This report assesses Serbia's economic governance — the first sub-criterion of a functioning market economy — through the lens of competitiveness: the capacity to generate broad-based productivity growth under competitive pressure, as envisaged by the Western Balkans Growth Plan. The past decade has brought Serbia a steady if slow economic convergence with the EU while stabilising the macroeconomic framework and reducing the public debt burden. Part of this convergence, however, is the artefact of a fast appreciation of the real exchange rate whose sustainability is questionable. Productivity growth has been slow overall and particularly in the tradable sectors, on which competitiveness depends. GDP per capita reached 51% of the EU average by 2024, employment nearly converged, and the fiscal position stabilised. But productivity — the harder test of real catch-up — moved from only 50% to 57% of EU levels, implying some 25 years to convergence at current rates. Meanwhile, social development indicators are lagging, governance and environmental indicators are diverging from EU benchmarks, and life expectancy — that telling indicator of a society's health — is diverging too.
In good measure, the slow productivity growth reflects a "Dutch Disease" problem "manufactured" by policy choices and economic governance limitations. The squeeze results from the interaction of an FDI-centred industrial policy focused on large labour-intensive employers, non-tradable public investments, a domestic supply response constrained by a highly unsupportive environment that disincentivises domestic investment and discriminates against SMEs, and monetary tightening that falls disproportionately on domestic credit. Together, these raise domestic prices and wages relative to foreign ones, amounting to a manufactured Dutch Disease that is eroding Serbia's substantial manufacturing comparative advantage. Without widespread real productivity increases, economic growth will at best be contained, sharpening inequalities; more likely, it will grind down to stagnation and a weakening macroeconomic framework.
The EU's Reform Agenda offers the necessary policy changes, but its actual implementation and a genuine improvement of the business environment require deep changes in dysfunctional executive practices that so far have only been deepened in this period. Two distinct governance failures underlie these outcomes. The first consists of deliberate policy choices the government could change: politically driven large public and private investment choices, special laws exempting some of the largest ones from procurement rules, the misalignment of state aid with EU frameworks, and unreformed governance of public enterprises. These are targeted by the Reform Agenda and require no institutional transformation — only political decisions, mostly to relinquish instruments of discretionary allocation.
The second is more complex. Serbia's public administration carries structural weaknesses that require political intervention for even basic problem solving and prioritisation. Fragmented competences, absent planning, no functioning accountability — these predate the current regime, but current political choices have intensified political intervention to an unprecedented degree. These are not gaps that better implementation or a stronger judiciary alone can fix.
The economy has reached the limits of what this governance model can deliver. At the beginning of the analysed period, focused political intervention did accelerate private and public investment. However, its extreme centralisation at a single apex is now backfiring. It has displaced the institutional capacity on which sustained, broad-based growth depends. The individually negotiated packages that a single apex can manage are the only industrial policy Serbia can execute. Budget analysis confirms this pattern. Substantial economic spending through only nominal "programmes" is concentrated in individually large centrally managed investment flagships and transfer schemes, and private-sector support favours large investors over SMEs by a ratio exceeding 9:1. The very communities that benefited most from such shortcuts are now the first to lose as tightening labour markets price labour-intensive operations out of Serbia, while flagship projects concentrate on Belgrade — deepening a spatial divergence already among the sharpest in Europe.
On its own, Reform Agenda compliance — even if genuine — would not fully activate the institutional capacity that broad-based productivity growth requires. Deep administrative reforms would also be needed. The report's recommendations, however, focus on reforms and interventions complementary to the Reform Agenda, ameliorating the consequences of the status quo or preparing the transition to its aftermath. They are organised by the degree of institutional capacity they presuppose.
A first tier identifies low-cost measures — a EUR 10–15 million budget line to guarantee AOFI's credit insurance operations, unique project identifiers for capital investments, immediate procurement transparency — that require no reform and have no defensible reason to be postponed. A second tier proposes that the European Commission attach substantive conditions to reforms already under way: a regional aid map and SME strategy within state aid alignment, mandatory transparency in public investment reform backed by independent monitoring capacity. A third tier presents independent initiatives — a credit guarantee facility accompanied by an SME upgrading pipeline, competitive territorial coalitions, an investment monitoring platform, an SME ombudsman designed to strengthen competitiveness and independent stakeholder capacity for better governance. The fundamental public administration reforms, including tackling culture, necessary to bring governance back into Serbia's institutions, fall outside the scope of this report.