looking at reform in the communications-related sectors. The first study used bilateral data on communication costs and trade flows for 107 countries, finding that costs affect trade flows negatively, with the effect being larger for differentiated goods. The second used a panel of Asian countries and found that variations in communications-related infrastructure affected export performance in those countries.

The channel we examine in this paper, linking services sector reform with manufacturing firms’ productivity levels has been previously explored in the context of the Czech Republic, Chile and India, and for the Sub-Saharan African (SSA) region. Arnold, Javorcik and Mattoo (2007) used firm-level data for manufacturers in Czech Republic, combined with several indicators of service sector reform, and found sizable effects on productivity of increased foreign entry into services. Arnold, Mattoo and Narciso (2008) focused on Africa, using data from 1000 firms in 10 SSA countries, and found a positive effect of performance of communications, electricity, and financial sectors on manufacturing TFP. Fernandes and Paunov (2008) used firm-level data of Chilean manufacturers combined with FDI stocks in the services sector, and examined the impact of the latter stocks on manufacturing firms’ productivity, finding a positive effect of significance both economically and statistically. Interestingly, they also found that those manufacturing firms furthest from the technology frontier had most to gain in terms of productivity improvements as a result of service sector liberalization.

Finally, Arnold, Javorcik, Lipscomb and Mattoo (2010) used data from Indian manufacturing firms and constructed indicators of service sector reform in the same country, and found that potential productivity gains appear to be greatest for reforming those service sectors most closely related to trade: transport, communications and finance. They found effects on foreign firms to be stronger.

# **3. The Service Sector in Indonesia: Some Background Information**

## **3.1 Trends**

In 2011, the services sector accounted for 53.8% of Indonesian GDP. It has been growing at an average rate of 7.2% per annum since 2001, faster than either the primary or secondary sectors (Figure 1). By early 2012, the services sector accounted for 49.2% of those employed, or 55.4m workers, and created almost 400,000 jobs in the last year alone.

All service sub-sectors have grown strongly and steadily since the turn of the century. While the trade, hotel & restaurant sub-sector remains the largest, accounting for 33% of all services output, since 2000 the transport & communications sector has been the most dynamic, increasing its share of services output from 10.5% to 18.2% (Figure 2). This dynamism is due in large part to the communications sub-sector, annual growth for which peaked at over 30% in 2008.

Services account for some 35% of all intermediate inputs utilized by the productive sectors (Figure 3). As an example, the manufacture of wood products relies on the services sector for 36.9% of all inputs. Roughly a third of this, or 12.8% of total inputs, is accounted for by the transport sector, 11.1% by retail & distribution, and 3.9% by finance & insurance (Figure 4).

5