2 WHAT IS A TRANSITION?

Bob Hancké, PEACS

7 February 2025

The green transition may be new and unique, but we actually have quite a few analytical tools in political economy to make sense of this big shift. Only some 35 years ago, a large part of Central and Eastern Europe embarked on a big transition, when they abandoned one-party rule and central. The way political economists have understood that structural shift from one (coherent but failing) economic system to another (coherent and problematic but not failing) system offers useful tools to start the analysis of the green transition. That parallel, which sketches the broad background of the rest of the analysis, is the core of this essay.

Any structural transformation implies a recombination of existing elements – production factors in this case – and new elements – such as the specificity and type of production factors. The political, economic and social transition in Central and Eastern Europe (CEE) is the most recent example of such a process, and many lessons over the past thirty years are remarkably helpful for understanding the green transition. Take a look at Figure 1, which presents a highly stylised, simple picture of the central problem of a – any – transition. The curve presents combinations of capital (K) and labour (L) on a production possibilities curve; this depicts the range of feasible combinations of labour and capital, from zero L and maximal K to its opposite. (It could entail anything that goes into ‘production,’ here loosely understood as the creation of something.) Imagine, to set things up, that before the transition, we find ourselves in combination A, broadly in the top-left corner; after the transition, we will (or would like to) find ourselves at point C, in the bottom right corner.

Figure 1. Production possibilities curve and the transition

One of the key characteristics of a structural transformation is that it is often very ‘lumpy’: simply walking along the possibilities curve in Fig. 1, gradually adjusting a combination of production factors several times until you have found the right combination is practically impossible in many cases. Getting from A to C in Central Europe, for example, meant that companies needed to stop making tractors, heavy trucks and tanks (they moved from A to B), and convert to washing machines, computers and cars (moving from B to C). Since the factories and workers that make tractors and tanks are very different from those that make washing machines and cars, changing the underlying economic model therefore also implied destroying large parts of the original system and replacing it, almost wholesale, with different skills and technology in new factories – the process captured in the move from A to B, and then to C in Fig 1. It was simply impossible to walk slowly along the production possibilities curve because of the incompatibility of skills, technology and organisation in the two models. This led to the destruction of a large part of output (the shaded area between points A, B and C below the possibilities curve), known in the literature as a transition recession, usually with dramatic social consequences. Everywhere in CEE, output fell by 25-50% after 1990, for growth to pick up only slowly three or four years later, after which it took many countries in CEE ten years or longer to reach the output levels of 1989. Transitions are expensive and painful because of this process of economy-wide destruction and reconstruction.

In the green transition, the problem is essentially the same. We need to abandon the old and recombine different, new production factors in new ways. It may even be slightly more complicated, because both brown and green products are made simultaneously, albeit on different trajectories (down for brown and up for green). Take the electrification of the car industry as an example: it is extremely difficult, and probably not very efficient in most cases, to build 499 petrol cars and 1 EV on the same assembly line (and 498 and 2 EVs tomorrow, and so on until we reach 0-500 EVs), because the skills, many of the parts, and practically all the machines you need to produce cars often differ substantially between these two types of products. Electrification of the product means nothing less than reinventing the process, therefore – dismantling the old assembly line, retraining workers, and reorganising (and partially replacing) the supplier network to start from scratch with these new inputs. Ditto in energy production: while you can complement fossil-based energy plants with renewables, it is usually not easy to do so within a single plant. Eventually, you will need to abandon those old power plants and shift energy production wholesale to new methods. And since the production of renewables is often more decentralised than fossil or nuclear power plants you need, because of this added layer of complexity, considerably more coordination in a different distribution network. The green transition implies, like the political-economic transition in CEE did three decades ago, a difficult, and probably painful, adjustment process.

Here the trouble starts. Replacing everything is difficult; this is true in the physical world, and even more so in the social world, and it will definitely have a steep price. Think again of Central Europe three decades ago. Joseph Stiglitz (1999) quite rightly pointed out that the shock therapy from socialism to capitalism annihilated a lot of social capital along the way, usually by destroying the institutions that embodied that. But while that point is correct in the abstract, smooth world of (relatively) orthodox economics, we now also knew that many of the institutions were of the ‘bad’ sort – reflecting conservative vested interests – such as the Communist Party or state elites. In the first-best world that defends the gradualist argument, we could simply have destroyed those bad institutions and kept the good ones that would allow us to mobilise social capital, and build trust, the basis for more equitable economy, afterwards. But distinguishing the bad from the good institutions is easier said than done, especially ex ante. Political consequences add to this epistemological issue: because institutions also reflect vested interests, leaving even one reactionary institution intact could jeopardise the entire transition. Much as we may worry about its effects, shock therapy was, in that light, a rational, politically ‘precautionary’ response to incomplete information about the nature of the institutions in the transition.

Transitions are by their very nature processes that are never complete, and the new world can take many forms. If, for example, fifteen years ago, progressive forces in Europe entertained the optimistic view of where we would end up – a world of windmills and solar panels that power ultra energy-efficient houses and clean electric cars – today we know that things are and will be a lot bumpier. A Green Party minister in Germany reopened coal plants in the early 2020s, and the once-mighty European car industry, which had just re-emerged after the restructuring of the 2000s, has not only barely engaged in building electric cars, in 2024 it was also facing a major existential crisis because domestic and foreign markets have withered. While the COVID crisis of 2020-21 certainly threw a spanner in the works, it would be wrong to see that as the cause of the stuttering green transition. Transitions are simply complicated and unpredictable, and their outcomes are highly contingent on the social and economic processes that govern the economy. Since a transition also redistributes life chances, it always will be a political process, where groups struggle over the direction, processes, instruments and outcomes of the transition.

The two essays that will follow soon unpack these broad statements on two crucial concepts at the basis of the political economy of the transition: time inconsistency (the idea that losses today often trump equally big gains in the future) and collective action (the notion that cooperation is very often not a rational outcome of aligned, let alone non-aligned, interests).