Booming London drains UK economy

There’s London. And then there’s the rest of the country.

A tale of two Britains has increasingly emerged since the Great Recession. While the government trumpets the country’s recovery from the financial crisis and its status as the world’s fastest-growing developed economy, the rhetoric hides an increasing divide: One that pits London’s boom against the malaise in cities such as Manchester and Birmingham that are struggling to remain vibrant in the 21st century.

Buoyed by foreign investment and a resurgent financial industry, the economy of London and the rest of Britain’s South East region has expanded almost twice as fast as the rest of the country since the 2008 financial crisis. A chasm that began opening with the decline of Britain’s textile and coal industries a century ago is widening as London’s ability to attract jobs and investment leaves the rest of the country struggling.

Britain’s economy is, by some calculations, the most dependent on a single urban area among the world’s most industrialized nations.

“It’s almost the definition of polarization,” said Danny Dorling, a professor of geography at Oxford University. “It’s pulling apart in a quite dramatic way.”

Policymakers are considering a range of ideas to address the imbalance. Among them is building a 43 billion-pound ($71 billion) high-speed rail network to connect London with Birmingham, Manchester and Leeds, helping the northern cities become viable alternatives for business location. Another idea is for Manchester and Liverpool to merge into a super-city that could better compete with London for investment.

The issue of economic inequality – how to get more people to share the fruits of the recovery – is of growing concern for governments around the world.

It is also central to the political fortunes of Prime Minister David Cameron, whose Conservatives are trying to broaden their base into traditional Labour Party strongholds outside southeastern Britain in hopes of winning next year’s election. The Conservatives were forced to form a coalition with the Liberal Democrats after failing to win a majority four years ago after 13 years of Labour governments.

House divided

Measured in terms of geography, Britain’s economic divide is among the widest of the seven most industrialized countries, according to figures from the Organization for Economic Cooperation and Development. London and the rest of Britain’s South East region account for about 35 percent of U.K. economic output. Only Tokyo and Paris and their surrounding regions rival London for the top spot. New York, the biggest economic center in the United States, generates just 7.3 percent of national gross domestic product. In the case of Britain and Japan, critics note the countries are smaller, making it easier for one metropolitan area to dominate.

When Mayor Boris Johnson recently suggested that London issue its own visas for international artists and technology wizards, critics only half-joked that London might take it a step further and become its own city state, like the Vatican.

That dominance translates into higher wages for workers in London as the city attracts those with skills in high demand. Londoners last year earned an average of 41,143 pounds ($68,297), 51 percent more than the national average.

The gap is even bigger in the housing market, where foreign buyers have snapped up London homes as investments rather than places to live. So vast is the demand for high-end homes that London’s skyline is changing, with glass-and-steel apartment blocks sprouting along the banks of the Thames.

Home prices in the most expensive parts of London are now almost 25 times higher than Britain’s cheapest homes, up from 10 times in 2007, according to research by the independent Smith Institute.

London-based businesses are the biggest private-sector employers in each of the U.K.’s 62 cities, according to the Centre for Cities, a think tank focused on urban issues. And London generates roughly 99 billion pounds ($164 billion) in taxes and receives 94 billion pounds ($156 billion) in government spending in return – leaving a 5 billion pound subsidy for the rest of the country.

Yet that is not translating into new jobs.

The Centre for Cities found that the capital region, which has about a quarter of Britain’s people, accounted for 80 percent of private-sector employment growth from 2010 to 2012. Northern cities like Bradford, Blackpool and Glasgow lost jobs in both the private and public sectors.

Regional shifts

It wasn’t always like this. Northern England used to be the heart of the British economy. The textile mills and coal mines fueled the Industrial Revolution and boomed with the affluence of the British Empire in Victorian times and well into the 20th century.

But globalization hit the aging industries hard. The deregulation of the financial markets in the mid-1980s touched off a boom in London that surpassed anything the others could muster. The city became one of the world’s largest financial centers, with banks that reached across the globe.

There was hope that the Great Recession would bring more balance as the government tightened regulations on the London-dominated financial industry after providing tens of billions of pounds of bailouts.

But the financial sector bounced back relatively quickly. And the crisis only magnified London’s allure as a safe place for foreigners to invest in property and an island of opportunity for professionals, entrepreneurs and artists from other European countries that are still in the economic doldrums.

Tony Travers, an expert on the capital at the London School of Economics, has likened London to a dark star — attracting all comers and swallowing investment.

“It would be better if there were other, smaller dark stars,” he said. “It would be better to have a constellation of dark stars.”