Macedonia’s economy is under-performing. The unemployment rate is constantly one of the largest in Europe; and, almost one third of the population lives below the poverty line. Reforms have been put in place, but they have not done enough to solve the key problems. The present paper applies the growth diagnostics’ methodology, proposed by Hausmann et al. (2005), in order to identify the most binding constraints on economic activity. We emphasize institutional framework and distortions of the legal system and the rule of law as the key binding constraint for growth. Especially, we point out to: large informal economy, dependence of the judicial system on the political elite, political patronage and legal and regulatory uncertainties. In addition, we find infrastructure, human capital and information externalities as possible binding constraints in the near future.