sector growth and economic inclusion. The second area has six main objectives, among them the importance of working on business climate improvements and on closing medium- and long-term skill gaps. A major impediment to growth in Serbia is low labor productivity, caused by, among other factors, the low quality of human capital (World Bank 2017b). Similarly, among the most important challenges highlighted by the latest report of the European Commission (EC 2019) are the needs for labor to contribute more to growth, for greater transparency and predictability in the regulatory environment, and for increasing competition.

# **7. Conclusions**

This paper studied the impact of structural reforms on economic growth in ECA, with special attention to Serbia. The analysis attempts to uncover the structural determinants of GDP growth by studying separately each supply-side channel—capital accumulation, labor utilization, and productivity. Productivity is proxied by a measure of efficiency estimated through stochastic frontier analysis. This approach makes it possible to estimate contemporaneously efficiency and its determinants, instead of recovering productivity as the residual of a growth regression.

Institutions and better-functioning domestic product markets are important structural determinants of growth. Higher quality of human capital, as proxied by educational outcomes, is positively associated with both employment and productivity, thus making a significant contribution to economic growth. Growth is also positively affected by the degree of development of financial systems and by the country’s innovation capability, but labor market reforms and trade openness do not have a straightforward relationship with growth. Infrastructure, ICT adoption, and macroeconomic stability also matter for GDP growth. Finally, EU accession may contribute to GDP growth by promoting capital deepening.

Applying these results to Serbia, the analysis shows that if the country were to close certain structural gaps with Germany, it would significantly boost its potential. Measures that would contribute the most are those that would enhance regulatory quality, government effectiveness, financial development, and human capital.

When decomposing economic growth into its drivers, the methodology adopted in the study does not assign a direct role to human capital, which only enters as a deeper determinant of labor, capital, and productivity. Researchers have also studied how reforms may affect human capital accumulation by treating it as an additional input into the production function. For example, Lutz et al. (2008) introduced a model where human capital by broad age groups enters production both as differentiated labor force inputs and through the absorption rate of new technologies, which depends on the interaction between human capital and the distance to the frontier. It would be interesting to extend the analysis to allow for a more direct role of human capital and to study its structural determinants and the impact of reforms. Another extension of this study would be to conduct a more systematic assessment of model uncertainty by adopting frontier methodology, which would minimize endogeneity and the bias arising from discretional selection of models.

# **References**

Adams, Z., Bishop, L. and Deakin, S. 2017. CBR Labor Regulation Index (Dataset of 117 Countries). Cambridge, UK: Centre for Business Research.

> Aiyar, S., et al. 2019. “Strengthening the Euro Area: The Role of National Structural Reforms in Enhancing Resilience.” IMF Staff Discussion Note SDN/19/05. International Monetary Fund, Washington, DC.

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