## REPUBLIC OF SERBIA — NAVIGATING SERBIA’S ECONOMIC FUTURE: CHAPTER EXCERPTS

## Source details

**Canonical URL:** [REPUBLIC OF SERBIA — NAVIGATING SERBIA’S ECONOMIC FUTURE: CHAPTER EXCERPTS](https://www.imf.org/-/media/files/publications/cr/2025/english/1srbea2025002-source-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2025/english/1srbea2025002-source-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2025/english/1srbea2025002-source-pdf.pdf.json)

---

### 2. GDP Per Capita Gap with the U.S. in 2023 — Key recent achievements and remaining gap
- Serbia has grown at a rate comparable to peers over recent decades, with GDP per capita increasing rapidly since comprehensive reforms from 2014.
- Albeit approaching 5 percentage point closer over the last ten years, Serbian income in 2023 remained about half of its European peers and significantly lags behind the U.S.
- The shortfall in total factor productivity (TFP) is identified as the main contributor to the income gap.

### Contributions to growth (historical 2016–24)
- Labor
  - Unemployment fell from 26 percent in 2012 to 8.6 percent in 2024.
  - Labor force participation rate (LFPR) reached 56.6 percent in 2024.
  - Employment grew at an average pace of 2 percent annually, enabling labor to contribute 1 percentage point to growth over 2016–24.
- Capital
  - Public and private investment increases contributed 0.8 percentage points to growth over 2016–24.
  - Private investment almost doubled in 2023 compared to its level in 2014; public investment more than tripled.
- Productivity
  - TFP growth contributed 1.6 percentage points to growth over 2016–24.
  - Labor productivity rose at a significantly faster pace since 2021, supported by FDI spillovers and expansion of the ICT sector.
  - The ICT sector accounted for almost 15 percent (20 percent) of additional employment (value-added) created in 2023 compared to 2016.

### Growth model and competitiveness risks
- Manufacturing expansion has been driven by medium-low technology industries; medium-high technology industries contributed to employment but created little additional value added, indicating low productivity in those sectors.
- Wages increased sharply in recent years (partly in response to high inflation during the 2022 energy crisis), raising unit labor costs and external competitiveness concerns.
- Wage levels remain below most regional peers and were partly compensated by productivity gains.
- Around half of recent FDI inflows have been concentrated in labor-intensive industries, including construction and rubber and food manufacturing.

### Medium-term limits to factor accumulation (baseline projections and scenarios)
- Labor
  - Absent reforms, labor is projected to contribute only 0.5 percent to growth in the medium term given unfavorable demographics.
  - Baseline assumption: employment growth at 0.8 percent over 2025–30; LFPR expected to reach 61 percent by 2030.
  - Reform scenario: increasing female LFPR, reducing structural unemployment, and lowering youth unemployment could add 0.3 percentage points to potential growth (i.e., add to the 0.5 percent baseline).
  - The estimate for reforms is based on: raising the ratio of female to male LFPR to 80.5 percent by 2030 (closing half the gap with current EU level), a fall in structural unemployment to 7 percent by 2030, and youth unemployment falling to 16 percent by 2030 (current EU average).
- Capital
  - Capital accumulation could contribute another 1.6 percent to potential growth under a marginal increase in investment.
  - Baseline private investment is expected to increase marginally to 18 percent of GDP by 2030.
  - If private investment could reach 20 percent of GDP by 2030, this would contribute an additional 0.08 percent to growth.
  - Public investment is expected to stay more or less at current high levels (percent of GDP) given absorption constraints.
- Productivity (TFP)
  - Baseline assumption: TFP contributes 1.8 percentage-points (in line with historical average) → potential output growth of 4 percent.
  - Under that baseline, Serbia could achieve full income convergence with the EU by 2050.
  - If productivity-enhancing reforms raised annual growth to 5 percent, Serbia could reach full income convergence with the EU by 2042 (eight years earlier).

### Structural policy gaps and priorities
- A comprehensive database of structural policy indicators (normalized 0–100 where 100 = frontier average) shows Serbia has sizeable gaps relative to Europe and U.S. frontiers, with largest gaps in:
  - Governance
  - Innovation, R&D, and digitalization
  - Credit and capital markets
- Business regulation and labor & human capital perform better than the above areas but still show weaknesses in:
  - Distortions in the business environment
  - Labor tax wedge and skill mismatches

### Governance
- Serbia ranks below most peers in all six World Bank governance categories, particularly in control of corruption and rule of law.
- Corruption perception has deteriorated significantly over the last ten years.
- Judicial deficiencies persist, with protracted court case resolution times undermining investor confidence.

### Labor market characteristics and constraints
- Labor legislation became more flexible after the 2014 Labor Law revision; hiring and firing regulations are generally more relaxed than other CESEE countries.
- The major labor-market issue is a heavy labor tax wedge:
  - Estimated tax wedge is almost 40 percent.
  - Social security contributions (SSC): 20 percent paid by employees and 15 percent paid by employers.
  - A flat absolute floor for SSC at minimum wage levels is applied, increasing burden on low-wage workers.
  - Absence of tax-free family allowances significantly increases financial burden of workers with dependents.
- Employers identify labor tax as the second-greatest labor-related constraint after shortages of educated and experienced workforce.

### Human capital and skill mismatch
- Education outcomes
  - Share of population with tertiary education expanded considerably over the last ten years; share with basic education declined.
  - High share of STEM students among tertiary graduates and relatively good education quality (proxied by PISA scores).
- Persistent two-sided skill mismatch
  - Overqualification: an estimated 40 percent of graduates in Serbia are overqualified for their jobs.
  - Skills gaps: about 25 percent of Serbian firms cite inadequately educated workforce as their biggest obstacle.
  - Employers report shortages in work experience, new-economy technical skills, and interactive skills such as problem-solving and critical thinking.
- Consequences include lower pay, lower job retention, productivity loss, and potential for higher emigration among youth.

### 12. The business environment has notably improved thanks to substantial reform efforts — Business environment and state influence
- Reforms implemented between 2014 and 2016 (e-government, e-tax filing, business registration reforms, one-stop shop for business services, investment incentives) significantly reduced business red tape and improved the regulatory environment.
- Serbia remains among the countries with the most restrictions in market competition in Europe, primarily due to distortions induced by active state participation in markets.
- Key manifestations of excessive state influence:
  - Weak governance of state-owned enterprises (SOEs) amid their high presence in the economy.
  - Inadequate state aid control.
  - Gaps in systems and policies to design and assess regulations.
- SOE scale and implications
  - Roughly 800 SOEs operated and employed nearly 200,000 people or 9 percent of the registered workforce in 2023.
  - State support largely flows to SOEs, especially in the form of subsidies to support investment and cover financial loss, suggesting potentially severe resource misallocation.
- Tax breaks and tax credits
  - Widely used to attract foreign investment but create disparities that disadvantage domestic enterprises.
  - Example: the special tax relief for large investments grants 10-year corporate income tax exemption for large investors who invest over RSD 1 billion in fixed assets and hire an additional 100 employees for an indefinite period of time, ultimately benefiting only large firms and FDI firms.
- Effects on firm types
  - Domestic private firms and SMEs, particularly innovative and micro firms, are least likely to receive state support despite their large share in employment and output, making them prone to market failure.

### Digitalization outcomes
- Serbia has comparable digital infrastructure to other European countries and has invested intensively in digitalization (including public services digitalization and e-invoicing).
- Adoption highlights
  - Most firms are online; about half are relatively highly digitalized, including use of AI, cloud computing, data analytics, 3D printing, and robotics.
- Shortcomings
  - Use of e-commerce among firms has been relatively limited, especially among SMEs.
  - At the individual level, about half of the citizens made purchases or ordered online in the past three months, but individual digital skills are assessed as less developed than those in other countries in the region by Eurostat.
- Laws and initiatives mentioned
  - Digital Serbia Initiative and amendments aimed at improving cybersecurity.

### R&D and innovation
- Policy support
  - Innovation Fund, Serbia Ventures Program, and Scale Up Factory provide support for innovative projects and domestic start-ups via financial assistance, mentorship, and networking.
- Measured outcomes
  - Serbia improved 7 percent in the European Innovation Scoreboard over 2017–24.
  - By level, Serbia’s innovation performance was around 60 percent of the EU average in 2024.
- R&D and firm innovation gaps
  - Share of innovative firms introducing new products/processes and conducting R&D is significantly lower than the EU average, especially among private and smaller firms.
  - Private businesses invest very little in R&D; the share of firms conducting R&D is less than 10 percent compared to the EU27 average of 40 percent.
- Policy implications
  - Higher direct government funding to R&D, grants to innovative projects, or tax exemptions to intangible investment could enhance innovation.
  - Accelerating development of the innovation ecosystem requires human capital reforms, availability of risk capital financing, low barriers to entry and exit, labor regulations that facilitate labor reallocation, and a growth-friendly tax system.

### Access to finance and financial markets
- Firms rely largely on internal funding for working capital and investment; bank borrowing is the most important external source.
- Micro firms face greater difficulty accessing bank loans
  - Around 35 percent of micro firms reported obstacles when applying for a loan application.
  - A significantly smaller portion of bank borrowing is allocated to micro firms, who rely on alternative funding such as borrowing from family and relatives.
  - Although more than 10 percent of new business loans are issued to micro enterprises, banks view this segment as not strategically important because of challenging firm formalization, unreliable financial statements, and limited growth potential.
- Major constraints across firm sizes include unfavorable interest rates; micro and small firms additionally face complex application procedures, high collateral requirements, and insufficient loan sizes.
- Policy needs
  - Better bank lending support for micro firms and entrepreneurs.
  - A more diversified financial market to provide risk capital to micro and start-up firms that traditional banks are reluctant to serve.
  - Simplification and automatization of legalization processes to ease bottlenecks in collateral assets for formal lending.

### Medium-term GDP impact of selected structural reforms (closing 50 percent of gaps with the frontier)
- Methodology
  - Following Budina et al. (2025), estimate medium-term impact on potential output if Serbia closes 50 percent of gaps with the frontier using available output elasticities from IMF, OECD, and related studies.
  - Benchmarks note limitations: model does not account for interactions between reforms or general equilibrium effects; closing 50 percent gaps may be ambitious in some areas.
- Estimated contributions to potential output from partial gap closure
  - Improving governance through enhanced corruption control: could add around 5 percent to GDP over the medium term.
    - Rationale: relatively large policy gap and sizable impact of governance on growth; strengthens policy credibility, investor confidence, and public sector efficiency; increases effectiveness of other reforms.
    - Examples of governance reforms: reducing corruption, strengthening judicial performance for commercial disputes, introduction of e-court system, e-title, and electronic registration.
  - Continuing labor market reforms (revisiting the labor tax wedge, boosting participation, lowering structural unemployment, limiting emigration): closing half of the gaps in labor tax could add 2½ percent to potential output.
    - Additional measures: lower SSCs contribution and minima for low-income workers, higher family tax exemptions, active labor market policies for re-skilling/up-skilling, policies promoting geographic mobility and regional development, easing hiring procedures for foreign labor and electronic labor documentation.
  - Human capital (bringing the PISA score closer to the frontier): could increase potential output by ½ percent.
    - Policies: stronger HEI–employer links, internships, career centers, higher investment in mathematical and IT education, teaching methods fostering teamwork and critical thinking, alignment of curricula with labor market requirements.
  - Further improving business environment by streamlining regulation and reducing state influence: could add roughly 2 percent to GDP over the medium term.
    - Measures: SOE privatization and/or centralized ownership model, improving SOE governance, reducing state control in product markets (price regulation), increasing transparency and public consultations in legislation, redesigning state aid to reallocate support from unproductive SOEs to private firms, focus state aid on intangible investment and innovative R&D, refocus FDI tax incentives to enforce FDI-local linkages and technology transfer.
  - Improving bank lending and deepening the capital market: could add another 2 percent to potential GDP.
    - Measures: simplify loan application and collateral systems, automatize legalization processes, develop non-bank lending and risk-capital financing.
- Reforms noted but not quantified (due to unavailable elasticity estimates)
  - Digitalization, R&D, and innovation are crucial to lift labor productivity substantially; policy options include revamping public e-services (e.g., enabling fiscal receipts issuance and electronic payment of non-tax charges), investing in individual digital literacy, and targeted incentives for firms’ innovative endeavors.

### 19. Serbia has made commendable progress in lifting growth and income — Progress and drivers
- Over the last decade Serbia increased labor force participation rates, reduced unemployment rates, and boosted domestic private and public investment as well as attracted FDIs, resulting in solid accumulation of labor and capital.
- Increased labor productivity, including from positive spillover effects of FDI and ICT investment, also supported growth, making Serbia among fastest-growing economy in Europe in recent years.

### Challenges to continued convergence with the EU
- Despite narrowing, the income gap with the EU remains large with substantial deficiencies in total factor productivity.
- The manufacturing sector faces difficulties in shifting to higher value-added industries.
- While wage levels are still low by regional standards, recent increases in wages need to be monitored as they may weaken external competitiveness, particularly in labor-intensive construction and manufacturing industries that received half of FDI inflows during 2021–

### Limits to factor accumulation and need for productivity growth
- Scope for additional factor accumulation to boost growth will likely become more limited going forward, with capital and labor likely contribute 2.1 percent to growth in medium term, pointing to the need of a higher productivity growth to facilitate sustainable growth and accelerate the income catch-up.

### Quantified potential gains from closing structural policy gaps
- Closing half of Serbia’s gaps with the global frontier could yield sizable potential output gains (indicator-based analysis, acknowledging wide uncertainty).
- Estimated medium-term growth increases if governance reforms and other reforms were implemented (closing half the gap):
  - Governance reforms: around 5 percent
  - Labor market reforms: 2½ percent
  - Reforms in business regulations: 2 percent
  - Reforms in capital market: 2 percent

### Policy recommendations (holistic reform spectrum)
- Strengthen governance as a foundational element because of its high returns to medium-term growth and catalytic role in magnifying impacts of other reforms.
- Reduce heavy and distortive labor tax to enhance labor force participation and formalization.
- Invest in human capital by enhancing education curriculum, university-firm linkage, and vocational training to reduce skill mismatch and boost labor productivity.
- Re-design, effectively monitor, and evaluate state aid to ensure fair market competition and level the playing field between domestic private firms, SOEs and FDIs; this would help foster a more conducive business environment, enhance investment and capital accumulation in all firm types, and facilitate higher productivity through resource reallocation.
- Increase availability of risk financing for high-tech to facilitate better access to finance for start-ups.
- Support digitalization, R&D, and innovation to catapult labor productivity, supported by adequate skills, a favorable business environment, and availability of risk capital financing.

*Source: REPUBLIC OF SERBIA — NAVIGATING SERBIA’S ECONOMIC FUTURE: THE CRUCIAL ROLE OF PRODUCTIVITY (June 17, 2025), chapter excerpts.*

### 2. GDP Per Capita Gap with the U.S. in 2023 ____________________________________________ 3

### 2. GDP Per Capita Gap with the U.S. in 2023

### Key recent achievements and remaining gap
- Serbia has grown at a rate comparable to peers over recent decades, with GDP per capita increasing rapidly since comprehensive reforms from 2014.
- Albeit approaching 5 percentage point closer over the last ten years, Serbian income in 2023 remained about half of its European peers and significantly lags behind the U.S.
- The shortfall in total factor productivity (TFP) is identified as the main contributor to the income gap.

### Contributions to growth (historical 2016–24)
- Labor:
  - Unemployment fell from 26 percent in 2012 to 8.6 percent in 2024.
  - Labor force participation rate (LFPR) reached 56.6 percent in 2024.
  - Employment grew at an average pace of 2 percent annually, enabling labor to contribute 1 percentage point to growth over 2016–24.
- Capital:
  - Public and private investment increases contributed 0.8 percentage points to growth over 2016–24.
  - Private investment almost doubled in 2023 compared to its level in 2014; public investment more than tripled.
- Productivity:
  - TFP growth contributed 1.6 percentage points to growth over 2016–24.
  - Labor productivity rose at a significantly faster pace since 2021, supported by FDI spillovers and expansion of the ICT sector.
  - The ICT sector accounted for almost 15 percent (20 percent) of additional employment (value-added) created in 2023 compared to 2016.

### Growth model and competitiveness risks
- Manufacturing expansion has been driven by medium-low technology industries; medium-high technology industries contributed to employment but created little additional value added, indicating low productivity in those sectors.
- Wages increased sharply in recent years (partly in response to high inflation during the 2022 energy crisis), raising unit labor costs and external competitiveness concerns.
- Wage levels remain below most regional peers and were partly compensated by productivity gains.
- Around half of recent FDI inflows have been concentrated in labor-intensive industries, including construction and rubber and food manufacturing.

### Medium-term limits to factor accumulation (baseline projections and scenarios)
- Labor:
  - Absent reforms, labor is projected to contribute only 0.5 percent to growth in the medium term given unfavorable demographics.
  - Baseline assumption: employment growth at 0.8 percent over 2025–30; LFPR expected to reach 61 percent by 2030.
  - Reform scenario: increasing female LFPR, reducing structural unemployment, and lowering youth unemployment could add 0.3 percentage points to potential growth (i.e., add to the 0.5 percent baseline).
  - The estimate for reforms is based on: raising the ratio of female to male LFPR to 80.5 percent by 2030 (closing half the gap with current EU level), a fall in structural unemployment to 7 percent by 2030, and youth unemployment falling to 16 percent by 2030 (current EU average).
- Capital:
  - Capital accumulation could contribute another 1.6 percent to potential growth under a marginal increase in investment.
  - Baseline private investment is expected to increase marginally to 18 percent of GDP by 2030.
  - If private investment could reach 20 percent of GDP by 2030, this would contribute an additional 0.08 percent to growth.
  - Public investment is expected to stay more or less at current high levels (percent of GDP) given absorption constraints.
- Productivity (TFP):
  - Baseline assumption: TFP contributes 1.8 percentage-points (in line with historical average) → potential output growth of 4 percent.
  - Under that baseline, Serbia could achieve full income convergence with the EU by 2050.
  - If productivity-enhancing reforms raised annual growth to 5 percent, Serbia could reach full income convergence with the EU by 2042 (eight years earlier).

### Structural policy gaps and priorities
- A comprehensive database of structural policy indicators (normalized 0–100 where 100 = frontier average) shows Serbia has sizeable gaps relative to Europe and U.S. frontiers, with largest gaps in:
  - Governance
  - Innovation, R&D, and digitalization
  - Credit and capital markets
- Business regulation and labor & human capital perform better than the above areas but still show weaknesses in:
  - Distortions in the business environment
  - Labor tax wedge and skill mismatches

### Governance
- Serbia ranks below most peers in all six World Bank governance categories, particularly in control of corruption and rule of law.
- Corruption perception has deteriorated significantly over the last ten years.
- Judicial deficiencies persist, with protracted court case resolution times undermining investor confidence.

### Labor market characteristics and constraints
- Labor legislation became more flexible after the 2014 Labor Law revision; hiring and firing regulations are generally more relaxed than other CESEE countries.
- The major labor-market issue is a heavy labor tax wedge:
  - Estimated tax wedge is almost 40 percent.
  - Social security contributions (SSC): 20 percent paid by employees and 15 percent paid by employers.
  - A flat absolute floor for SSC at minimum wage levels is applied, increasing burden on low-wage workers.
  - Absence of tax-free family allowances significantly increases financial burden of workers with dependents.
- Employers identify labor tax as the second-greatest labor-related constraint after shortages of educated and experienced workforce.

### Human capital and skill mismatch
- Education outcomes:
  - Share of population with tertiary education expanded considerably over the last ten years; share with basic education declined.
  - High share of STEM students among tertiary graduates and relatively good education quality (proxied by PISA scores).
- Persistent two-sided skill mismatch:
  - Overqualification: an estimated 40 percent of graduates in Serbia are overqualified for their jobs.
  - Skills gaps: about 25 percent of Serbian firms cite inadequately educated workforce as their biggest obstacle.
  - Employers report shortages in work experience, new-economy technical skills, and interactive skills such as problem-solving and critical thinking.
- Consequences include lower pay, lower job retention, productivity loss, and potential for higher emigration among youth.

*Source: REPUBLIC OF SERBIA — NAVIGATING SERBIA’S ECONOMIC FUTURE: THE CRUCIAL ROLE OF PRODUCTIVITY (June 17, 2025), chapter excerpts.*

### 12.      The business environment has notably improved thanks to substantial reform efforts,

### 12. The business environment has notably improved thanks to substantial reform efforts

### Business environment and state influence
- Reforms implemented between 2014 and 2016 (e-government, e-tax filing, business registration reforms, one-stop shop for business services, investment incentives) significantly reduced business red tape and improved the regulatory environment.
- Serbia remains among the countries with the most restrictions in market competition in Europe, primarily due to distortions induced by active state participation in markets.
- Key manifestations of excessive state influence:
  - Weak governance of state-owned enterprises (SOEs) amid their high presence in the economy.
  - Inadequate state aid control.
  - Gaps in systems and policies to design and assess regulations.
- SOE scale and implications:
  - Roughly 800 SOEs operated and employed nearly 200,000 people or 9 percent of the registered workforce in 2023.
  - State support largely flows to SOEs, especially in the form of subsidies to support investment and cover financial loss, suggesting potentially severe resource misallocation.
- Tax breaks and tax credits:
  - Widely used to attract foreign investment but create disparities that disadvantage domestic enterprises.
  - Example: the special tax relief for large investments grants 10-year corporate income tax exemption for large investors who invest over RSD 1 billion in fixed assets and hire an additional 100 employees for an indefinite period of time, ultimately benefiting only large firms and FDI firms.
- Effects on firm types:
  - Domestic private firms and SMEs, particularly innovative and micro firms, are least likely to receive state support despite their large share in employment and output, making them prone to market failure.

### Digitalization outcomes
- Serbia has comparable digital infrastructure to other European countries and has invested intensively in digitalization (including public services digitalization and e-invoicing).
- Adoption highlights:
  - Most firms are online; about half are relatively highly digitalized, including use of AI, cloud computing, data analytics, 3D printing, and robotics.
- Shortcomings:
  - Use of e-commerce among firms has been relatively limited, especially among SMEs.
  - At the individual level, about half of the citizens made purchases or ordered online in the past three months, but individual digital skills are assessed as less developed than those in other countries in the region by Eurostat.
- Laws and initiatives mentioned:
  - Digital Serbia Initiative and amendments aimed at improving cybersecurity.

### R&D and innovation
- Policy support:
  - Innovation Fund, Serbia Ventures Program, and Scale Up Factory provide support for innovative projects and domestic start-ups via financial assistance, mentorship, and networking.
- Measured outcomes:
  - Serbia improved 7 percent in the European Innovation Scoreboard over 2017–24.
  - By level, Serbia’s innovation performance was around 60 percent of the EU average in 2024.
- R&D and firm innovation gaps:
  - Share of innovative firms introducing new products/processes and conducting R&D is significantly lower than the EU average, especially among private and smaller firms.
  - Private businesses invest very little in R&D; the share of firms conducting R&D is less than 10 percent compared to the EU27 average of 40 percent.
- Policy implications:
  - Higher direct government funding to R&D, grants to innovative projects, or tax exemptions to intangible investment could enhance innovation.
  - Accelerating development of the innovation ecosystem requires human capital reforms, availability of risk capital financing, low barriers to entry and exit, labor regulations that facilitate labor reallocation, and a growth-friendly tax system.

### Access to finance and financial markets
- Firms rely largely on internal funding for working capital and investment; bank borrowing is the most important external source.
- Micro firms face greater difficulty accessing bank loans:
  - Around 35 percent of micro firms reported obstacles when applying for a loan application.
  - A significantly smaller portion of bank borrowing is allocated to micro firms, who rely on alternative funding such as borrowing from family and relatives.
  - Although more than 10 percent of new business loans are issued to micro enterprises, banks view this segment as not strategically important because of challenging firm formalization, unreliable financial statements, and limited growth potential.
- Major constraints across firm sizes include unfavorable interest rates; micro and small firms additionally face complex application procedures, high collateral requirements, and insufficient loan sizes.
- Policy needs:
  - Better bank lending support for micro firms and entrepreneurs.
  - A more diversified financial market to provide risk capital to micro and start-up firms that traditional banks are reluctant to serve.
  - Simplification and automatization of legalization processes to ease bottlenecks in collateral assets for formal lending.

### Medium-term GDP impact of selected structural reforms (closing 50 percent of gaps with the frontier)
- Methodology:
  - Following Budina et al. (2025), estimate medium-term impact on potential output if Serbia closes 50 percent of gaps with the frontier using available output elasticities from IMF, OECD, and related studies.
  - Benchmarks note limitations: model does not account for interactions between reforms or general equilibrium effects; closing 50 percent gaps may be ambitious in some areas.
- Estimated contributions to potential output from partial gap closure:
  - Improving governance through enhanced corruption control: could add around 5 percent to GDP over the medium term.
    - Rationale: relatively large policy gap and sizable impact of governance on growth; strengthens policy credibility, investor confidence, and public sector efficiency; increases effectiveness of other reforms.
    - Examples of governance reforms: reducing corruption, strengthening judicial performance for commercial disputes, introduction of e-court system, e-title, and electronic registration.
  - Continuing labor market reforms (revisiting the labor tax wedge, boosting participation, lowering structural unemployment, limiting emigration): closing half of the gaps in labor tax could add 2½ percent to potential output.
    - Additional measures: lower SSCs contribution and minima for low-income workers, higher family tax exemptions, active labor market policies for re-skilling/up-skilling, policies promoting geographic mobility and regional development, easing hiring procedures for foreign labor and electronic labor documentation.
  - Human capital (bringing the PISA score closer to the frontier): could increase potential output by ½ percent.
    - Policies: stronger HEI–employer links, internships, career centers, higher investment in mathematical and IT education, teaching methods fostering teamwork and critical thinking, alignment of curricula with labor market requirements.
  - Further improving business environment by streamlining regulation and reducing state influence: could add roughly 2 percent to GDP over the medium term.
    - Measures: SOE privatization and/or centralized ownership model, improving SOE governance, reducing state control in product markets (price regulation), increasing transparency and public consultations in legislation, redesigning state aid to reallocate support from unproductive SOEs to private firms, focus state aid on intangible investment and innovative R&D, refocus FDI tax incentives to enforce FDI-local linkages and technology transfer.
  - Improving bank lending and deepening the capital market: could add another 2 percent to potential GDP.
    - Measures: simplify loan application and collateral systems, automatize legalization processes, develop non-bank lending and risk-capital financing.
- Reforms noted but not quantified (due to unavailable elasticity estimates):
  - Digitalization, R&D, and innovation are crucial to lift labor productivity substantially; policy options include revamping public e-services (e.g., enabling fiscal receipts issuance and electronic payment of non-tax charges), investing in individual digital literacy, and targeted incentives for firms’ innovative endeavors.

*Source: IMF staff analysis (chapter text).*

### 19.      Serbia has made commendable progress in lifting growth and income. Significant

### 19.      Serbia has made commendable progress in lifting growth and income.

### Progress and drivers
- Over the last decade Serbia increased labor force participation rates, reduced unemployment rates, and boosted domestic private and public investment as well as attracted FDIs, resulting in solid accumulation of labor and capital.
- Increased labor productivity, including from positive spillover effects of FDI and ICT investment, also supported growth, making Serbia among fastest-growing economy in Europe in recent years.

### Challenges to continued convergence with the EU
- Despite narrowing, the income gap with the EU remains large with substantial deficiencies in total factor productivity.
- The manufacturing sector faces difficulties in shifting to higher value-added industries.
- While wage levels are still low by regional standards, recent increases in wages need to be monitored as they may weaken external competitiveness, particularly in labor-intensive construction and manufacturing industries that received half of FDI inflows during 2021–

### Limits to factor accumulation and need for productivity growth
- Scope for additional factor accumulation to boost growth will likely become more limited going forward, with capital and labor likely contribute 2.1 percent to growth in medium term, pointing to the need of a higher productivity growth to facilitate sustainable growth and accelerate the income catch-up.

### Quantified potential gains from closing structural policy gaps
- Closing half of Serbia’s gaps with the global frontier could yield sizable potential output gains (indicator-based analysis, acknowledging wide uncertainty).
- Estimated medium-term growth increases if governance reforms and other reforms were implemented (closing half the gap):
  - Governance reforms: around 5 percent
  - Labor market reforms: 2½ percent
  - Reforms in business regulations: 2 percent
  - Reforms in capital market: 2 percent

### Policy recommendations (holistic reform spectrum)
- Strengthen governance as a foundational element because of its high returns to medium-term growth and catalytic role in magnifying impacts of other reforms.
- Reduce heavy and distortive labor tax to enhance labor force participation and formalization.
- Invest in human capital by enhancing education curriculum, university-firm linkage, and vocational training to reduce skill mismatch and boost labor productivity.
- Re-design, effectively monitor, and evaluate state aid to ensure fair market competition and level the playing field between domestic private firms, SOEs and FDIs; this would help foster a more conducive business environment, enhance investment and capital accumulation in all firm types, and facilitate higher productivity through resource reallocation.
- Increase availability of risk financing for high-tech to facilitate better access to finance for start-ups.
- Support digitalization, R&D, and innovation to catapult labor productivity, supported by adequate skills, a favorable business environment, and availability of risk capital financing.

*Source: Republic of Serbia — IMF country material (extract provided).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1srbea2025002-source-pdf.pdf_