A professional and competent public administration is necessary for successful transition from a socialist, centrally planned economy to a functioning market democracy. The difficulty lies in building an organized and effective civil service sector. This paper gives a brief overview of formal bureaucratic reasoning, beginning with Niskanen’s theory, followed by the principal-agent model. The "Weberian state hypothesis", which provides an alternative view of bureaucracies in less developed countries, is subsequently explored. Finally, the currant state of Serbian public administration is described, along with a discussion of challenges to be addressed in the future.