The continued slowdown of Indonesia’s gross domestic product (GDP) growth in 2019 should not come as a surprise. The signs were already there, in particular in the continuing decline in imports.

Imports in the first six months of 2019 fell by US$20 billion, a 20 percent drop from the second half of 2018. This included a $4 billion decline in fuel imports.

As Indonesian manufacturing still relies heavily on imports, their steep decline in the first two quarters of 2019 should have given warning to the government that all was not going to be well in the final two quarters of 2019. And so if the GDP growth in the last two quarters of 2019 turned out to be the lowest growth since March 2017, it was because all the signs had been ignored.

The environment seemed to indicate that for the government, it was business as usual. No significant measures were taken to preempt the incoming slowdown as, understandably, all attention and energy were directed to the general and presidential elections and their aftermath.

GDP grew by 4.97 percent in the fourth quarter of 2019, the lowest since the fourth quarter of 2016, and it mirrored the overall weakness in consumption growth.

The government, still plagued by weak tax revenue, was unable to increase its spending to stimulate growth. Its expenditure barely increased as it grew by less than 1 percent in the last two quarters of last year. Private investors, during the months of uncertainty following the general election still maintained their “wait and see” attitude. And so, gross fixed investment growth fell to 4 percent in the second half of 2019 from 5 percent in the first half, continuing the downward trend that began in September 2018.

But amid these bleak figures, there were some bright spots in the GDP data that indicated gradual changes in the structure of the Indonesian economy.

The growth of the service sector (or non-tradable sector) rose to 6.2 percent in 2019, after growing at 5.9 percent in 2018. It was the highest growth since 2014. The strong growth in the service sector was pulled by high-growth sectors such as information and communication, transportation and warehousing and financial services, which have been growing strongly. In contrast, the real sector (or the tradable sector), which includes agriculture, mining and manufacturing only grew 3.3 percent.

As the service sector is growing faster than the real sector, it has become the largest component of GDP. The share of the service sector in GDP has risen from 54 percent in 2014 to 58 percent in 2019. Now, the second-biggest component of GDP is no longer agriculture but wholesale and retail trade.

This indicates that the Indonesian economy is moving gradually from a mainly basic manufacturing economy into a service economy.

As the economy matures, structural shifts take place wherein the service sector becomes the main driver of economic growth. At this level of the service sector, Indonesia is on par with other developing economies. In India, where the export of information technology is dominant, the service sector makes up 54 percent of GDP.

In China, the service sector accounts for 52 percent of GDP and has been the main driver of the country’s economic growth. In the United States, a developed economy, the service sector accounts for 80 percent of GDP, while in Japan it is 73 percent and in Brazil it is 69 percent.

The growth of services is critical for strengthening the economy in general. The manufacturing sector would benefit from the development of the service sector because if the quality of service improves, it will help the manufacturing sector increase productivity and be more competitive.

But to ensure a smooth transition into a service economy, there are several conditions that have to be met. As the service industry is a technology-intensive sector, an adequate supply of well-trained and skilled workers is required to ensure its growth and development. The current government policy on human development and education has to be directed toward that goal.

Although the service sector is playing a greater role in the economy, investment and trade in services are facing restrictions from government policy, including restrictions of foreign ownership and outright bans on the use of certain foreign services by domestic entities.

The government is still reluctant to open the sector to foreign investment and to reduce the barriers in the service trade. In 2014, for example, the government increased the negative list for foreign investment in services, making restrictions on the service trade in Indonesia relatively high among East Asian countries.

The reluctance to open the service sector comes from the belief that the current policy helps reduce the current account deficit and the fear that domestic service industries will not be able to compete globally.

But it could also be argued that if Indonesian businesses are allowed access to better-quality services from outside the country, they could reduce costs and improve their competitiveness, hence increasing export volumes and reducing current account deficits.

Sectors that are important for improving productivity and competitiveness such as logistics, maritime transport, retail, education and health are still subject to various restrictions. These deny Indonesian businesses and individuals access to higher-quality services, causing an increased cost of doing business in Indonesia.

It is not clear at this point to what extent the omnibus bill on job creation now being drafted by the government would reduce restrictions on the service sector. The omnibus bill is supposed to streamline the bureaucracy, simplify licenses and reform labor markets to attract more investment into the country.

But since the service sector is assuming a more important role in the economy, it is important that provisions in the bill nurture a better investment climate for the service sector.

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Commissioner at a publicly listed company. The views expressed are his own.

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