The Baseline Diagnosis

This report has presented a consistent picture across seven dimensions of economic governance. Serbia has achieved commendable macroeconomic stability and a decade of sustained growth. Yet the policies that produced this growth have also generated structural imbalances that are now becoming binding constraints.

The macroeconomic story (Chapter II) shows convergence that is real but slow and uneven. At current rates, productivity convergence with the EU would take approximately 25 years. This is puzzling given the volume of capital Serbia has received. The explanation lies not in the quantity of investment but in its composition and in the institutional environment that shapes its impact.

The trade competitiveness analysis (Chapter III) reveals the mechanism through which these policies are now constraining growth. A manufactured form of Dutch Disease — driven by the interaction of FDI concentrated in non-tradables, fiscal discrimination favouring large foreign investors, infrastructure investment that imports rather than builds domestic capacity, and monetary policy that disproportionately tightens credit to domestic firms — has produced real exchange rate appreciation exceeding 20% since 2016. Serbia’s manufacturing cost advantage relative to CEE peers has been effectively exhausted. The market response is already visible: factory closures, SME export decline, and widening regional disparities.

The analysis of executive dysfunction (Chapter IV) identifies the institutional root cause. Serbia’s formal regulatory framework is assessed as broadly adequate — the problem is not insufficient legislation but a fundamental incapacity of the executive to implement it predictably and equitably. Over-prescriptive regulation inherited from the Yugoslav self-management system, the absence of meaningful goal-setting and accountability mechanisms, and endemic fragmentation of competences create a system that cannot function without external political intervention. That intervention operates selectively, benefiting the connected while disadvantaging others, and progressively hollowing out institutional autonomy.

The budget analysis (Chapter V) demonstrates how administrative dysfunction translates into fiscal outcomes. Spending gravitates toward instruments that can be managed from the centre — broad transfers, negotiated subsidies, flagship projects — while programmes requiring dispersed implementation capacity remain underdeveloped. The revealed priorities in aggregate spending show persistent over-allocation to security functions at the expense of human capital investment.

The state aid chapter (Chapter VI) shows how current incentive architecture systematically tilts support toward large, discrete projects at a ratio approaching 9:1 over SME-oriented instruments. Key alignment gaps sit in tax legislation, the free zones regime, and state guarantees rather than in the State Aid Control Law itself. The chapter demonstrates that the widespread belief that EU alignment would constrain SME support is a misconception; the GBER framework permits substantially larger rules-based support than Serbia currently provides.

The public investment and procurement analysis (Chapter VII) reveals that the largest and most consequential projects routinely bypass the formal investment management framework. Without a binding Development Plan or Public Investment Plan, project selection is driven by ad hoc political initiative rather than systematic prioritisation. In procurement, transparency improvements have not been matched by gains in contestability, with single-bid procedures remaining persistently common in high-value tenders.

What Would Constitute Progress

Progress in the coming period would be evidenced not by additional legislation or new institutional structures, but by measurable changes in how existing frameworks are applied. A first set of indicators relates to transparency and coverage: the publication of the completed state aid inventory; the expansion of PIM system coverage to include projects currently proceeding under special regimes; and the introduction of standardised disclosure requirements for intergovernmental-agreement procurement.

A second set of indicators relates to the rebalancing of support instruments: an increase in the SME share of total state aid volume; a reduction in the concentration ratio of state aid among top beneficiaries; the introduction of at least one GBER-based SME investment scheme that exceeds de minimis ceilings; and the stabilisation and expansion of equipment upgrading programme envelopes.

A third set relates to budgetary practice: a reduction in the share of spending allocated through reserve decisions; the adoption of standardised ex post evaluation for major spending programmes; and measurable progress toward completing the National Development Plan and Investment Plan mandated by the Law on the Planning System.

A fourth set relates to procurement outcomes: an increase in the value-weighted share of procurement that is both competitive and entry-enabling; the introduction of systematic monitoring of lotting practices and their impact on SME participation in high-value tenders; and the reduction of single-bid procedures in contracts above EU thresholds.

Finally, progress in governance quality would be captured by a stabilisation or improvement in the World Justice Project’s constraints on government powers score; a reduction in the share of senior civil service positions filled on an acting basis; and the emergence of functioning performance assessment processes as evidenced by a more differentiated distribution of performance ratings.

These indicators are not aspirational targets chosen for political appeal. They are minimum conditions for Serbia’s economic governance to support the broad-based productivity growth required for sustainable convergence. Without substantial progress across these dimensions, the competitiveness squeeze documented in this report will intensify, constraining growth and deepening the inequalities that already mark Serbia’s development path. The challenge is not to design more reforms, but to build the institutional capacity to implement the reforms that already exist. This is, at its core, what the EU’s “fundamentals first” principle demands.