Why Indonesia Needs Legal Trust, Not Tax Cuts, to Build a Finance Hub

Indonesia’s bid to become a major financial hub in Southeast Asia has been gaining momentum, but its efforts remain unclear due to a lack of focus on the right issues. While tax breaks and incentives have long been touted as key to luring global capital, recent trends suggest these measures are no longer sufficient to win over investors.

A growing number of analysts argue that Indonesia’s finance hub ambitions would be better served by addressing its legal infrastructure and regulatory stability rather than simply cutting taxes. This shift reflects a fundamental change in how global investors approach emerging markets like Indonesia. As Aurelio Gurrea-Martinez, a law professor at Singapore Management University, notes, established hubs such as Singapore and Hong Kong have succeeded because they created strong, predictable institutional environments that foster investor confidence.

Established finance hubs like Singapore and Hong Kong have built their success on creating robust, enforceable contracts; predictable regulation; and effective dispute resolution mechanisms. In contrast, Indonesia’s business community has been plagued by regulatory uncertainty and inconsistent application of laws, leading to a lack of trust among investors and businesses alike. This makes it difficult for companies to operate smoothly and efficiently.

Singapore’s experience offers a clear example of how this plays out in practice. Over the years, Singapore has built a reputation as one of the most business-friendly environments in Asia, with a robust regulatory framework and strong institutions that support investor confidence. The result is a thriving financial sector that attracts top talent from around the world.

To build trust among investors and businesses, Indonesia needs to address its institutional weaknesses by strengthening its judicial system and improving regulatory oversight. This will require sustained efforts to improve transparency and accountability in government decision-making. Policymakers must also take a long-term view when it comes to economic development, recognizing that tax breaks are not a substitute for sound institutional frameworks.

Countries like Ireland and Luxembourg offer valuable lessons on how to create an environment conducive to foreign investment while ensuring domestic businesses are not left behind. These countries have successfully transformed themselves into major financial hubs by investing heavily in their legal infrastructure and regulatory stability. Indonesia could learn from these examples as it seeks to build a finance hub of its own.

In reality, Indonesia’s finance hub ambitions require more than just tax cuts; they demand a fundamental transformation of the country’s institutional landscape. By prioritizing regulatory stability and legal certainty over short-term economic gains, Jakarta can create an environment that supports sustainable growth and attracts top talent from around the world.