Serbia's competitiveness is under threat. The real exchange rate appreciation documented in this report (Chapter III) — driven not by resource abundance but by mutually reinforcing policy choices — has already begun to erode the cost advantages on which a decade of FDI-led growth was built. Factory closures and layoffs are accelerating in precisely the labour-intensive manufacturing sectors that absorbed the largest share of new employment since 2015. The economy now needs broad-based productivity growth to sustain convergence, but the governance system that would have to deliver it is structurally incapable of doing so (Chapter IV).
At the root of this predicament lies a governance system built on parallel political decision-making whose centralisation at a single apex has been deepened. Two distinct mechanisms are at work. The first is a set of deliberate policy choices the government has full legal capacity to change, covered by the Reform Agenda reforms discussed in this report: special laws that derogate procurement and public investment rules, directing the largest capital projects outside competitive procedures and public scrutiny (Chapters VII–VIII); and the misalignment of state aid with EU frameworks, largely driven by the desire to keep intervention outside systematic control (Chapter VI). Compliance would require giving up instruments of discretionary allocation that the authorities value precisely because they are discretionary.
The second mechanism runs deeper. Pervasive discretionary decision-making beyond the special laws is sustained by a parallel political system that intervenes in and shapes institutional work — made possible, even invited, by structural characteristics of Serbia's public administration that long predate the current regime: fragmented competences, an absent planning architecture, no functioning accountability (Chapter IV). Serbia's formal institutional framework is in many respects technically adequate. That it cannot function without informal political coordination is not a flaw the centre is working to repair — it is the condition on which the centre's power depends. This is what produces the pervasive uncertainty, the prohibitive transaction costs, and the suffocating business environment that suppress domestic enterprise and investment.
The very communities that benefited most from the governance shortcuts of the past decade — localities that attracted wire-harness plants, clothing factories, and assembly operations through negotiated subsidies — are now the first to lose as the tightening labour market prices those operations out of Serbia. Meanwhile, flagship government projects concentrate on Belgrade's transformation into a regional hub, deepening a spatial divergence already among the sharpest in Europe (Chapter II). The growth model that once delivered visible results is turning against its own constituents.
The extreme centralisation also determines which policies are feasible. The concentration of state aid on large, individually negotiated packages is not only a preference for insiders — it is the only mode of industrial policy a system governed from a single apex can execute (Chapter V). Systematic programmes reaching thousands of SMEs through transparent criteria require decentralised institutional capacity that the parallel system has displaced.
Genuine Reform Agenda compliance would both signal and contribute to improved governance, but broad-based productivity growth requires deep administrative reform. It would reduce the most egregious discrimination against domestic firms and begin to level parts of the playing field. But for the deeper dysfunction to be tackled, the administration must be enabled to plan, exercise professional judgement, and be held accountable — which requires the political centre to accept institutional autonomy it currently treats as a threat.
Until such political will materialises, reforms need to be selected with a clear eye to feasibility within the system as it is. This report's recommendations are organised by the degree of institutional capacity they presuppose. Some measures — a small government fund supporting AOFI, unique project identifiers for capital investments, procurement transparency for projects under special laws — require no institutional reform and no plausible justification for delay. Others require the European Commission to attach substantive conditions to reforms already under way, ensuring that alignment delivers real results rather than hollow compliance.
Most importantly, it is essential to strengthen outsiders — SMEs, business associations, local economic coalitions — both economically and as stakeholders of economic governance, complementing IPA programming, which by design operates primarily through government structures. A broadened Civil Society Facility that encompasses businesses and supports competitiveness infrastructure could be considered as a vehicle. These independent initiatives deliver direct economic value and demonstrate how transparent and participatory institutions can deliver results. Building this capacity is not a substitute for governance reform. It is preparation for the day reform becomes possible — enhancing the probability of its success.
This report is a baseline. It establishes the diagnosis against which progress — or its absence — can be measured when CEVES returns to these questions in the next edition. For methodological issues and CEVES' ongoing monitoring of economic governance consult ceves.org.rs.