services. The report points to a clear policy bias: manufacturing enjoys tax breaks, incentives, and facilitation, while most services are excluded from priority sector lists, even though they are essential for productivity and competitiveness.

Trade Potential Held Back by Regulation

Indonesia’s services exports tell a similar story of underperformance. Although services exports have tripled since the mid-2000s, Indonesia’s share of the global services market remains below 0.5 percent, far behind regional peers. Tourism dominates export earnings, leaving the economy exposed to shocks like the pandemic. At the same time, fast-growing global services such as ICT and professional services have expanded more slowly in Indonesia, despite signs of rising competitiveness.

Regulation is a major factor. The report finds that Indonesia remains one of the most restrictive services markets in the world. Barriers are especially high in professional services, transport, telecommunications, and insurance sectors that support the entire economy. High minimum capital requirements, complex licensing, data localization rules, limits on foreign professionals, and restrictive public procurement practices all raise costs and discourage investment.

The economic price is high. Service restrictions in Indonesia are equivalent to an average tariff of 55 percent, far higher than barriers applied to goods. These costs hurt consumers, reduce exports, and make manufacturing less competitive by raising logistics, finance, and connectivity costs.

Services Will Decide Indonesia’s Growth Future

Indonesia’s path to high-income status will depend on services. As the country moves toward OECD accession and its 2045 development goals, reforming services regulation could unlock large gains in investment, productivity, and growth. Modeling suggests that targeted reforms in ICT, professional services, and transport could significantly boost GDP while supporting industrial upgrading and digital transformation.

Indonesia’s future growth will depend less on what it digs out of the ground and more on how efficiently its services connect workers, firms, and markets. Treating services as a strategic priority, rather than a secondary sector, may be the key to delivering better jobs, stronger competitiveness, and more resilient growth in the decades ahead.