A Dysfunctional Executive at the Root of the Onerous Business Environment

Serbia's preparedness for a functioning market economy is generally assessed as broadly good, yet the business environment remains hampered by pervasive unpredictability, excessive costs, and systematic discrimination against domestic SMEs. This chapter argues that these are not implementation gaps that better laws or e-governance can fix. They reflect a fundamental dysfunction of the executive, rooted in an administrative culture inherited from Yugoslavia's self-management system that current governance preferences have deepened.¹

IV.1 The Implementation Problem

The EC has assessed Serbia's preparedness for a "functional market economy" as generally good already since 2020. The fundamental market rules of the game and regulation had largely been adequately legislated even a decade earlier. The post-2014 reforms were about better operationalising key policies: principally achieving fiscal stabilisation and near-completing the resolution of legacy companies under restructuring and tightening market discipline. The key remaining market-framing reforms — such as governance of public enterprises and state aid — have long remained unaddressed and are reflected in the Reform Agenda. However, in the words of the EC itself, "The business environment is hampered by red tape, weaknesses in the rule of law and limited efficiency and transparency of the public administration." (European Commission, 2025a)

The business environment — which can usefully be seen as how the regulatory framework and economic governance reflect on the conduct of business — in many aspects is becoming increasingly problematic. On the one hand, the past nearly two decades were marked by serious efforts to reduce the regulatory burden, yet this burden proved resistant to change. The 2024 World Bank EU-supported Business Environment Report (World Bank, 2024) 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. On the other hand, the rule of law has been weakening (World Justice Project, 2024), and key rules — such as transparent procurement procedures — have been suspended (also addressed by the Reform Agenda). The latter have led to rising corruption (Transparency International, 2024) and, as we argue, a deepening division between insider and outsider businesses (World Bank, 2024). Good laws are not of much use if they are not applied equally or not implemented at all.

The problem runs deeper than what can be resolved by doubling down on red-tape alleviation through e-governance, strengthening anti-corruption measures, and judicial independence.² Consider the example of the construction permitting reform (see Text Box 2), which initially seemed singularly successful but then pitifully sagged.

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. 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, and even deepening, of intervention that we see today possible. That political intervention has been spreading and that political control has been deepening are a matter of political choice.

IV.2 A Formidable Burden

Three features of Serbia's business environment compound into a formidable burden. Deep uncertainty in everyday administrative processes weighs on operations and especially investment decisions; these uncertainties, as well as thoughtless transfer of costs by the administration, push transaction costs far beyond what red tape alone would generate; finally, competitiveness policies, far from rewarding efficiency, in practice discriminate against outsiders and especially SMEs. The following subsections document each.³⁴

IV.2.1 Pervasive uncertainty

It is in the operation of the executive branch — not the judiciary — that companies encounter the most immediate source of uncertainty. Serbia has conquered macroeconomic stability, and property registration functions adequately. But the unpredictability in everyday administrative processes creates uncertainties that no amount of judicial enforcement can compensate. First, typically the damage is done and hard to compensate. Second, particularly for small and undiversified companies, formal legal remedies are not really an option, considering both cost and the risks of informal retribution. The practice that public-sector suppliers do not submit invoices until they are given a signal that the counterpart is ready to pay illustrates how far businesses are ready to go to accommodate. It is indicative that the SAI report (Text Box 2) notes no complaints had been filed regarding the construction permit delays.

A first, fundamental layer of uncertainty arises from the instability of policies themselves. The predictability of the business environment is compromised starting from the absence of a reasonably committing formal planning architecture (discussed in Section IV.3), but also by a culture that all too easily tolerates changes in de facto plans and even policies at the ministerial level, often linked to personal preference rather than political affiliation. An important exception is the medium-term fiscal plan, which is oriented more to setting an envelope than clear priorities to fill it; but as we argue in Chapter V, very substantial discretion is built in through the treatment of reserves. Hence, companies and local governments cannot anticipate infrastructure priorities, policy direction, what projects are planned, or even how commitments to the EU will be fulfilled (even when measures are being taken) — for example under the Carbon Border Adjustment Mechanism (CBAM). About projects and reforms under way they find out by word of mouth, if at all. The consequences for public investment quality are examined in Chapter VII.

Beyond policy instability, companies face a second layer of uncertainty: the unpredictability of routine administrative processes. 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." We cannot quantify the frequency of such unpredictability. It is indicative, however, that roughly half of the approximately 25 companies that contributed to a Chamber of Commerce and Industry (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 (Novosti, 2025). In CEVES's meetings with smaller companies, once asked, nearly all had frustrating experiences to contribute.

The deeper problem, however, is not merely that processes are slow but that irregularities can reach devastating levels with absolute impunity. 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 whose construction started 3 years ago by a well-known industrial group still does not have a construction permit. Some 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 interlock of unreasonable regulatory rigidity with unpredictability of implementation.⁵ 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, and any day an inspector can return and charge them. Or she may never. But compliance is extremely demanding and the links and conditionalities they encounter do not have an evident rationale: why can the licensed contractor not take responsibility for compliant technical requirements? Why do regulations require full permitting for small premise adjustments?

IV.2.2 Transaction costs

The transaction costs of red tape can be staggering, and the much-touted digitalisation 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 utilised the deductible VAT.⁶ Based on standard cost and procedural compliance assumptions, the cost of red tape is estimated at approximately 3% of GDP (Public Policy Secretariat, 2024). Yet the hidden costs of administrative dysfunction dwarf measurable compliance costs. Standard cost estimates 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 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 requiring the investor to provide whatever expansion of transmission infrastructure is necessary, and then requesting the transfer of its ownership to EPS at no cost. Similarly, independent power producer (IPP) investors sign binding contracts with EPS requiring electricity delivery within a fixed period, with penalties for any delay regardless of cause. Yet delivery depends on state procedures — grid connections, permits, environmental consents — that move through multiple institutions with no single point of accountability. While administrative processes stall, the contractual clock runs and the costs cumulate.

This attitude permeates routine interactions with the administration. In the SEF case, if the counterparty confirmation does not arrive on time, the company must pay VAT twice — on both the cancelled and the replacement invoice — with correction possible only in the following period. VAT refund verification requirements prolong reimbursement of funds that are legally owed. Sanctions, too, are routinely disproportionate: inspectorates may close a business for a week for minor non-compliance, and clerical errors attract the same fines as deliberate violations. These are not isolated cases; CEVES's detailed study of Serbia's regulatory culture documents the pattern across a far wider range of administrative interactions (CEVES, 2024).

IV.2.3 The uneven and unrewarding playing field

The business environment is not conducive to productive private-sector development, and it is particularly hostile to domestic SMEs — potentially the most dynamic segment of the economy, the most embedded in local value chains, and the most important for broad-based employment. Policy actively favours large investors over smaller firms; the way the administration operates requires access to centralised channels that SMEs cannot reach; and the provision of public goods is inadequate. The combined effect is a system that rewards size and political proximity rather than efficiency, investment, or innovation.

The policy framework is tilted against SMEs, primarily through the fiscal architecture of investment and competitiveness support. As described in Chapters V and VI, through the tax system and subsidies the state provides well over an order of magnitude more support to large companies than to SMEs. But the bias extends beyond fiscal instruments. Policy support for access to finance is minimal — an export credit and guarantee facility exists but provides negligible support compared to what is standard in EU and OECD member states, with no instruments of maturity longer than two years and almost no development lending. Public procurement — through which the state, a singularly large buyer, allocates its most important projects — operates in ways that distort competition, favour political access over merit, and additionally disadvantage smaller firms (Chapter VIII).

The discrimination is compounded by the way the business environment actually operates. As the rest of this chapter elaborates, effective interaction with the administration frequently requires access to centralised, political channels of resolution. Large firms — and foreign investors, who by virtue of their entry into the country deal with senior government counterparts — are structurally better positioned to obtain such access. Domestic SMEs must navigate standard administrative channels that, as documented above, frequently do not function. The result is an additional, informal layer of disadvantage that reinforces the formal policy tilt.

Finally, the provision of public goods is insufficient overall and uneven across the economy. The education system is insufficiently oriented toward the skills the economy needs. State-owned enterprises, which mostly retain monopoly positions in energy, water management, postal services, and key local utilities, are a particularly important part of this picture: the quality and pricing of their services directly shape the cost structure of the private sector, yet their governance is marked by implicit subsidies and politically influenced management (European Commission, 2024; EBRD, 2023). These gaps affect firms of all sizes, but the burden falls disproportionately on SMEs: large corporations can compensate through in-house training, proprietary logistics, and direct government engagement, while smaller firms must either do without or operate at reduced productivity.

IV.2.4 The roots

Two factors explain why the business environment described above can persist. The first is a regulatory culture that treats the private sector with suspicion and is oblivious to the costs it imposes. The second, developed in Section IV.3, is a set of structural characteristics of the administration that make accountability logically impossible. The unequal treatment of SMEs is reinforced by the fact that, as a relatively new constituency, they remain politically weak.

The cultural dimension encompasses a presumption of guilt with regard to the entire private sector, the understanding that compliance has to be monitored case by case, and a complete obliviousness to what constitutes the costs of business conduct and how much successful business matters to society.⁷ This culture is a legacy of a state that controlled private enterprise rather than emanating from it — a legacy that has not been squarely addressed to this date. The R&D social contribution exemption case illustrates the pattern. Introduced in 2021, the exemption appeared to work until the first R&D employees changed jobs — and discovered their social contributions had never been paid. The Ministry of Finance had reserved the right to pay them only after inspections confirming legitimate R&D engagement, inspections that had never been carried out. When the issue was raised at the PKS meeting, Ministry staff dismissed it as a "technical issue that will eventually be resolved." This culture is not confined to a single ministry; it pervades administrative practice.

IV.3 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.

IV.3.1 The Yugoslav Legacy

The Yugoslav self-management model was distinctive: unlike centralised Soviet-style administration, it created an elaborate apparatus of participatory governance. Institutions and businesses functioned autonomously in their operations, while massive regulatory structures specified precisely how all economic transactions were to be conducted. 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 without formal entry into the governance system. 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.⁸

IV.3.2 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 continues to specify 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. To make matters worse, economic regulatory frameworks operate as if what is not explicitly allowed is forbidden (despite the Constitution establishing the opposite), paralysing all action that is not instructed. Over the years of transition and frequently changing governments, responsibilities have also fragmented across multiple bodies, causing overlaps and gaps.

Under such circumstances, coordination failures become endemic not only at the operational but also at the policy and programme levels. The absence of a comprehensive planning framework means clear documented goals and priorities are also scant, further complicating coordination. Think of guiding the threading of a needle with separate instructions on the movement trajectory of each hand, rather than describing the goal that each hand has to accomplish. Ministries pursue inconsistent approaches; agencies fail to share information essential to shared tasks (CEVES, 2024).⁹

The Yugoslav planning system vanished with the implosion of the system at the start of the 1990s, and today, more than three decades later, effective policy and operational planning remain patchy. The Constitution, as well as the Law on the Planning System (Republic of Serbia, 2018), mandate a national development plan (Plan razvoja) and a national investment plan (Investicioni plan) as the highest-level strategic documents from which all other planning should 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 (SIGMA, 2025). 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 the Republic's Public Policy Secretariat comments are incorporated (European Commission, 2024). 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 (SIGMA, 2025). These patterns reduce the chance that programmes reflect real constraints faced by firms and households, and they make it harder to design targeted instruments (SIGMA, 2025).

IV.3.3 Why Accountability Cannot Exist

These features interact to make managerial accountability, and hence the use of the judgement that it engenders, not merely weak but logically impossible. If regulation specifies every procedural step, there is no room for judgement — and accountability presupposes judgement. 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 (SIGMA, 2025). This weakens authority and reduces willingness to make decisions that require judgement. Where permanent positions have been filled, a change of leadership may result in the dissolution of sectors so that unwelcome managers are thus removed. 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 (SIGMA, 2025).

These factors compound with the dilemmas over how to proceed in situations where the answer is not clearly prescribed. They escalate even minor decisions upward, document every action regardless of utility, and treat discretion not as space for judgement but as institutional risk. The administration has weaker incentives to invest in programme design, monitoring, and evaluation. As documented in Chapter V, budgets then drift toward spending channels that can be defended procedurally and delivered through a narrow set of central decisions (SIGMA, 2025). The consequential rigidity of regulation is further entrenched by a negative feedback loop. The greater the intervention that the system requires to move in any direction, as described below, the more government officials will resist allowing any scope for judgement in regulations. The concern is that such scope will invite political pressure to use it in politically motivated or corrupt ways. And it is the government officials who, ultimately, design the regulation.

IV.3.4 Parallelism Steps In

When goals are absent, accountability impossible, and coordination mechanisms unreliable, something has to step in to give direction to the system's operation. And this is political intervention. Routine processes do, of course, eventually complete. They come out of the administrative machine, however slowly. But contested cases, matters requiring inter-agency agreement, creativity, or anything touching competing interests can stall — and do stall — indefinitely, until they become urgent enough for political intervention.

Political "intervention" happens both officially and informally. Formal decision-making authority is rarely delegated below the head of the institution, even for standard administrative procedures (SIGMA, 2021, 2025). When the newly established PKS Centre for Business Initiatives and Fast Solutions undertook to address the chronic construction permitting failures documented earlier in this chapter, its working sessions were attended at ministerial level — illustrating both the seniority required to move any contested matter and the absence of empowered officials below that level who could resolve it. Ministers sign off on matters that in EU member states would be handled two or three levels down, overloading political appointees with operational decisions while depriving career managers of the authority that would make accountability meaningful.

However, intervention also happens through informal channels, more or less subtly, through personal relationships with decision-makers at one extreme, or by interpretation of what the political intent is from the press, at the other. In general, the parallel system does not replace formal procedures — it motivates, orients, or directs formal action — but this makes it a powerful instrument of discrimination. 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 (EBRD, 2023). Someone with access gets their case moved to the top of the pile; everyone else's cases get pushed further back. 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.

IV.4 The Centre of Political Power

The centralisation of administrative decision-making described above should not be confounded with the centralisation of political power in the hands of currently 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 currently 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 Tadić (2008–2012) and, in more extreme form, President Vučić. 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.

Over the past eight years a parallel management system has been developed, centred on the Presidential office. The formal investment promotion framework — RAS, the Council for Economic Development — operates formally, but investment decisions are effectively channelled through informal presidential mechanisms. In this particular issue a key figure is a presidential adviser, not listed in the president's adviser roster at present, but well-known in business circles.¹⁰ Through regular meetings with investors and direct communication channels, this parallel structure can accelerate processes, override bureaucratic obstacles, and deliver results that the formal system cannot.

Using these resources and its political authority, the Presidential office has been able to motivate, prioritise, and direct public resources — not only subsidies to attract investors, but also public infrastructure investment. It has been able to accelerate passage through red tape, or reduce 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 the heights described earlier. It has also been able to fill part of the planning vacuum documented in the previous section. There is little doubt that the "investment programmes" referred to in public, first as "Serbia 2025" and subsequently as "Leap into the Future — Serbia EXPO 2027," originate there.¹¹ The government administration has officially confirmed that neither programme is a public policy document within the meaning of the Planning System Law.¹²

This is the ultimate expression of the parallel system: not only are selected individual administrative decisions made at the centre, but the very purpose and direction of public investment is set informally, outside the institutional architecture designed to produce it. Such management methods carry serious costs. The immediate drawback is discrimination: large companies, domestic and foreign, with presidential access get their issues resolved; smaller firms and the uninitiated do not. The system creates winners and losers based on visibility and access rather than merit. The deeper cost concerns institutional weakening. If expertise and experience have little bearing on how problems are solved, investing in one's own institutional capacity becomes irrational. Officials learn that initiative is unnecessary at best and dangerous at worst. The system selects for compliance rather than competence.

The economic returns of this model are now diminishing. The 2025 FDI slowdown, the accelerating factory closures documented in Chapter III, and the business community's own complaints at the February 2025 PKS dialogue — where the largest domestic investors described different aspects of administrative dysfunction the parallel system had not solved — suggest that centralised intervention is reaching the limits of what it can deliver even as an economic growth strategy. At the same time, as the next chapter argues, this system is unable to offer the very solutions that Serbia's economy now needs to continue moving forward: the public services needed to raise the economy's productivity.

The World Justice Project Rule of Law Index captures this dynamic precisely. The Index overall first saw an improvement in Serbia and then a weakening to 85th place of 142 countries in the decade to 2024 — 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 entire period, even as other components such as regulatory implementation first improved. 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, but by bypassing institutions rather than strengthening them.

IV.5 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 large and connected while disadvantaging others. The more the parallel system operates, the more it undermines formal institutions' capacity to develop. Reform efforts that add procedures or monitoring mechanisms leave the underlying architecture unchanged — new structures inherit the same deficits.

While the legacy of political intervention in administration is long-standing, the degree of concentration has changed, progressively migrating to a single apex. Centralised intervention in administrative processes is not new in Serbia — under previous governments, highly discretionary steering was exercised both at ministerial level and above. But over the past decade, instead of gradual institutional empowerment, the legacy of institutional dependence has been deepened and exploited. What we have explained in this chapter is how such concentration could be reached given that Serbia enjoys a notionally complex and developed institutional system with relatively strong formal separations of power.

A system that cannot set goals, cannot hold anyone accountable, and cannot coordinate across its own fragments will not resist a centre determined to fill the vacuum — and a centre that benefits from the vacuum has no incentive to repair it. The weakening of public administration is the consequence of a governance preference that treats institutional autonomy as a threat rather than a resource. Serbia's administrative regression since the mid-2010s is visible in the components that drive the World Justice Project Rule of Law Index to decline, as well as in the rising share of acting appointments and stalling of cross-agency reforms. The implications of this structural trap — including why the standard reform instruments cannot resolve it and what kinds of reform can realistically work within the system as it stands — are drawn in the conclusion.