A Decade of Uneven Convergence

Serbia's economy has grown steadily over the past decade, but convergence with the EU has been uneven. Macroeconomic and employment indicators have improved markedly, while 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. Source: Eurostat; Statistical Office of the Republic of Serbia (SORS); National Bank of Serbia (NBS). CEVES estimates.

II.2 Convergence Outcomes

Given this acceleration of investment and growth, Serbia's economy converged with the European Union in many respects, but the pace and quality of catch-up were uneven and in some areas it regressed. While aggregate indicators point to gradual improvement, convergence outcomes diverge markedly across policy domains. Advances in integration and digitalisation coexist with persistent gaps in productivity, human capital formation, governance, and core infrastructure, limiting the economy's capacity to translate growth into durable efficiency gains. At the same time, convergence challenges are not only external but also internal: pronounced regional disparities and uneven social outcomes shape aggregate performance and reflect differences in access to opportunities, public services, and institutional capacity.

Table 2a: The convergence picture across policy domains, 2024

Table 2b: The convergence picture across policy domains, 2024 (continued)

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

A note on interpretation is warranted. 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, 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.

II.3 Governance, Health, and Infrastructure

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.