## sipea2025111

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### Recent growth developments and composition
- Serbia’s 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 the main contributor.
- Over the last ten years Serbia approached 5 percentage point closer to peers, but convergence remains incomplete.
- Growth drivers over the last decade:
  - Labor:
    - Unemployment fell from 26 percent in 2012 to a record-low of 8.6 percent in 2024.
    - Labor force participation rate (LFPR) reached a record high of 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 2014; public investment more than tripled.
  - Productivity:
    - TFP contributed 1.6 percentage points to growth over 2016–24, considerably above its contribution over 2008–15.
    - Labor productivity has increased at a significantly faster pace since 2021, aided by FDI spillovers and the rise of the ICT sector.

### Sectoral patterns and competitiveness risks
- Manufacturing:
  - Growth driven by medium-low technology sectors.
  - Medium-high technology industries (electrical equipment and machinery) contributed to employment since 2016 but created little additional value added, indicating low productivity in these sectors.
- ICT:
  - ICT sector (high value-added) has grown substantially and contributed to employment.
- Wages and competitiveness:
  - Wages rose sharply in recent years (partly in response to 2022 energy crisis inflation), raising unit labor costs and external competitiveness concerns.
  - Wage increases surpassed those in other countries in the region, though wage levels remain below most regional peers and have been partly compensated by labor productivity gains.
  - Around half of recent FDI inflows concentrated in labor-intensive industries, including construction and rubber and food manufacturing; continued elevated wage growth without productivity gains could weaken external competitiveness and FDI.

### Medium-term factor accumulation and baseline projections (absent reforms)
- Labor:
  - Absent reforms, labor is projected to contribute only 0.5 percent to growth in the medium term given unfavorable demographics.
  - Baseline assumption: continuing employment growth at 0.8 percent over 2025–30.
  - LFPR is expected to reach 61 percent by 2030 under this assumption.
- Capital:
  - Capital accumulation could contribute another 1.6 percent to potential growth with only a marginal increase in investment.
  - Baseline assumes public investment stays more or less at the same current level (as percent of GDP).
  - 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.
- Productivity and potential output:
  - Baseline assumption: a 1.8 percentage-points contribution from TFP, in line with the historical average.
  - Under that baseline, potential output growth would be 4 percent, ranking Serbia among the fastest-growing economies in Europe.
  - If Serbia maintained this 4 percent growth rate, full income convergence with the EU could be achieved by 2050.
  - If annual growth increased to 5 percent (through enhanced productivity), full income convergence with the EU could be achieved by 2042.

### Labor market structure and constraints
- Labor market flexibility:
  - The 2014 Labor Law revision facilitated more flexible labor regulations and generally aligned employment legislation with OECD member levels.
  - Hiring and firing regulations are still more relaxed than other CESEE countries, despite some tightening since 2020.
- High labor tax wedge:
  - The estimated tax wedge is almost 40 percent.
  - Social security contributions (SSC): 20 percent paid by employees and 15 percent paid by employers.
  - An absolute floor for SSC at the minimum wage levels is applied.
  - Absence of tax-free family allowances increases financial burden on workers with dependents.
  - High SSC and the absolute floor exacerbate the tax burden on low-wage workers, disincentivizing formal employment.
- Labor market outcomes and skill mismatch:
  - Share of population with tertiary education expanded considerably over the last ten years; proportion with basic education declined.
  - High share of STEM students among tertiary graduates and relatively good education quality (as proxied by PISA).
  - Overqualification: an estimated 40 percent of graduates are overqualified for their jobs; about 25 percent of firms cite inadequately educated workforce as their biggest obstacle.
  - Skill gaps: lack of work experience, shortage of new-economy technical skills, and low interactive skills (problem-solving, critical-thinking) hinder matching and productivity, and may encourage emigration.

### Structural policy gaps and institutional quality
- Five broad areas with sizeable gaps relative to Europe and USA frontier: governance; business regulation; innovation, R&D, and digitalization; labor and human capital; and credit and capital market.
  - Largest gaps observed in governance, innovation, and credit and capital market.
  - Business regulations and labor and human capital perform better but still lag in distortion of 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.
  - Deficiencies in the judiciary: case resolution is often protracted, undermining investor confidence and growth.
- Business environment and state involvement:
  - Reforms between 2014 and 2016 (e-government, e-tax filing, business registration reforms, one-stop shop, investment incentives) reduced red tape and improved the regulatory environment.
  - Excessive state influence undermines fair competition:
    - Active state participation in markets and weak governance of state-owned enterprises (SOEs).
    - Roughly 800 SOEs operated and employed nearly 200,000 people or 9 percent of the registered workforce in 2023.
    - State support (subsidies, investment support, coverage of financial losses) largely flows to SOEs, suggesting potential resource misallocation.
    - Tax breaks and tax credits disproportionately benefit large firms and FDI; example: 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.
    - SMEs and innovative firms face uneven playing field and market failures, being least likely to receive state support despite large shares in employment and output.

### Reform scenarios and quantified impacts
- Labor-focused scenario:
  - Labor reforms raising female LFPR, reducing structural unemployment to 7 percent by 2030, and decreasing youth unemployment to 16 percent by 2030 could add 0.3 percentage points to potential growth on top of the 0.5 percentage points contribution of labor under the baseline.
  - Assumptions: raise ratio of female to male LFPR to 80.5 percent by 2030 (closing half the gap with current EU level), structural unemployment falls to 7 percent by 2030, youth unemployment decreases to 16 percent by 2030.
- Private investment:
  - Boosting private investment to 20 percent of GDP by 2030 would add 0.08 percent to growth.
- TFP and convergence:
  - Achieving higher TFP contributions to raise annual growth from 4 percent to 5 percent could accelerate EU income convergence by eight years (from 2050 to 2042).

### Digitalization, R&D, innovation, and access to finance
- Digitalization outcomes:
  - Serbia has comparable digital infrastructure to other European countries and has invested intensively in digitalization (public services digitalization, e-invoicing, Digital Serbia Initiative, cybersecurity law amendments).
  - Firm-level adoption:
    - Most firms are online; about half are relatively highly digitalized, including use of AI, cloud computing, data analytics, 3D printing, and robotics.
    - Use of e-commerce among firms has been relatively limited, especially among SMEs.
  - Individual-level adoption and skills:
    - Half of the citizens made purchases or ordered online in the past three months.
    - Individual digital skills are assessed as less developed than those in other countries in the region by Eurostat.
- R&D and innovation activities:
  - Government initiatives include the Innovation Fund, the Serbia Ventures Program, and the Scale Up Factory (Chamber of Commerce and Industry).
  - Serbia improved 7 percent in the European Innovation Scoreboard over 2017–24.
  - Serbia’s innovation performance was around 60 percent of the EU average in 2024 (EIS, 2024).
  - 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.
- Access to finance, financial markets, micro firms/start-ups:
  - Serbian firms largely rely on internal funding; bank borrowing is the most important external source.
  - Micro enterprises face greater difficulty accessing bank loans and rely more on alternative funding (family and relatives).
  - Around 35 percent of micro firms reported obstacles when applying for a loan application.
  - Major constraint across all firm sizes: unfavorable interest rates.
  - Additional constraints for micro and small firms: complex application procedures, high collateral, insufficient loan size.
  - Although more than 10 percent of new business loans are issued to micro enterprises, banks regard this segment as not strategically important.
  - Need for better bank lending support and more diversified financial markets that can provide risky capital to micro and start-up firms.

### Medium-term GDP impacts from closing 50 percent of gaps with the frontier
- Methodology:
  - Exercise follows Budina et al. (2025) estimating medium-term impact on potential output if Serbia closes 50 percent of gaps with the frontier; output elasticities drawn from IMF and OECD studies; estimates subject to under- and over-estimation and do not account for interactions/general equilibrium effects.
- Estimated contributions to potential GDP (closing 50 percent of gaps):
  - Governance (improving corruption control, judicial performance, e-court, e-title, electronic registration): around 5 percent.
  - Labor market (reducing labor tax wedge for couples with two children, lower SSC minima, higher family tax exemptions, active labor market policies, mobility, relaxed work visas, electronic labor documentation, flexible part-time work, childcare support): 2½ percent.
  - Human capital (bringing PISA score closer to frontier, HEI–employer links, internships, investment in mathematical and IT education, teamwork/decision-making pedagogy): ½ percent.
  - Business regulation and state influence (streamline business regulation, SOE privatization, centralized ownership, improve SOE governance, redesign state aid, reorient FDI incentives): roughly 2 percent.
  - Financial markets and bank lending (simplify loan procedures, collateral systems, automate/legalize collateral processes, develop non-bank lending and risk-capital availability): 2 percent.
- Digitalization, R&D, and innovation:
  - Not quantified due to lack of elasticity estimates in this paper.
  - Suggested measures: increase direct government funding to R&D or targeted incentives (grants, tax exemptions for intangible investment); revamp public e-services; invest in individual digital literacy; develop comprehensive innovation ecosystem (human capital reforms, risk capital availability, low barriers to entry/exit, labor regulations facilitating reallocation, growth-friendly tax system).

### Key aggregate findings and policy implications
- Achievements:
  - Serbia achieved solid accumulation of labor and capital and among the fastest-growing economies in Europe in recent years due to higher labor force participation, reduced unemployment, increased private and public investment, and FDI spillovers.
- Main challenges:
  - Large residual deficiencies in total factor productivity.
  - Manufacturing faces difficulty moving to higher value-added industries.
  - Recent wage increases may weaken external competitiveness in labor-intensive construction and manufacturing.
- Future contributions and needs:
  - Capital and labor likely contribute 2.1 percent to growth in medium term, implying the need for higher productivity growth for sustainable convergence.
- Recommended integrated policy priorities:
  - Treat governance strengthening as a priority to unlock returns from other reforms.
  - Implement labor tax reforms to reduce distortions and improve participation and formalization.
  - Align education and vocational training with private sector needs and strengthen university–firm linkages to address skill mismatches.
  - Reform state aid frameworks and enforce monitoring/evaluation to promote competition and resource reallocation.
  - Expand risk financing for high-tech start-ups to improve access to finance and support scaling.
  - Promote digitalization, R&D, and innovation while ensuring complementary reforms in skills, business environment, and finance.

*Source: sipea2025111 — IMF staff chapter on Serbia’s growth, productivity, and structural gaps.*

### 2.      Notwithstanding notable economic

### 2.      Notwithstanding notable economic progress, the income gap with European peers remains large

### Recent growth developments and composition
- Serbia’s 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 the main contributor.
- Over the last ten years Serbia approached 5 percentage point closer to peers, but convergence remains incomplete.
- Growth drivers over the last decade:
  - Labor:
    - Unemployment fell from 26 percent in 2012 to a record-low of 8.6 percent in 2024.
    - Labor force participation rate (LFPR) reached a record high of 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 2014; public investment more than tripled.
  - Productivity:
    - TFP contributed 1.6 percentage points to growth over 2016–24, considerably above its contribution over 2008–15.
    - Labor productivity has increased at a significantly faster pace since 2021, aided by FDI spillovers and the rise of the ICT sector.

### Sectoral patterns and competitiveness risks
- Manufacturing growth has been driven by medium-low technology sectors, while medium-high technology industries (electrical equipment and machinery) contributed to employment growth since 2016 but created little additional value added, indicating low productivity in these sectors.
- The ICT sector (high value-added) has grown substantially and contributed to employment.
- Wages rose sharply in recent years (partly in response to 2022 energy crisis inflation), raising unit labor costs and external competitiveness concerns:
  - Wage increases surpassed those in other countries in the region.
  - Wage levels remain below most regional peers and have been partly compensated by labor productivity gains.
  - Around half of recent FDI inflows concentrated in labor-intensive industries, including construction and rubber and food manufacturing; continued elevated wage growth without productivity gains could weaken external competitiveness and FDI.

### Medium-term factor accumulation and baseline projections (absent reforms)
- Labor:
  - Absent reforms, labor is projected to contribute only 0.5 percent to growth in the medium term given unfavorable demographics.
  - Baseline assumption: continuing employment growth at 0.8 percent over 2025–30 (milder than the 2020–24 average).
  - LFPR is expected to reach 61 percent by 2030 under this assumption.
- Capital:
  - Capital accumulation could contribute another 1.6 percent to potential growth with only a marginal increase in investment.
  - Baseline assumes public investment stays more or less at the same current level (as percent of GDP).
  - Private investment is expected to increase marginally to 18 percent of GDP by 2030.
  - Note: If private investment could reach 20 percent of GDP by 2030, this would contribute an additional 0.08 percent to growth.
- Productivity and potential output:
  - Baseline assumption: a 1.8 percentage-points contribution from TFP, in line with the historical average.
  - Under that baseline, potential output growth would be 4 percent, ranking Serbia among the fastest-growing economies in Europe.
  - If Serbia maintained this 4 percent growth rate, full income convergence with the EU could be achieved by 2050.
  - If annual growth increased to 5 percent (through enhanced productivity), full income convergence with the EU could be achieved by 2042 (eight years earlier).

### Labor market structure and constraints
- Labor market flexibility:
  - The 2014 Labor Law revision facilitated more flexible labor regulations and generally aligned employment legislation with OECD member levels.
  - Hiring and firing regulations are still more relaxed than other CESEE countries, despite some tightening since 2020.
- High labor tax wedge:
  - The estimated tax wedge is almost 40 percent.
  - Social security contributions (SSC): 20 percent paid by employees and 15 percent paid by employers.
  - An absolute floor for SSC at the minimum wage levels is applied.
  - Absence of tax-free family allowances increases financial burden on workers with dependents.
  - High SSC and the absolute floor exacerbate the tax burden on low-wage workers, disincentivizing formal employment.
- Labor market outcomes and skill mismatch:
  - Share of population with tertiary education expanded considerably over the last ten years; proportion with basic education declined.
  - High share of STEM students among tertiary graduates and relatively good education quality (as proxied by PISA).
  - Overqualification: an estimated 40 percent of graduates are overqualified for their jobs (Uvalić and Bartlett, 2020); about 25 percent of firms cite inadequately educated workforce as their biggest obstacle.
  - Skill gaps: lack of work experience, shortage of new-economy technical skills, and low interactive skills (problem-solving, critical-thinking) hinder matching and productivity, and may encourage emigration.

### Structural policy gaps and institutional quality
- Serbia exhibits sizeable structural policy gaps relative to the Europe and USA frontier across five broad areas: governance; business regulation; innovation, R&D, and digitalization; labor and human capital; and credit and capital market.
  - Largest gaps observed in governance, innovation, and credit and capital market.
  - Business regulations and labor and human capital perform better but still lag in distortion of 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.
  - Deficiencies in the judiciary: case resolution is often protracted, undermining investor confidence and growth.
- Business environment and state involvement:
  - Reforms between 2014 and 2016 (e-government, e-tax filing, business registration reforms, one-stop shop, investment incentives) reduced red tape and improved the regulatory environment.
  - However, excessive state influence undermines fair competition:
    - Active state participation in markets and weak governance of state-owned enterprises (SOEs).
    - Roughly 800 SOEs operated and employed nearly 200,000 people or 9 percent of the registered workforce in 2023.
    - State support (subsidies, investment support, coverage of financial losses) largely flows to SOEs, suggesting potential resource misallocation.
    - Tax breaks and tax credits disproportionately benefit large firms and FDI; example: 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.
    - SMEs and innovative firms face uneven playing field and market failures, being least likely to receive state support despite large shares in employment and output.

### Reform implications highlighted in the chapter
- The paper emphasizes that fostering higher productivity will be essential to sustainably maintain recent strong growth rates, given limited scope for further factor accumulation.
- Scenarios and reform impacts discussed in the chapter:
  - Labor reforms raising female LFPR, reducing structural unemployment to 7 percent by 2030, and decreasing youth unemployment to 16 percent by 2030 could add 0.3 percentage points to potential growth on top of the 0.5 percentage points contribution of labor under the baseline.
    - The estimate is based on raising the ratio of female to male LFPR to 80.5 percent by 2030 (closing half of the gap with the current EU level), a fall in structural unemployment to 7 percent by 2030, and youth unemployment decreasing to 16 percent by 2030.
  - Boosting private investment to 20 percent of GDP by 2030 would add 0.08 percent to growth.
  - Achieving higher TFP contributions is critical: raising annual growth from 4 percent to 5 percent through productivity-enhancing reforms could accelerate EU income convergence by eight years (from 2050 to 2042).

_Italic: Source: sipea2025111 — IMF staff chapter on Serbia’s growth, productivity, and structural gaps._

### 13.      Even with a well-developed digital infrastructure, the outcomes of digitalization have

### sipea2025111 - 13.      Even with a well-developed digital infrastructure, the outcomes of digitalization have

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

### R&D and innovation activities
- Government and institutional support:
  - Initiatives include the Innovation Fund, the Serbia Ventures Program, and the Scale Up Factory (Chamber of Commerce and Industry).
  - Serbia improved 7 percent in the European Innovation Scoreboard over 2017–24.
  - Serbia’s innovation performance was around 60 percent of the EU average in 2024 (EIS, 2024).
- Private sector innovation and R&D:
  - The share of innovative firms that introduce new products or improved processes and conduct 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.

### Access to finance, financial markets, and micro firms/start-ups
- Funding patterns:
  - Serbian firms largely rely on internal funding; bank borrowing is the most important external source.
  - Micro enterprises face greater difficulty accessing bank loans — they rely more on alternative funding (family and relatives).
- Obstacles and constraints:
  - Around 35 percent of micro firms reported obstacles when applying for a loan application.
  - Major constraint across all firm sizes: unfavorable interest rates.
  - Additional constraints for micro and small firms: complex application procedures, high collateral, insufficient loan size.
- Bank lending behavior:
  - Although more than 10 percent of new business loans are issued to micro enterprises, banks regard this segment as not strategically important (issues with formalization, unreliable financial statements, limited growth prospects).
- Policy need:
  - Need for better bank lending support and more diversified financial markets that can provide risky capital to micro and start-up firms.

### Medium-term GDP impact of selected structural reforms (methodology)
- Exercise basis:
  - Follows Budina et al. (2025) estimating medium-term impact on potential output if Serbia closes 50 percent of gaps with the frontier.
  - Output elasticities drawn from IMF and OECD studies; estimates subject to under- and over-estimation and do not account for interactions/general equilibrium effects.
- Benchmark assumption:
  - Closing 50 percent of structural policy gaps with the frontier.

### Estimated impacts of specific reforms (closing 50 percent policy gaps with frontier)
- Governance:
  - Improving governance through enhanced corruption control could add around 5 percent to GDP over the medium term.
  - Measures: reduce corruption, strengthen judicial performance for commercial disputes, introduce e-court system, e-title, electronic registration.
- Labor market:
  - Closing half of the gaps in labor tax (proxied by labor tax wedge for couples with two children) could add 2½ percent to potential output.
  - Policies: revisit labor tax wedge, lower SSC contribution minima for low-income workers, higher family tax exemptions, active labor market policies for re-skilling/up-skilling, promote geographic mobility, ease hiring of foreign labor (relax working visas, electronic labor documentation), flexible part-time work, childcare support.
- Human capital:
  - Bringing the PISA score closer to the frontier could help increase potential output by ½ percent.
  - Policies: strengthen HEI–employer links, internships, career center use, higher investment in mathematical and IT education, teaching methods fostering teamwork/decision making/critical thinking.
- Business regulation and state influence:
  - Further improving business environment could add roughly 2 percent to GDP over the medium term.
  - Measures: streamline business regulation and administrative burden, SOE privatization, centralized ownership model, improve SOE governance, reduce state control in product markets (price regulation), increase legislative transparency and public consultations, redesign state aid to incentivize investment in intangible assets and R&D, reorient FDI tax incentives towards FDI-local linkages and technology transfer.
- Financial markets and bank lending:
  - Improving bank lending and deepening the capital market could add another 2 percent to potential GDP.
  - Measures: simplify loan application procedures and collateral systems, automate/legalization processes for collateral, develop non-bank lending and availability of risk-capital financing.

### Digitalization, R&D, and innovation (not quantified)
- Digitalization and innovation are crucial to raise labor productivity but lack available elasticity estimates in this paper.
- Suggested measures:
  - Increase direct government funding to R&D or targeted incentives (grants, tax exemptions for intangible investment).
  - Revamp public e-services (enable fiscal receipts issuance, electronic payment of non-tax charges) and invest in individual digital literacy.
  - Develop a comprehensive innovation ecosystem: human capital reforms, risk capital availability, low barriers to entry/exit, labor regulations facilitating reallocation, and a growth-friendly tax system.

### Key aggregate findings and context
- Serbia achieved solid accumulation of labor and capital and among the fastest-growing economies in Europe in recent years due to higher labor force participation, reduced unemployment, increased private and public investment, and FDI spillovers.
- Challenges to continued income convergence with the EU:
  - Large residual deficiencies in total factor productivity.
  - Manufacturing faces difficulty moving to higher value-added industries.
  - Recent wage increases may weaken external competitiveness in labor-intensive construction and manufacturing.
- Future factor contributions and need for productivity:
  - Capital and labor likely contribute 2.1 percent to growth in medium term, implying the need for higher productivity growth for sustainable convergence.
- Summary of medium-term potential output gains if Serbia closes half its gaps with the frontier (indicator-based, subject to uncertainty):
  - Governance reforms: around 5 percent.
  - Labor market reforms: 2½ percent.
  - Business regulation reforms: 2 percent.
  - Capital market reforms: 2 percent.

*Source: IMF staff analysis in sipea2025111 (chapter content provided).*

### 22.      A spectrum of holistic policies could help to address structural deficiencies. Among

### 22. A spectrum of holistic policies could help to address structural deficiencies

### Overview
- Strengthening governance is a foundational element because of its high returns to medium-term growth and its catalytic role in magnifying impacts of other reforms.
- A package of reforms is required across labor taxation, human capital, state aid, risk financing, digitalization, R&D, and innovation to boost labor productivity, investment, and resource reallocation.

### Governance (foundational)
- Strengthen governance to magnify the impacts of other reforms and support medium-term growth.
- Governance improvements act catalytically across:
  - business environment,
  - investment climate,
  - monitoring and evaluation of public support (including state aid).

### Labor market and taxation
- Reduce heavy and distortive labor tax to:
  - enhance labor force participation,
  - encourage formalization.
- Reducing the labor tax wedge is essential for improving labor market outcomes.

### Human capital and skills
- Invest in human capital by:
  - enhancing education curriculum,
  - strengthening university-firm linkage,
  - expanding vocational training to reduce skill mismatch.
- These measures are crucial to boost labor productivity and to supply skills needed for digitalization and high-tech adoption.

### State aid, competition, and firm dynamics
- Re-design and effectively monitor and evaluate state aid to:
  - ensure fair market competition,
  - level the playing field between domestic private firms, SOEs, and FDIs.
- Better-designed state aid would foster a more conducive business environment, enhance investment and capital accumulation across firm types, and facilitate higher productivity through resource reallocation.

### Finance for high-tech and entrepreneurship
- Increase availability of risk financing for high-tech in Serbia to facilitate better access to finance for start-ups.
- Availability of risk capital complements skills and business environment reforms to scale innovation-driven firms.

### Digitalization, R&D, and innovation
- Support digitalization, R&D, and innovation to catapult labor productivity to a new level.
- Success in this area depends on:
  - adequate skills,
  - favorable business environment,
  - availability of risk capital financing.

### Integrated policy implications (recommended focus)
- Treat governance strengthening as a priority to unlock returns from other reforms.
- Implement labor tax reforms to reduce distortions and improve participation and formalization.
- Align education and vocational training with private sector needs and university-firm linkages to address skill mismatches.
- Reform state aid frameworks and enforce monitoring/evaluation to promote competition and resource reallocation.
- Expand risk financing for high-tech start-ups to improve access to finance and support scaling.
- Promote digitalization, R&D, and innovation while ensuring complementary reforms in skills, business environment, and finance.

*Source: Republic of Serbia — Selected Issues Paper (sipea2025111), International Monetary Fund; canonical URL: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025111.pdf*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025111.pdf_