The Implementation Problem

The EC has assessed Serbia’s preparedness for a “functional market economy” as generally good (and at least “moderate” across most chapters relevant to the business environment) already since 2020. The rules of the game had largely been adequately legislated even earlier. The post-2014 reforms were more about operationalizing them right: achieving fiscal stabilization, near-completing the resolution of legacy companies under restructuring and making a serious effort to reduce the regulatory burden.

Nevertheless, the business environment continues to be highly, and in some aspects increasingly, problematic. The regulatory burden has proved resistant to change: the 2024 World Bank EU-supported Business Environment Report found that SMEs continue to face high parafiscal fees and cumbersome procedures, with particular difficulties arising from the design of implementing regulations and from inconsistent enforcement across jurisdictions. Meanwhile, the deteriorating quality of overall governance, especially the weakening rule of law and high corruption, have been having their own negative effect. Good laws are not of much use if they are not applied equally, or not implemented at all.

The response has been to double down on red tape alleviation through e-governance reforms on the one hand and, on the other, to focus on anti-corruption measures and judicial independence.

We argue, however, that the problem runs deeper.

Consider the case of the initially successful construction permitting e-reform. In 2015-2019, the introduction of the Objedinjena procedura (Unified Procedure) reduced steps from 19 to 12 and the required time for a full permitting process from 264 to 100 days. Serbia’s Doing Business ranking improved from 186th to 9th in 2020. Yet, by 2024 a State Audit Institution performance audit found that 59% of construction permit applications nationwide exceeded their legal deadlines. At the Ministry of Construction itself, the figure was 85%, with the longest issuance of the actual construction permit step taking 387 working days against a legal deadline of 5.

What happened? The World Justice Project Rule of Law Index offers a hint. It places Serbia 85th of 142 countries overall — but performance varies dramatically across dimensions. The weakest component, by a wide margin, is constraints on government powers, where Serbia falls to approximately the 10th percentile globally — a dimension that weakened throughout the decade of observation ending in 2024, even as others first improved and then stagnated. We return to this finding in Section IV.4.

Our hypothesis is that, at best, the construction permitting reform worked while it was the beneficiary of focused political attention. Once attention flagged, the electronic integration of a process that suffered from deep coordination problems stopped being of help. In the worse-case scenario, only insiders get permits issued on time. Either way, the answer lies in the role of outside political intervention.

Trade facilitation reform tells a similar story. After a 2012 World Bank diagnostic identified multi-agency border procedures as a key constraint on export competitiveness, plans were set in motion for a National Single Window (NSW) integrating border agencies into a unified submission process. Reform advanced reliably where individual ministries could act alone. But only 2% of the EUR 9.2 million specifically allocated to the NSW were spent by the World Bank project’s December 2025 closing date. The institutional gap is captured by a concrete detail: MPALSG, which operates “e-Inspektor” — the most natural domestic counterpart to a unified border inspections system — was not even invited to the NSW visioning workshops. Full-time automated customs processing remains unavailable and notarised hard copies are still required for various trade documents — precisely the dysfunction the 2012 diagnosis identified.

These failures are not exceptions; they are paradigmatic. Sustained cross-agency reform — whether of licensing, trade facilitation, or inspections — requires top-level political attention and ultimately deeper public administration reform. Our argument in this chapter is that, beyond the usual understanding of “regulatory implementation” problems, what we see is a fundamental dysfunction in the operation of the entire executive, largely caused by legacy administrative practices. These dysfunctionalities invite political intervention. The degree and nature of the intervention are not predetermined. But the fact that the system invites it makes the pervasiveness of intervention that we see today possible. That political intervention has been spreading and deepening political control are, however, a matter of political choice.

A Formidable Burden

From the business perspective, a conducive business environment minimizes uncertainty and transaction costs while reliably rewarding efficiency, productive investment, and innovation. In Serbia, deep sources of uncertainty weigh down on company operations and especially investment decision-making. Thoughtless cost-burden transfer by the administration takes transaction costs far beyond the already weighty costs of red tape alone. And competitiveness policies are in practice discriminatory towards SMEs. Throughout, we indicate how these behaviours reflect both regulatory capacity and regulatory culture.

The pervasive uncertainty

Serbia has conquered the first aspect of minimizing uncertainty — macroeconomic stability. Another key aspect is securing property rights and contract enforcement. While property rights cannot be said to be insecure — property registration functions adequately — studied difficulties in the functioning of the judiciary do weaken the credibility of contract enforcement. As to the behaviour of the executive, it amply contributes to insecurity amid an intensifying role of political patronage. For small and undiversified companies, formal legal remedies are practically irrelevant. Often, public sector suppliers do not submit invoices until they are given a signal that the counterpart is ready to pay. Where public-private cooperation is at issue — such as the granting of policy or project support — it tends to come with a price: CEVES documents cases in which payments in what were understood as multi-year policy commitments were initially made and eventually stopped, depending on political allegiance.

Fundamental difficulties also arise in the predictability and stability of policies and rules. Serbia’s formal planning architecture recognises the need for a coherent development framework, but it has not produced one. The Law on the Planning System introduced a hierarchy of national planning documents and assigned the Public Policy Secretariat a central role in quality control and coherence across strategies and plans. In 2023 the government adopted a regulation setting the procedure for preparing a Draft Development Plan and envisaged a dedicated management body to steer the process. However, the National Development Plan and the subsequent multi-year investment plan that should anchor policy and budget choices remain under preparation and do not yet discipline allocation decisions. Line ministries therefore continue to prepare sector strategies and annual budget proposals without a binding or even directional national set of priorities. A credible capital pipeline, filtered through objective selection and appraisal criteria, has likewise not materialised. Although a list of capital projects exists and is formally recognised in the Fiscal Strategy, the underlying preparatory documents that should support project selection are often missing in practice or are completed retroactively to satisfy formal requirements. Such documents include environmental impact assessments, cost-benefit analyses and in some cases even construction permits. Other than by word of mouth, companies, and even local governments, do not have a reliable way to know what investment projects are under way or in the pipeline. The country has no mechanism for coordinating what projects are undertaken and where — rendering aimless the engagement of the public administration itself.

Finally, as the failed construction permitting and trade facilitation reforms suggest, companies cannot plan how long key administrative processes will take. They are all too often not sure what exactly these processes require, nor that what they see is what they will truly get. It is indicative that roughly half of the approximately 25 companies that contributed to a PKS dialogue on improving the business environment chose to raise exactly this kind of issue — rather than lobby for their interests or propose innovative policies. In CEVES’ meetings with smaller companies, once asked, nearly all had frustrating experiences to contribute.

The bigger problem, however, is the depth the irregularities can reach and the absolute impunity that accompanies them. Customs sampling and clearance procedures for imported frozen fruits and vegetables can last up to 9 months; veterinary-sanitary permits for animal-origin semi-products often break the already long 60-day legal deadlines and may permit smaller volumes than requested, without explanation. A metal processing company must provide 14 separate documents for non-hazardous waste (copper scrap) import permits, including documents not requested anywhere else in the region and unknown to EU operators.

Construction permitting delays cumulate so that a major investor says he does not know if his EUR 1.6 billion pipeline will take 3 or 8 years to be implemented; a bioethanol factory his group started 3 years ago still does not have a construction permit, and 95% of the factory equipment has been sitting on an open field for over 6 months, ready to install.

A medium-sized company in Western Serbia illustrates the regulatory absurdity. It has not been able to obtain a water permit for a wastewater treatment unit in five years, despite having had the unit installed by a licensed supplier. The water permit is conditional on construction permitting for its entire premises — including minor adjustments and additions — at a cost four times that of the treatment unit itself. The company is in breach of the law, but compliance is extremely demanding and without rationale: why can the licensed contractor not take responsibility for compliant technical requirements? Why do regulations require full permitting for small premise adjustments?

The transaction costs

The transaction costs of red tape can be staggering, and the much-touted digitalization effort has not reached mindsets. The newly introduced electronic invoicing system (SEF) does not allow simple correction of non-substantive errors. A typographical error that does not affect the invoice’s correctness requires full cancellation, which in turn requires obtaining a paper statement from the counterparty confirming that they have not utilized the deductible VAT. Based on standard cost and procedural compliance assumptions, the cost of red tape is estimated at approximately 3% of GDP.

However, the costs extend far beyond those estimates. Standard costs and procedures do not include the working capital tied up when procedures stall, the opportunity costs of investments delayed or abandoned, the excess inventory maintained against regulatory unpredictability, or the staff time devoted to navigating dysfunction rather than building businesses.

Moreover, a distinctive feature of Serbia’s regulatory culture is the systematic transfer of costs that should be borne by the service providers and administration onto private parties. The most blatant case, and an often substantial obstacle to, or at least “tax” on, investment is EPS’s practice of leaving the construction of transmission infrastructure when needed to the investor, and then requesting the transfer of its ownership to EPS at no cost. However, this attitude is reflected all along the process of interaction with the administration. Analyzing the law on SEF: VAT refund verification requirements prolong reimbursement of funds legally owed; if the counterparty confirmation mentioned above does not arrive on time, the company needs to pay VAT twice — on both the cancelled and the replacement invoice — with correction possible only in the following period.

Finally, sanctions are often completely out of proportion with the transgression. Inspectorates may close a business for a week at a time for minor non-compliance. Clerical errors are subject to the same disproportionate fines as deliberate non-compliance.

That such costs can be so easily imposed on the entire economy is related to a peculiar regulatory culture that the R&D social contribution exemption case illustrates well. This exemption was introduced in 2021 as an incentive for the engagement of staff in R&D. It took time for all local jurisdictions to recognize and allow the exemption, and just as the system appeared to be working well, the first turnovers of R&D employees began. This is when they discovered that all along their social contributions had not been paid in. In other words, these individuals had been working without social insurance cover. The explanation was that the Ministry of Finance planned to pay the contributions upon completion of inspections confirming that the R&D engagements were legitimate. This idea is the less reassuring as no inspections had been carried out up to the moment when the problem was raised at the PKS meeting. The reaction of Ministry staff to the complaint was even more telling. To paraphrase it: so what? This is a technical issue that will eventually be resolved. The case illustrates three important cultural characteristics: a presumption of “guilty” with regard to the entire private sector, the understanding that compliance has to be monitored case by case, and a complete obliviousness to what comprises the costs of business conduct and that they matter.

Aimless, Unaccountable, and Fragmented: The Roots of Administrative Dysfunction

Even when businesses comply fully with formal requirements, the administration fails to deliver predictable outcomes. Courts can adjudicate disputes after the fact, but they cannot prevent the administrative fait accompli that destroys business value before any remedy becomes available. This is different from problems of corruption or insufficient judicial capacity — the usual issues first addressed when considering rule of law. It reflects something more fundamental: an extreme absence of managerial accountability within the public administration.

Understanding why this persists despite decades of reform requires examining structural features inherited from Yugoslavia’s distinctive socialist system.

The Yugoslav Legacy

The Yugoslav self-management model was distinctive: unlike centralized Soviet-style administration, it created an elaborate apparatus of participatory governance. Massive regulatory structures specified precisely how economic agents’ transactions were to be conducted. Institutions functioned autonomously in their operations. But vision and purpose came from outside the official governance system — from the League of Communists, which set policy direction and mediated among competing interests. When that external coordinating force lost its coherence after 1990, the formal institutional architecture remained but now without the capacity to set direction for itself. The institutions had been designed to execute decisions made elsewhere, not to generate purpose internally.

Persistent Structural Characteristics

Three decades of reform, including two with sustained EU engagement, have made remarkably little difference to certain deep structural characteristics. Serbian regulation specifies procedures in extraordinary detail — jobs enumerate tasks rather than responsibilities for results; bylaws prescribe exactly how activities must be conducted rather than what outcomes must be achieved. In practice, economic regulatory frameworks operate as if what is not explicitly allowed is forbidden — despite the Constitution establishing the opposite. Coordination failures are endemic: responsibilities fragment across multiple bodies, ministries pursue inconsistent approaches, agencies fail to share information essential to shared tasks.

Strategic documents and formal procedures often substitute for real prioritisation. Strategies tend to function as wish lists rather than instruments from which genuine prioritisation can derive. SIGMA reports that the quality of costing in planning documents is inadequate, with some documents lacking appropriate cost estimates for planned activities, and that reporting on sector strategies is not regularly published and remains underdeveloped. The European Commission reaches similar conclusions, noting that policy development and coordination are regulated but not systematically enforced and that there has been no notable progress in ensuring that RSJP comments are incorporated. The consultation process also remains uneven: SIGMA reports that only 56% of draft laws and sectoral planning documents adopted in 2023 were published for public consultation and that only 43% of citizens believe they are consulted when new legislation or policy documents are developed. These patterns reduce the chance that programmes reflect real constraints faced by firms and households, and they make it harder to design targeted instruments.

Why Accountability Cannot Exist

These features interact to make managerial accountability not merely weak but logically impossible. If regulation specifies every procedural step, there is no room for judgment — and accountability presupposes judgment. Where procedure dictates every action, the only question is whether the prescription was followed; if outcomes are poor, the fault lies with the prescription, not the official. Where goals are never defined, the question “did we achieve our purpose?” cannot be posed.

This absence of accountability is reinforced by leadership instability. SIGMA reports that a majority of top public management positions remain filled on an acting basis, and notes that in practice around half of top managers are acting, despite legal limits on acting appointments. This weakens authority and reduces willingness to make decisions that require judgment. SIGMA also reports strong inflation of performance ratings: in 2023, 70.6% of public servants received the highest rating (“exceeded expectations”) on a four-grade scale, which is inconsistent with a functioning appraisal system that differentiates performance and corrects poor results. When leadership is temporary and appraisal is merely formal, officials rationally adapt: they escalate even minor decisions upward, document every action regardless of utility, and treat discretion not as space for judgment but as institutional risk. The administration has weaker incentives to invest in programme design, monitoring, and evaluation. Budgets then drift toward spending channels that can be defended procedurally and delivered through a narrow set of central decisions.

Parallelism Steps In

When goals are absent, accountability impossible, and coordination mechanisms unreliable, many routine processes do eventually complete — they come out of the administrative machine, however slowly. But contested cases, matters requiring inter-agency agreement, or anything touching competing interests can stall indefinitely. Into this space steps the parallel system: intervention through informal channels and personal relationships with decision-makers. The parallel system does not replace formal procedures — it motivates and gives direction to action. Someone with access gets their case moved to the top of the pile; everyone else’s cases get pushed further back.

This mechanism is particularly powerful as an instrument of discrimination. Local governments constantly need central government inputs or approvals; if the locality belongs to the opposition, those inputs may never arrive — not through explicit denial, but simply through endless delay. The EBRD has identified “excessive centralisation of the institutional set-up” and lack of insulation of civil servants from political pressures as key governance constraints.

The Center of Political Power

The centralization of administrative decision-making described above should not be confounded with the centralization of political power in the hands of the President — a well-documented phenomenon in Serbia’s political science literature. The former happens within public administration at every level. The latter pertains to the political domain: in Serbia, power resides with the de facto leader of the strongest political party, and moves to the post that person happens to hold. This structure systematically converts a formally nearly ceremonial office into de facto executive dominance — a dynamic observed under both President Tadic (2008-2012) and, in more extreme form, President Vucic. The two phenomena interact to give the President an inordinate amount of executive power over any decisions he chooses to intervene on, limited predominantly by his personal capacity and interest.

President Vucic has clearly constructed a parallel management system centered on the Presidential office. With regard to private direct investment, while policy is formally set by the Council for Economic Development established by the 2015 Law on Investments, it is generally understood that for investments of significant scale the relevant parameters — the investor, the support package, and often the location — are determined at the Presidency. The long-standing role of the Presidential Adviser for Investments in identifying target municipalities, working across institutional boundaries, and liaising with local governments is broadly known and understood. That a leading private sector figure could make such a reference in a large gathering and expect it to be immediately understood by all present is itself evidence of how institutionalized this informal role has become.

Using these resources and his political authority, the President has been able to motivate, prioritize, and direct public resources as desired — accelerating passage through red tape, or reducing it, for selected generally large investors and public investment projects. This increased the attractiveness of Serbia as an investment destination and contributed to FDI and public investment reaching among the highest levels in Europe.

Such management methods, however, carry serious costs. The immediate drawback is discrimination: large companies, domestic or foreign, are more likely to gain priority, as are politically connected ones. Now that near-full employment has been accomplished, this bias undermines the growth effect of large investment by stymying the investment and supply capacity of the rest of the economy — the “rest” that is necessary for growth to be maintained.

The deeper cost has taken more time to manifest. It concerns the weakening effect on institutions that are so consistently bypassed. Over time, capable staff observe that real decisions are made elsewhere, that professional judgment receives little appreciation, and that advancement depends on political connection — and they leave. The European Commission found 57% of senior civil servants serving in an acting capacity. SIGMA reports that public servants perceive personal connections (51%) and political connections (48%) as significant factors in career advancement.

This is what the international indicators capture. The World Justice Project’s finding that constraints on government powers weakened throughout the entire period — even during years when government effectiveness improved — reflects precisely this dynamic. Parallel political intervention was deployed to achieve economic results, initially accelerating FDI attraction and public investment. The approach delivered measurable outcomes — but at the cost of progressively hollowing out institutional autonomy. Effectiveness improved because the President made things happen; constraints weakened because the President made things happen by bypassing institutions rather than strengthening them.

The Structural Trap

What emerges is a system caught in a structural trap. The formal apparatus struggles to resolve contested matters autonomously. Political intervention fills this gap but does so selectively, benefiting the connected while disadvantaging others. The more the parallel system operates, the more it undermines formal institutions’ capacity to develop. Reform efforts that add procedures and monitoring mechanisms leave the underlying architecture unchanged — new structures inherit the same deficits.

A stronger, even much stronger, justice system could alone not resolve this problem. In the time a single case could realistically be adjudicated, massive executive foot-dragging, incompetence, or injustice would cause incomparably more new damage. Moreover, no adjudication can make whole a company that has been stopped from meeting commitments by indefinite licensing waits, or that has missed a singular export opportunity because it could not obtain the necessary guarantees on time. Interestingly, Serbian companies do not seem to see recourse to legal remedy as an option. The SAI report notes that no misdemeanor proceedings had ever been initiated against any official related to the construction permitting delays.

E-governance reforms are even less effective. They have saved some shoe-leather costs, but without a change of mind-set they actually ossify superfluous and over-prescribed procedures. What is more, they risk making a human judgment-based intervention even more difficult.

Finally, Serbia’s administrative dysfunction is neither a matter of insufficient laws — the country has extensive legislation. It is not primarily understaffing, although chronic understaffing is now beginning to be felt, especially in the very “oversight” functions the system expects so much from. It is a matter of institutional architecture: a system that cannot set its own direction, cannot hold anyone accountable for results, in which competences have been fragmented and overlap, and yet which aims to oversee the conduct of private sector business at the level of individual companies — requires external lubrication to move.

The implications for the reforms discussed in the subsequent chapters of this report are direct. The challenge is not to pass more laws, add more regulatory procedures, or create additional oversight bodies. It is to change how authority is assigned, how judgment is permitted, and how accountability operates. Without this, the same administrative dysfunction will shape the budget instruments and spending patterns examined in Chapter V, and will reproduce itself through whatever new reform framework is adopted.