Why we can all share in London's success

IN THE year AD60, the newly founded Roman garrison town of Londinium was burned to the ground by Queen Boudicca. Fortunately, the enterprising Romans decided to rebuild it. Today, London is not only one of the world’s greatest cities, it is also Britain’s economic and cultural engine room. But now London’s gargantuan success seemingly threatens to drain both population and economic vitality from Britain’s other cities and regions.

In the last decade, the island of Britain has become split effectively into two provinces: the megalopolis of London, and everywhere else. The seeds of this north-south divide go a long way back, but the final transformation of the British Isles into an appendage of Greater London has really taken place since the start of the 1990s. The evidence is now at hand in a new report based on the latest census data - People and Places: A 2001 Census Atlas of Britain.

During the 1990s, driven by a booming economy in finance, tourism and cultural industries, net employment growth in London grew by 6.8 per cent, whereas the national trend was flat at 0.6 per cent. London now constitutes a fifth of Britain’s economy and is richer than many successful countries, including Norway and Finland. London’s jobs bonanza sucked in, and was sustained by, a massive increase in population. While cities like Manchester and Glasgow saw their populations fall in the period between 1991 and 2001, the census figures show that London grew officially by 360,000 - and probably by much more, as a result of illegal immigration.

How did London achieve this spectacular growth, and why did other UK cities fail to emulate it? One theory is that London was especially privileged by being the political capital of the UK. Over 90 per cent of the UN’s 185 member countries have an embassy or high commission there. London also hosts 14 international organisations, including the European Bank for Reconstruction and Development and the Commonwealth Secretariat. London attracts company head offices anxious to be close to the centre of things. It is home to more corporate HQs than any other European city: 33 per cent of the Fortune Global 500 firms have their European HQ in the city, compared with only 9 per cent in Paris and 3 per cent in Frankfurt.

However, the balance of the evidence suggests that London’s political clout stems from its economic weight and not the other way around. Contrary to popular mythology, only 18.4 per cent of all UK civil servants work in London. Public expenditure in Greater London accounts for only 30 per cent of its economy, far less than the near 50 per cent in Scotland. This low level of public spending in London results in the capital’s dreadful infrastructure, particularly in public transport.

London’s success story lies outside government. In fact, it began just as Margaret Thatcher abolished the old Greater London Council and put its leader, Ken Livingstone, temporarily out of a job. The roots of London’s recent growth lie in three things: possessing the right industries, a willingness to accept growth and an influx of young migrant labour.

London was the first UK city to turn its back on declining smokestack manufacturing. True, there were bloody labour disputes: witness the street battles at Wapping in the 1980s. But today non-industrial sectors generate 86 per cent of London’s output, compared with 65 per cent nationally. And it is these new service sectors which have generated growth and jobs in the past 15 years.

Finance now constitutes almost a third of the London economy. Some 50 per cent of European investment banking activity and 31 per cent of global foreign exchange transactions take place in London. Other parts of the UK also grabbed employment in the financial sector - witness the rise of the Royal Bank of Scotland. But London had critical mass in the industry and - crucially - a willingness to be international in scope and vision, unlike the French and German bankers.

London’s global dominance comes not just from banking, but from its cultural industries. In fashion, publishing, architecture, advertising, design, television, film, music, performing arts and even antique sales, London now sets international trends in a way it has not done since Victorian times. The sheer scale of the capital’s creative talent is impressive. More than 500,000 people work in the creative sector. Advertising and design employ some 40,000 people, earning at least 2 billion annually in overseas income. London is the third-biggest film production centre in the world.

London’s success in cultural production stems from various factors: that English is the dominant global mother tongue; that London is strategically positioned geographically between America and Asia - very important in news delivery terms; but above all, London embraced a cosmopolitan interest in ideas and innovation in cultural trends that eluded insular Europe.

But none of these industries would have been successful had London not been prepared to grow and embrace a substantial population increase - a policy frequently rejected by other UK cities. After decades of decline, London’s population started to expand in the 1990s, as foreign immigrants were attracted by the growing economy. A virtuous cycle emerged not seen in other UK cities: jobs attracted workers, whose skills or willingness to take employment at low pay generated yet more economic growth. London now absorbs 200,000 foreign immigrants each year (plus a large number of young people from north Britain). According to the 2001 census, over 30 per cent of the enumerated London population is foreign-born.

Contrary to myth, most of these immigrants are highly skilled. Many come from unexpected places like France, escaping high taxes and slow promotion in highly regulated continental industries, yet still able to commute home at le weekend via the Channel Tunnel. Above all, they are young. London’s population is now younger than the rest of the UK’s, giving it a huge advantage in energy and new ideas.

Does the London economic octopus threaten the viability of the rest of the UK? Some will be moved to demand curbs on London’s growth and a "redirection" of jobs northwards. We have been here before. Back in the 1960s and 1970s, much British domestic economic policy was directed towards blocking the expansion of the London economy and attempting to get firms to move to the regions. Partly as a result, London lost one and a half million manufacturing jobs.

However, there is little evidence that such policies do any good. Putting a strait-jacket on London’s ability to compete will not automatically persuade tourists to visit Scunthorpe, or international banks to move to Dundee. More likely, they will all move to Paris or Madrid. In addition, deliberately undermining the London economy could kill the proverbial golden goose. London already pays more in taxation than it receives back in public expenditure. According to researchers at the London School of Economics, in 2001-2 the capital contributed between 16.5 per cent and 17.4 per cent of UK taxation, while receiving some 14 per cent of public expenditure. As a result, London is likely to have made a net contribution of up to 17.45 billion to the rest of the UK.

More important than this, London’s economy is vitally interconnected with the rest of the UK. Most of London’s trade is not with foreign countries, but the other UK regions. On balance, London exports financial and business services to these regions and imports manufactured goods from them. Squeeze the London economy and you deprive a lot of Britain of its main market. London supports an estimated four million jobs in the rest of the country.

That said, London’s emergence as the UK’s only economic superpower does generate problems for the rest of the country. For instance, in 2001, London exported two thirds of its municipal waste to other parts of England. The dramatic rise in house prices is driving its workforce to seek accommodation far from central London. In turn, this is driving up property prices from Birmingham to Devon. It could be said the recent rise in interest rates has more to do with cooling the London housing market than it has with the rest of Britain.

The solution to these problems lies in the need to devote more investment for the housing, transport and environmental infrastructure that befits a major world city - and to do it before London’s negative spill-over effects seriously damage neighbouring regions. Currently, London is pinning its hopes on a successful bid to host the 2012 Olympic Games as a lever to extract government cash for improved public transport links.

Despite London’s success story, there is a darker side. Nearly a quarter of Londoners of working age - one million people - are without a job. They are the white elderly and the black unskilled (disproportionately from London’s Afro-Caribbean community). The seeds of future social conflict are being laid here, unless a way can be found to integrate these marginal groups into London’s success story. That may be more of a real problem than any supposed north-south frictions.

The real lesson of London’s superpower status is perhaps implicit in Queen Boudicca’s forlorn attempt to destroy it as an alien power centre: blaming London’s success for our own economic ills is not only self-defeating, but a waste of time.