Lecture Introduction:
CEU President John Shattuck opened the final lecture, highlighting its significance as the culmination of a week-long series. George Soros would address key global trends and their economic and political implications, with a focus on China’s growing role. The lecture aimed to bring together themes explored throughout the week and provide insights into the future.

Global Audience and Interactive Video Conferencing:
The lecture expanded its audience beyond Budapest, including students from China and Hong Kong University. This marked the completion of a three-continent, five-university global outreach, enabling students to participate in real-time through interactive video conferencing.

Distinguished Moderator and Commentary:
Howard Davies, Director of the London School of Economics, served as the moderator for the lecture. Cristobal Buarque, a Brazilian senator and former presidential candidate, offered a brief commentary from the floor.

Lecture Structure:
George Soros would deliver a lecture lasting approximately 50 minutes, followed by brief comments from Howard Davies. Soros would then answer questions, beginning with three questions from Hong Kong and continuing with questions from the Budapest audience.

Overview of George Soros’s Approach:
Soros aimed to offer a conceptual framework for a better understanding of human events in his lectures.

Uncertainty in Economic Systems:
Economic events are not governed solely by scientific laws due to the complexity of situations and the influence of participants’ thinking. Misunderstandings and misconceptions can significantly shape reality and introduce uncertainty, making predictions challenging.

Financial Crisis of 2008:
The 2008 financial crisis was more severe than previous ones, comparable to the Japanese real estate bubble and the Great Depression. Unlike the Japanese experience, this crisis affected the entire world. Artificial life support measures prevented a collapse but resulted in a larger credit and leverage problem than in the 1930s.

Recovery and Economic Perception:
The initial recovery from the crisis may falter and lead to a double dip recession. Many individuals and institutions are slow to recognize that this crisis is fundamentally different from past crises, leading to a disconnect between perception and reality.

Changing World Order:
The unipolar world dominated by the United States after the Soviet Union’s collapse has shifted due to the Iraq War and America’s decline in power and influence. A new world order will emerge, requiring a different conceptual framework to understand it.

Market Economy and Political Economy:
The efficient market hypothesis fails to consider the role of politics in shaping financial markets. Soros emphasizes the interplay between financial markets and politics, arguing that the visible hand of politics determines the rules and conditions of market operations. He views financial markets as a branch of history, influenced by political and economic factors.

International Financial System:
The international financial system post-World War II was designed to favor wealthy countries, with the United States holding disproportionate power. The system transitioned from a regulated to a deregulated state, guided by the Washington Consensus. A two-tier structure emerged, with countries borrowing in their currency forming the center and others borrowing in hard currencies forming the periphery.

System Preservation and Lender Assistance:
In times of crisis, individual countries receive assistance under strict conditions, while the center is given priority to preserve the system. This approach was seen in the 1982 international banking crisis and the 1997 Asian financial crisis. Debtor countries faced harsh market discipline, but failing banks were bailed out to protect the system.

IMF’s Role in the 2008 Crisis:
The 2008 crisis originated at the center, drawing periphery countries into it. The IMF faced a unique challenge in protecting the periphery from the storm and raised a trillion dollars to address the situation. Despite initial difficulties, the IMF adapted well to its new task.

Overall Crisis Management:
The international financial authorities applied similar bailout and stimulus measures as in previous crises. However, the larger scale of the 2008 crisis initially challenged these techniques, as seen in the failed rescue of Lehman Brothers.

The Collapse of the Financial System:
Financial markets ceased to function, leading to artificial life support from governments. Periphery countries like Eastern Europe were hit hard. Central banks pumped money into the system to stabilize the economy.

Global Financial System Challenges:
Globalization of financial markets made it difficult to tax or regulate financial capital. Governments prioritized international capital requirements over domestic aspirations. The global financial system was fundamentally unstable due to the belief that markets can be left to their own devices.

Need for International Regulations:
Current regulations are rooted in national sovereignty, not international cooperation. This leads to financial protectionism and risks disrupting global markets. Regulations must be international in scope to prevent regulatory arbitrage.

Challenges of Creating Uniform Regulations:
Different countries have varying interests and solutions, making uniform regulations difficult. European countries struggle to agree on financial system guarantees. The euro lacks a common treasury, hindering effective financial management.

Impacts of the Crisis on Different Countries:
The United States is poised to lose the most due to its excessive current account deficit and household indebtedness. China is emerging as the greatest winner due to its resilience to the financial crisis and its efficient economic model. China’s economic growth and trade surplus allow it to stimulate domestic demand and boost exports.

Shifting Global Dynamics:
China’s rise and the United States’ decline will lead to a tectonic shift in the global economy. The world economy will grow at a slower pace due to China’s smaller economy. Third parties will reorient themselves to the source of positive impulses, with China taking the lead.

The Global Shift:
China’s economic success is the most prominent trend in the global political economy. China’s growth is driving its trading partners, like Brazil, India, and some African and Asian countries.

China’s Internal Challenges:
China’s infrastructure investments may not generate self-sustaining economic growth. Investment decisions are politically motivated, resulting in low returns. Relaxation of bank credit has led to bad loans in the past. Centralization of power may improve the situation, but success is not guaranteed. A global slowdown could drag down China’s economy.

The Global Impact:
China’s success is more assured than its absolute success. If China falters, the global economy loses its driving force.

Comparing to Post-World War II:
The current situation is similar to the end of World War II, where a new system needed to be built. The victorious powers at Bretton Woods created a system that accommodated the world, with the United States having more influence.

Challenges to International Capitalism:
The prevailing multilateral system, known as international capitalism, has weakened. Its flaws have been exposed, and a viable alternative has emerged. China’s rise presents a fundamentally different economic organization model.

Washington Consensus:
The Washington Consensus is a set of policies that promote free trade, deregulation, and privatization. It has been criticized for leading to economic instability and inequality.

State Capitalism:
State capitalism is a system in which the government controls or heavily influences the economy. It is seen as a more stable and equitable alternative to international capitalism.

China and State Capitalism:
China’s rise has been facilitated by its state capitalist model. China’s dealings with resource-rich countries have led to conflict and instability. China’s reluctance to join the extractive industries transparency initiative is a major obstacle to the success of the initiative.

A New World Order:
The current multilateral system is weakening, and China is expanding its influence bilaterally. China’s participation in international financial institutions is passive, and its active expansion is through bilateral channels. China will promote the use of special drawing rights (SDRs) but maintain capital controls and bilateral clearing accounts in renminbi, diminishing the dollar’s status without replacing it.

International Capitalism vs. State Capitalism:
The world is choosing between international capitalism (represented by the US) and state capitalism (represented by China). The current path leads to the disintegration of the international financial system. A new multilateral system based on sound principles is needed, serving the interests of the US, China, and the world.

Challenges in Creating a New System:
International cooperation is difficult to achieve piecemeal but possible through a grand bargain. The G20 is a step in the right direction but operates within IMF constraints. Changing IMF articles of association is a lengthy process, requiring a new Bretton Woods conference.

Reforming the International Financial System:
A new Bretton Woods conference would reform the IMF, revise its methods, address “too big to fail” institutions, and control capital movements. The total freedom of financial capital has proven destabilizing and needs correction. The use of the dollar as the main international currency has created imbalances and a loss of trust. Wider use of SDRs could reduce imbalances, as they are denominated in multiple currencies, including a potentially non-fully convertible renminbi. SDRs allow international money creation, directing it where needed.

Beyond the Financial System:
Reorganizing the world order may extend to global warming, nuclear proliferation, and the UN Security Council. The United States must initiate changes, but China and developing countries should participate as equals. Rising powers need to be involved in creating the new order to ensure support.

US and China’s Roles:
The US can no longer impose its will but can lead a cooperative effort involving developed and developing countries. China must move towards a more open society and the rule of law to continue rising peacefully. A declining superpower with military supremacy is dangerous, especially considering America’s deep democratic troubles.

Concerns and Solutions:
President Obama’s economic advisors may not fully grasp the systemic issues. Surviving financial institutions will resist systemic overhauls that curb their powers. The theory of financial markets needs wider acceptance to drive systemic reform. China needs to be farsighted, give up some privileges, and become a more open society to be acceptable to the world.

Conclusion:
The future of the world depends on the Chinese leadership rising to the occasion and creating a new world order based on international cooperation and shared values.