Response to the All-Party Parliamentary Group for London as a Global City from LSE London. Prepared by Max Herbertson, Neil Lee, Nancy Holman, Christine Whitehead.
The current landscape:
London’s global or world city status has been a vital part of its economic success. As a global city London is a major node in the interconnected system of information, capital, and wealth. On this basis, its success is intimately related to the specialised businesses that facilitate and rely on flows in these areas: financial institutions, consulting, accounting and legal firms, and media organisations (Sassen, 2005). This status entails considerable benefits for the UK. London, for example, provides significant employment opportunities in high-value sectors such as finance and professional services, where around 750,000 people are employed (Statista, 2021). Employment in these sectors in London further drives employment in financial and professional services throughout the UK, which in total contributes around £200 billion to UK GVA (The City UK, 2020). However, alongside these opportunities, global city status also brings significant challenges, not least stark and growing economic inequalities. These persist both between London and other regions in the UK (McCann, 2016), and internally, within the city (Lee et al., 2016; OECD, 2018). London needs to become more inclusive internally, and needs to work with the UK’s other major cities to ensure they are able to benefit from London’s global city status. For London to do this effectively, maintaining its position as a global city, and overcoming the challenges which may hinder this, will be vital.
Challenges facing London’s global city status:
London is facing a skills shortage. Even before Brexit and the pandemic, 23% of all job vacancies were due to a lack of applicants with the right skills and 42% of firms were not confident they would be able to recruit people with the higher-level skills their organisation needed over the next five years (London Councils, 2017). Changes in the UK-EU trading relationship, and the ending of free movement, are likely to accentuate this challenge. In London, 90% of businesses employ EU citizens, with 14% of jobs being held by EEA workers compared to 6% in the rest of the UK (Rocks, 2018). EU nationals make up significant sections of the workforce across multiple industries: 30% of the construction workforce, 15% in financial services, 30% in the tech sector, 10% of London’s NHS workforce, 30% of those in hospitality and 12% of the wholesale and retail workforce (Rocks, 2018; Seidu et al., 2019). The threat, therefore, is that ending free movement will make London a less accessible and less attractive location for European migrants, which in turn may worsen skills mismatch issues and reduce the competitiveness of London as a location for businesses to locate.
The UK’s departure from the EU also brings regulatory challenges. These are likely to be particularly challenging to those parts of London’s economy which specialise in export-oriented services, such as finance, information and communication, and professional services. Ultimately, uncertainty around the terms of future trading relationships may encourage businesses to move at least some elements of their operation to the EU, reducing the presence of their London offices. Indeed, estimated job losses as firms move some of their functions to Europe have already reached 7,400 and are expected to accelerate (The Economist, 2021). With these sectors being the foundation of an internationally connected city, losing them may significantly damage London’s global city status.
Housing also represents a challenge for London. Since 1997, while London’s population has grown by 28%, and total jobs has grown by 45%, the number of homes has only grown by 20% (Cosh and Gleeson, 2020). Significantly, this mismatch does not seem to be reducing: while the Mayor of London, Sadiq Kahn, has set a target of building 65,000 new homes a year in the capital over the next ten years, between 2017 and 2020 an average of only 40,000 have been built (GLA, 2021; Gariban, 2019). What this means is that, in 2018 house prices in London were 13 times the median gross annual earnings, compared to an average of eight times in the rest of England (GLA, 2021; Gariban, 2019). This has several implications, first, once accounting for housing costs, 28% of residents are in relatively low-income (a proxy for poverty), a higher proportion than any other British region (Francis-Devine, 2020). Second, while low-income groups are able to maintain a foothold in London as a certain share of housing is assigned to them through social housing, and/or they are willing to accept poorer living conditions (Rodriguez-Pose and Storper, 2020), middle-income groups are being squeezed out (Buitelaar et al., 2018). This raises the issue of brain-drain. Third and relatedly, housing shortages can limit migration, curtailing London’s expansion potential and inhibiting national growth.
There is a danger that the Levelling Up agenda misses the significant concentrations of poverty and disadvantage in London. The UK’s regional disparities are large and there is a clear rationale to better address them. Yet policymakers, in doing so, need to avoid the ecological fallacy of assuming that all Londoners are rich just because they are on average. After housing costs, 2.4 million Londoners (27%) live in relative low income (the best available measure of poverty), more than in any other region (House of Commons Library, 2021).
There are warning signs that policy may increasingly be focused on places with lower average incomes before housing costs, rather than places with higher poverty rates. For example, the government has given London the smallest share of the UK Community Renewal Fund: only £1.9 million of the £203.3 million will come to the capital (DLUHC, 2021a), and the second to lowest amount of the first £1.7 billion Levelling Up Fund (DLUHC, 2021b). In this light, the challenge for London is really a question of governance. Over the last 20 years, London has benefitted from a unique institutional arrangement with a strengthened sub-national government through the GLA and London Mayor. Other UK cities have only recently started receiving similar arrangements in the form of Combined Authorities. What this means is that there will be other demands on expenditure for infrastructure, innovation and economic development generally. The challenge will be for London to both assert its importance as a donor region which benefits other parts of the UK, and as a city which suffers from significant pockets of deprivation.
London has a highly qualified workforce and strong, world-leading, higher education institutions – with four universities in the top 40 worldwide (QS Top Universities, 2021). These contribute to human capital formation as well as undertaking innovation activities themselves (Deiaco et al., 2012). These universities will play a significant role in attracting and retaining talent in the future. Indeed, student numbers from outside the EU have been rising, possibly because a lower exchange rate makes the UK more attractive (Hope, 2019). In addition, London has two institutions in the top 100 universities ranked against the UN’s Sustainable Development Goal surrounding Industry, Innovation and Infrastructure. These universities – Imperial College London (ranked 7) and King’s College London (ranked 88) – are recognised for their ability to produce research relevant to industry innovation and infrastructure, generate patents, create spin-offs and undertake research with the support of industry (Ormond, 2021). Combined the talent generation, research, and university-industry linkages which London’s higher education institutions offer, represent a significant opportunity to build London’s global city status.
As one of the world’s leading financial centres and start-up hubs, London is a great place for innovative businesses to access finance and business support. In 2014 it was found that 35% of SMEs attempted to access external finance in London, of which 48% obtained all the money they needed and 30% obtained partial financing (LBS, 2014). On this basis, London represents an attractive location for innovative start-ups looking for finance and support. This also represents an opportunity to spread the benefits.
While the UK consistently spends less on R&D than the OECD average (Hutton, 2021), London has a strong base with 31,000 full time equivalent R&D roles, and R&D performed per head standing at £709 (Hutton, 2021). A key opportunity to improve this comes with changes in government policy. Most significantly the target for total UK investment in R&D (public and private) to reach 2.4% of GDP by 2027 (HMT, 2021). Ensuring London receives increased public R&D will help to crowd-in more private investment – at a ratio of around two pounds on average for each pound of government funding (HMT, 2021).
London and other parts of the UK:
London maintains significant relationships with other parts of the UK. On the one hand, the UK’s public finances are increasingly dependent on taxes generated in London. In 1998, London accounted for 20% of UK GVA, but by 2018 this had risen to 24% (Orellana, 2018). Equally, on the other hand, London relies on the rest of the UK for a significant amount of talent who are attracted by the opportunities offered by a global city: a quarter of all new graduates from UK universities worked in London six months after graduation (Centre for Cities, 2016). However, while there is co-dependency, the relationship is not equal. Indeed, cities in other countries have a far more equitable relationship. For example, while London consistently ranks second in global city scores, it is the only UK city in the top 30 global cities. By contrast, Germany has no cities in the top 10, but three in the top thirty: Berlin, Munich, and Frankfurt (Kearney, 2020).
Policy and initiatives:
Looking first at the issue of inequalities and co-dependency between cities, London should look to build stronger relationships with the other Combined Authorities. The objective would be better to utilise synergies and complementarities and to both reduce inequalities and support increasing productivity. Better relationships are a necessary prerequisite for supporting the industries necessary for London to maintain its global position.
Housing is seen as being a major constraint on London’s prosperity, with rents in the private rented sector (which now accommodates more than one in four Londoners) taking more than a third of the tenants’ median income. Equally, new housing output is constrained by available land; slow planning processes and the costs of bringing brownfield sites into use. Change takes time but must speed up the development process.
The use of modern methods of construction and of meantime housing sites could significantly increase output levels. Permitted development rights, if handled carefully, may provide significant opportunities as both office and retail usage is re-structured. However, it is important that minimum standards notably with respect to light and ventilation as well as size are consistent with London’s more general housing regulations and it is important that any office space converted is truly unoccupied. Equally enforcement of standards in the existing stock needs to be significantly improved.
The threshold approach to S106 has worked well in London but the planning process needs to be more certain and transparent, and the new viability rules more effectively enforced. Enabling some housing policies to operate on a London-wide rather than borough basis, including expenditure of Right-to-Buy receipts and First Homes could also help.
As noted earlier, a chief advantage for London is its highly skilled workforce and thriving SME sector, which drives innovation in the economy. To ensure that this enterprise culture is nurtured and encouraged, the Capital needs affordable workspace where young businesses can grow. Unfortunately, per square foot office rents have been rising quickly over the last 10 years with the traditionally cheaper city fringe catching up with the city core (Bailey, 2021). Recent government planning policy that allows the conversion of office to residential use through permitted development and the profitability of residential development in general has helped to drive these increases.
There are interventions that could be made to help London retain its edge as a world leading city of innovation. The first centres on the retention of office space for start-ups, which can be achieved in two ways. Firstly, the Government should rethink its policy on permitted development rights and limit these in London so that more lower value office space can be retained. Secondly, policy SD5 in the London Plan, which sets out the strategic functions of the CAZ (Central Activity Zone) and gives greater weight to offices rather than residential development, should be explored in other areas of the Capital, where innovative clusters are located.
High Streets across London provide a strong base for encouraging ‘20 minute neighbourhoods’ which are clearly a necessary part of the post Covid approach to work patterns and the growth of local independent retail. The extent to which new initiatives have come forward since the lockdown has been impressive and helps to maintain and increase activity levels. Importantly though the High Street must be complemented by the use of digitalisation to ensure sales are developed across the world. Burberry’s is a particularly good example (which is bouncing back effectively) of how much this can increase and maintain revenues while benefitting the immediate locality. But there are many examples across the capital.
London should not grow in the same way as it did before the pandemic. To capitalise on today’s challenges and become a greener and more inclusive, but still global city, London needs to pursue innovative forms of bottom-up development strategies, increase support to disadvantaged communities, and develop a proactive focus on sustainability, public health, and safety.
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