A Decade of Uneven Convergence

Serbia's economy grew steadily over the past decade, driven by large FDI inflows, export expansion, and rising public investment. GDP per capita reached 51% of the EU average by 2024, and employment nearly converged. But productivity — the harder test of real catch-up — moved from only 50% to 57% of EU levels, implying some 25 years to full convergence. The growth drivers that delivered these gains are now weakening: manufacturing FDI has collapsed, public investment has peaked, and the compositional shift toward construction and non-tradable services offers diminishing returns. Meanwhile, governance, health, and environmental indicators are diverging from EU benchmarks.

II.1 Macro-developments

Serbia entered the period of this analysis (2015–2025) in deep macroeconomic distress. In 2014 unemployment stood at 20%, employment at just 47.2%, investment had averaged only about 20% of GDP over the previous decade, and GDP remained well below its pre-transition level. The first years of the period were marked by a sharp fiscal consolidation that redressed the accumulated imbalances. Between 2014 and 2018, the fiscal balance improved from a deficit of 5.94% to a surplus of 0.61% of GDP, and the public debt-to-GDP ratio stabilised at first, then declined to 45% by end-2025. Despite this sharp tightening, GDP growth remained positive, jumping to 4.6% already in 2018.

The key to the success of the early period, other than the radically increased fiscal discipline, had been a strong pick-up in FDI inflows, mainly from the European Union. Three factors were key in raising them from around 3% of GDP before 2015 to over 7% in 2021–2022. First, it is in this period that the outflow of European, especially German, capital intensified again in search of efficiency gains, as well as began nearshoring. Serbia was near, and with a deeply depressed economy, profit opportunities were extremely high. Second, more than a decade after the last political crisis and showing visible commitment to fiscal consolidation, Serbia was finally able to overcome its image of a politically risky destination. Last but not least, the authorities adopted an aggressive investment promotion policy that both facilitated entry — as we will argue, by short-circuiting rather than cutting red tape — and reinforced the high profit opportunities. However, as we will see, they also generated distortions that increasingly cost the country today.

Table 1: Three Macroeconomic Periods — Key Drivers of Growth and Context

Note: Simple averages of annual growth rates. Primary fiscal balance shows change during period. Source: Eurostat; Statistical Office of the Republic of Serbia (SORS); National Bank of Serbia (NBS). CEVES estimates.

Exports have also been a major driver of growth, comprising both the outputs of foreign investors and domestic SMEs. Their expansion substantially outstripped that of CEE peers, as they grew faster than their destination markets, diversifying in both product and geographic structure. By 2021, the GDP share of goods and service exports caught up with those of the less integrated CEE countries. Nearshoring capital came with ready markets, so it is not surprising that it would lead to Serbia's market expansion — effectively a market acquisition. However, Serbian SMEs showed impressive competitive strength throughout most of this period, diversifying and conquering market share. Until recently they approximately kept pace with the rest of Serbia's exports and showed remarkable adaptability and resilience during the COVID crisis, which only mildly affected their performance.

Soon after the acceleration of FDI, GDP growth was also lent support by accelerating general government capital expenditures. The expansion was quite steady, with expenditures peaking at 7.4% of GDP in 2024 (note that the latter figures also include significant expenditures on military equipment). This expansion has been significant — by comparison, few were the years when they surpassed 3.5% in the entire previous transition period — but it reached the point at which further acceleration is hard to engineer and even harder to justify.

Serbia's macroeconomic performance was robust throughout both the COVID and the subsequent energy/Ukraine war crisis, with GDP annual growth recording 4.1% on average between 2018–2021, slowing slightly to 3.5% in 2022–2024. There was some difficulty with the inflationary spell of 2021–2023, with inflation reaching 16.2% in March 2023 and slowing gradually to 2.7% by end-2025.

The performance was supported by significant FDI figures until 2024. However, the demonstrated resilience was a compositional artefact rather than a reflection of strong competitiveness. At first, carryover effects from the intense manufacturing FDI planned before the energy crisis did help, but after peaking in 2021 manufacturing FDI tumbled to near zero by the latter parts of 2024. What filled its place were three structurally different flows. One was mining and ore processing, following the Chinese acquisition of a copper mine and smelter plant and a gold mine. These were evidently finite projects. The second was a short-lived acceleration in ICT investment inflows, likely spurred by the Ukraine–Russian war. The third — and most consequential for the competitiveness dynamics discussed in this Report — was a strong inflow into construction capacity expansion and related architectural and engineering knowledge services. These accompanied the acceleration of public investment under bilateral contracts, of which a large portion is parallelly contracted with designated foreign companies.

In 2025 GDP growth sharply slowed to an estimated 2.3%, primarily due to a near halving of FDI inflows. Many observers attributed the decline to political protests that had been gathering steam since the tragic collapse of the canopy at Novi Sad's railway station the previous November. While there is no doubt that political unrest eventually did dampen investor spirits, a careful analysis of the FDI structure and timing suggests the initial drop was already under way. Manufacturing investment was already down, and the expansion of construction and related service capacities could not last indefinitely. As public investment slightly slowed after peaking, growth in 2025 was supported by exports and by an unusually high increase in household consumption, a result of very large real public and private wage increases over the previous year and a half.

II.2 Socio-economic Convergence

Serbia's convergence with the EU has been real and, in some dimensions, substantial — but the pace of productivity catch-up has not matched the volume of capital the economy has absorbed. GDP per capita in purchasing power terms rose from 41% of the EU average in 2015 to 51% in 2024 (Table 2). Two forces drove this: a significant increase in employment, and productivity growth. Employment convergence was the faster of the two, reaching 94% of EU levels — but it was substantially aided by a 12.4% decline in working-age population over the period, which both tightened the labour market and mechanically raised per capita figures. Productivity — the harder test of real catch-up — moved from 50% to only 57% of the EU average, implying some 25 years to convergence at current rates. This is modest by the standards of Central and Eastern European economies, several of which started at higher levels and still converged faster. The comparison prompts a question that runs through this report: given the exceptional levels of investment Serbia attracted, why did productivity not grow faster?

Table 2: Convergence Indicators, Serbia and EU

Source: Vienna Institute for International Economic Studies (wiiw); Eurostat; SORS; World Justice Project; Transparency International; authors' calculations.

A note on interpretation: convergence measured in PPS terms adjusts for the fact that Serbia's price level is still below the EU's, giving each euro greater purchasing power domestically. As Serbia's domestic prices rose toward EU levels over this period — a process closely linked to the real exchange rate appreciation analysed in Chapter III — a growing share of nominal income gains reflected higher prices rather than higher real output. Nominal wage convergence has been striking (from 22.5% to 38% of the EU average), but a substantial part of this reflects cost inflation rather than productivity improvement. The gap between wage convergence and productivity convergence is, in effect, the convergence table's expression of the competitiveness squeeze documented in the next chapter.

Inequality initially improved, but the gains have stalled and the growth model is now working against them. In the earlier part of the period, FDI inflows were directed primarily toward regions with the highest unemployment, bringing jobs to areas that had seen little private investment since the 1990s. The GINI coefficient converged toward EU levels and the poverty gap narrowed (Table 3). However, since 2019 regional disparities have reversed course and are widening, moving Serbia from the middle toward the upper range of regionally unequal European economies — comparable to Romania and Bulgaria, and substantially more unequal than neighbouring Croatia or Slovenia. This renewed divergence has occurred alongside sustained population decline (not shown), with only Belgrade remaining broadly demographically stable. The shift in the composition of FDI and public investment toward Belgrade-centred flagship projects, documented in later chapters, is deepening this spatial divide. The growth model that once spread employment opportunities is increasingly concentrating them.

Table 3: Inequality and Welfare Outcomes, Serbia and EU

Source: Eurostat; OECD PISA; World Inequality Database.

The more troubling dimension of the convergence picture concerns governance and health — areas where Serbia often started at relatively higher levels, making the subsequent divergence all the more concerning. Governance effectiveness and rule of law indicators have worsened or stagnated, diverging from EU benchmarks precisely when institutional quality should have been strengthening alongside economic growth. Life expectancy is diverging from the EU: it inched up from 75.3 to only 76.2 years over nine years, even though Serbia spends close to EU levels on health as a share of GDP. Life expectancy is arguably the single most telling measure of a society's overall health — not only of its medical system but of the functioning of its institutions, the quality of its environment, and the well-being of its citizens. Unmet medical needs and out-of-pocket expenditure are both more than twice the EU average (CEVES, 2017).

Education spending as a share of GDP has also diverged, even as PISA scores and enrolment rates have been sustained — a pattern better explained by the legacy of Yugoslavia's investment in human capital than by current policy effort (Table 3).

Environmental and infrastructure indicators reveal a further paradox: Serbia raised public investment to levels unmatched in the Western Balkans, yet key infrastructure outcomes are diverging. Rail infrastructure and electricity generation capacity — the segments with the highest productivity and transition effects — are falling further behind EU benchmarks, while road construction advanced. Carbon intensity and pollution-related mortality remain at levels that will become increasingly costly as EU climate standards tighten. The evidence suggests that the problem lies less in the volume of public investment than in its composition and the quality of its execution — themes examined in Chapters V and VII.

Digital infrastructure is a genuine bright spot, with internet access and e-government services near EU levels. The ICT sector generates an unusually high share of value added, though this figure includes lower-complexity activities such as call centres, so the comparison with the EU needs to be made with caution. More importantly, digital skills and economy-wide technology adoption lag behind the infrastructure, limiting the broader productivity impact.

Taken together, these patterns suggest that Serbia's convergence challenge is primarily one of governance quality, institutional capacity, and policy design — not of macroeconomic management or investment volume. The remainder of this report examines why.