**Table 10. Structural Indicators: Serbia vs Germany**

|**Competitiveness indicator**|**Serbia**|**Germany**|**Min**|**Max**|
|---|---|---|---|---|
|Regulatory quality|0.06|1.67|-2.50|2.50|
|Costs of starting business|6.00|9.00|18.00|1.00|
|CBR working time|0.69|0.50|0.00|1.00|
|Top marginal income payroll tax rate|39.00|47.00|17.00|70.00|
|Trade tariffs|5.06|1.04|0.00|10.00|
|Availability of latest technologies|4.14|6.14|1.00|7.00|
|Human capital|3.27|3.66|1.26|3.73|
|Financial development|43.37|77.95|0.00|100.00|
|Government effectiveness|0.11|1.74|-2.03|2.43|
|Energy use per capita|1859.43|3818.00|9.71|22762.00|
|No. individuals using internet|65.32|87.60|8.00|98.00|

Figure 5 shows the additional annual growth associated with structural policies, and the channels through which it operates, assuming that Serbia would close the gap with Germany within a certain time horizon. In particular, for each policy variable, the figure shows how far Serbia is from the frontier (Germany) and the estimated increase in annual growth rate of real GDP if the distance is closed in 20 years (40 for government effectiveness), together with the supply-side channel that affects GDP (Annex **_5_** explains the methodology). Variables on the right of the y-axis indicate policy areas where Serbia is far from the frontier, variables on the left areas where Serbia has passed the frontier.

Given the linearity assumption, more than a precise estimate, the simulations aim at quantifying the relative importance of each reform. Enhancing government effectiveness, regulatory quality, human capital and financial development may contribute the most to economic growth. EU accession would also add to economic growth, mainly by boosting capital deepening.

Closing the gap in terms of government effectiveness would have the most impact. Not only is this variable statistically significant across different model specifications and different channels, but its impact on GDP growth is relatively large—Serbia’s performance is poor compared to Germany’s, so it is much farther from the frontier; and the estimated elasticity for government effectiveness is also relatively large. Areas where action is especially needed to enhance government effectiveness are tax administration, court processes, public procurement, and land administration. However, as discussed in the latest Country Partnership Framework, reforms are unlikely to be effective unless Serbia addresses such systemic issues in public sector management as poor policy coordination and capacity to carry out reforms; an overly complex central administration, with overlapping and duplicative institutions and functions; and the ineffective organization of service delivery (World Bank 2015). That is why making government more effective takes time—and why the longer horizon of 40 years was chosen for the simulation: building institutions and establishing credibility requires sustaining performance through government turnover and cyclical events like elections or economic downturns.

An improvement in regulatory quality would be associated to almost 1 percent more annual growth. Because all three channels—capital, labor, and technical efficiency—would benefit from an improvement in regulatory quality, each would contribute more to GDP growth. The government can support competition by rolling back or avoiding anti-competitive interventions. Regulation can be simplified, increasing transparency in the legislative process, consulting more with stakeholders, assessing regulatory impact frequently, reducing the administrative burden, and unbundling monopolies in crucial input and network sectors, such as energy, transport, and telecoms.

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