This paper examines structural transformation mechanisms in developing countries, focusing on the shift from high-productivity, tradable sectors (agriculture and manufacturing) to low-productivity, service sectors and assesses how these elements contribute to rising income levels. Different relationships exist between countries’ structural transformations and economic development. The first group of countries shows sluggish income growth and rapid growth in services, and the second group of countries shows a more gradual shift to services, resulting in higher economic growth. With a simple, static model, with sector-specific distortion that replicates the actual, two-sector, relative TFP, capital stock and capital share well, we find a gradual increase in capital intensification in the tradable sector, coupled with a gradual shift to services (in line with comparative advantages) is the most important cause of sustained economic growth.