A tale of two cities
The debates about rebalancing and localism have led some to argue that the UK's capital should go it alone. But would such a move serve London's interests, questions Ian Gordon and Henry Overman FRSA
After a summer celebrating Team GB and the world coming to London, politics returned in the autumn. A timetable for Scotland's possible opt-out was agreed, the coalition was outflanked in the Commons by Eurosceptics, the government redoubled efforts to halve immigration, and Michael Heseltine re-emerged to propose a revolutionary shift of power and funding from Whitehall to business-led coalitions in provincial cities. If this is what a rebalancing of the UK looks like, London's increasingly cosmopolitan and still quite prosperous population might well be asking where the benefit is for them. As former mayor Ken Livingstone said five years ago in response to questions about whether it was politically healthy for London to have such a different population mix to the rest of the country: "If the rest of England doesn't like us that much, we're happy to be independent. We'll be a Singapore of the west."
Attitudes to migration and diversity might well be one of the biggest points of difference between London and other parts of the country. Boris Johnson, too, expresses a fear that current immigration policies will damage London-based businesses. The serious question, however, is not whether London should pursue political independence. Rather, it is whether what is good for London plc is good for the UK. Has, as the Economist recently put it, "a finance-driven London" actually become "increasingly detached from the rest of Britain" in economic terms? Perhaps, it is suggested, London's still relatively affluent population can afford to be indifferent to the effects of austerity, recession and competitive weakness elsewhere in the country. A summer of celebration, which reinforced the feeling that London is different in positive ways, also appears to have fuelled worries about the effects of the capital's national dominance. For some, it encouraged the idea that the city's role as an elite playground for the super-rich represented an increasing threat to the country at large. And rather more now argue that national government efforts to rebalance the UK economy in the wake of the financial crisis must include taming London's position as an economic city-state.
Rhetoric aside, any rebalancing programme seriously addressing the pathologies of the last boom-and-bust cycle must clearly have significant implications for the way London could develop. But there is a great deal of hyperbole in the talk about London's drift offshore, which itself needs to be rebalanced if the real implications are to be identified and followed up.
A global city
For a start, we need a realistic appreciation of the role of finance and the globally oriented segment of the London economy. These are not quite the same thing, but neither segment is nearly as dominant as often suggested. The financial and business services sector has been the growth area of employment during the past 50 years. However, almost all the long-term job growth has occured in activities other than finance. While part of this growth in other activities is clearly linked to finance – though, oddly, no one seems to have seriously examined how much – a great deal of core business services seem independent of the sector. Furthermore, London has strength in a range of information services beyond finance.
We can consider London's global orientation on two dimensions: as a place of residence, or at least of consumption, and as a place of production for global markets. On the first of these, survey evidence suggests that London is the preferred location for the super-rich and there is no doubt that some very wealthy people live in its more affluent neighbourhoods. But the super-rich are actually a tiny, if much publicised, minority. As with the financial services industry, it is hard to fully capture wealthy foreigners' impact on the London economy, but it is certainly possible to overstate it. To take just one example, the incredible prices paid for high-end London apartments are inflated by capital flight and the location preferences of the super-rich. This does tend to price locals out of that market, but when these properties can be sold at more than £50m, this scarcely affects the average Londoner. There may be some trickle down to the mainstream market, but high prices for the average Londoner are predominantly driven by the decisions of millions of more moderately resourced households, rather than those of a tiny global elite.
In terms of production, London almost certainly has a larger part of its economic base – maybe one-eighth of all its jobs – serving global markets beyond Europe than any other substantial onshore centre. But, in absolute terms, about two-thirds of these jobs are tied to the UK market beyond south-east England. Unsurprisingly, fluctuations in London's economy follow those of the UK macro-economy. What is more distinctive of the London economy, beyond the absence of real manufacturing, is its competitive strength across a very wide range of services and the skill levels of the workers they develop and deploy.
In short, a large part of London's superior economic performance comes from the concentration of Britain's more able and talented workers, who would be paid relatively well wherever they lived. In turn, that concentration is partly driven by the fact that London provides greater opportunities for individuals to use and develop their talents. All of this means that London has higher wages, more expensive housing and a greater general cost of living, with the gap in all of these rising as pay inequality in the UK labour market has grown. But, at least for those who are young, able and willing to economise on housing costs, living in London offers opportunities that are simply not available elsewhere. And since many later move on to work in other areas of the country, London also acts as a source of highly skilled workers to regional economies throughout the UK.
Such life-cycle migration is not the only factor that continues to bind London tightly to other parts of the UK. Indeed, it makes little economic sense to separate ‘Boris's fiefdom' from what has become London's extended economic region, which spans almost all of south-east England and includes Oxford, Cambridge and Brighton. The area works as an integrated set of housing and labour markets. Furthermore, during the past 30 years or so, the region has become the heartland of England's knowledge economy. It can be argued that the south-east has moved away from the UK economy, but that the drift is more in terms of dynamism and productivity than integration.
Its full potential is not being achieved, however, because of a functionally irrelevant divide between the old London inside the green belt, presided over by the mayor, and the fragmented region beyond. The pretence that London remains an island independent of this wider territory is sustained partly by artificial administrative boundaries, but also by efforts to play down implications of the city's growth or housing demand on the area that surrounds the capital. Much more than incursions of the super-rich into parts of inner London, it is an unwillingness to face the implications of this interdependence that accounts for the general shortage of affordable housing in the region.
Some things stay the same
If London is more detached in rhetoric than reality, current talk about London starting to float free also seriously exaggerates the extent to which the city's position has shifted in the relatively recent past. In many respects, it can be argued that London's character – for better or worse – reflects a great deal of continuity over the centuries. There was an era in the last century when it was a major centre of goods production and transport, but that really ended in the 1980s. Since that point, the most dramatic change has been the upsurge in the foreign-born population. But even allowing for that development, overall, London has simply become more like itself, because both the types of people it always attracted (the educated, unattached and cosmopolitans) and the activities it has always been good at (creative, symbolic and manipulative) have become a much larger part of the national whole, within a globalised economy. It is also important to remind ourselves that, just as in the past, London's ability to attract and reward talent helps disguise the fact that it has always been home to a disproportionately large number of England's poor.
As far as more recent changes are concerned, the big story perhaps should be that of the dog who scarcely barked. When the global financial crisis hit, many, including one of the authors, predicted that London would suffer more than other parts of the UK. This was both because of its specialisation in financial services, which had been at the heart of boom and bust, and because it had generally proved to be the most cyclically volatile part of the national economy since the 1980s. But this has not turned out to be the case. Indeed, we both said 18 months ago that London appeared to have got away with it. Incomes and employment in the capital both fell, but less severely than elsewhere. More recent figures suggest that London and the south-east are leading the UK's slow economic recovery. Much of the explanation for this is structural: the broader south-east is disproportionately represented in occupations and sectors that have fared relatively well through the recession. For London, the better-than-expected economic trends clearly owe something to public investment in Crossrail and the Olympics, plus luxury purchases by high-rolling overseas visitors, which held up through the depression. But it may also owe much, although no one knows how much, to large-scale state support to the major London-based banks during the crisis years.
Balancing to rebalance
Rebalancing the UK economy, in order to avoid a repeat of the past decade or two, clearly requires some macroeconomic rebalancing of demand that moves away from consumption and toward exports and investment, as well as of the relation between consumption and personal incomes. If this is achieved, it will very likely have implications for the balance in levels of activity between London – and its extended region – and the rest of the country, which will tend to favour the latter. And, if steps toward rebalancing consumption included some reduction in income inequality, this tendancy would be reinforced. As has been extensively discussed, shifts from public to private sector activity may well work in the opposite direction. But note that any resulting rebalancing is structural and not fundamentally spatial, as exaggerated stories about London's increasing drift offshore suggest.
London clearly does occupy a particular and functional role within the UK economy, with inescapably different characteristics to much of it. The sheer scale of the capital's economy, the nature of its industrial structure and the extent to which it attracts the brightest and best mean it sits as a clear outlier in the UK urban hierarchy. But, while London may be different, it is certainly not isolated. Nor need it be quite so unique, since cities that are a little smaller – such as Manchester, say – or that develop a distinct strength may be able to out-compete London for functions that do not need its scale, diversity or intensity quite enough to justify the costs that come with that territory.
Within London itself, a more balanced recognition of the range of things it excels at – and of how these can contribute to the welfare of the middle mass of Londoners, rather than the few who place it in an island of its own – would also be appropriate.
Ian Gordon is Professor of Human Geography at the London School of Economics. Henry Overman is Professor of Economic Geography at the London School of Economics and director of the Spatial Economics Research Centre