speri.comment: the political economy blog

The City of London and Britain’s uneven development

If the City’s prosperity is not made to work for all, then the break-up of Britain may be unavoidable

Jeremy Green, Lecturer in International Political Economy, University of Cambridge, SPERI Honorary Research Fellow

Jeremy GreenWe need to talk about the City of London.  It is driving some of the most damaging trends in Britain today.  Think of the staggeringly uneven distribution of wealth and income and the spatial contours on to which this is mapped.  You will not get far putting the puzzle together without thinking about the City’s role as the most important piece within it.

But what is the City of London?  The ‘City of London’ is a symbol for the spatial zones in which the financial services industry operates.  It can no longer be thought of in the traditionally confined manner of the ‘Square Mile’, but must now incorporate the gleaming towers of Canary Wharf, where many of the City’s contemporary financial power-houses are based.  It is an entrepôt centre: a spatial zone through which international commercial flows of trade and credit are mediated.  It is the City of London, in short, that provides the entry point for the global forces that drive much of Britain’s growing socio-economic unevenness.

The City absorbs vast flows of capital – from the ill-gotten gains of Russian oligarchs to the vast surpluses hoarded by oil-rich states and Sheikhs. Its role in mediating these flows and providing a wide array of related services undoubtedly brings benefits for London as a whole, as well as other parts of Britain and their citizens.  These activities contribute a large amount to Britain’s GDP (14% in 2010) and have helped maintain the wider role of London as Britain’s economic engine.  As global capital flows in, so too do ambitious young minds from the peripheral regions of Britain, as well as workers from further afield.  They are attracted by London’s high salaries and its prospects of upward mobility.  London as a whole (including more than simply financial services) is now estimated to account for 19% of jobs, 21% of businesses and 25% of Britain’s economic output.

There is, however, a second, more specific and well-defined, meaning to the City.  It refers to the City of London Corporation, a political authority responsible for jurisdiction over part of London and for representing the interests of the financial services industry as a whole.  It has been aptly described as an ‘ancient, semi-alien entity lodged inside the British nation state’. Over the centuries it has won unique freedoms and exclusions from British law that render it different from every other local authority in Britain – working beyond rather than under the authority of parliament.  Unlike other authorities, voting rights are not confined to individuals, but include businesses too.  Its financial resources are also unparalleled.  In 2013, it publicly announced, for the first time and in response to pressure from ‘Occupy London’, a cash balance of over £1.3 billion.  More importantly, it is at the heart of a huge web of ‘offshore’ tax havens and financial centres that incorporate peripheral centres such as Jersey and the Cayman Islands, parts of Britain’s overseas territories and crown dependencies.

This vast offshore infrastructure forms a web that is used to draw capital flows into different bits of the City of London.  Beyond generating commission earnings and fees, these flows drive price inflation and push many of the City’s original inhabitants out of London.  It is the reason that the market for London office-space has become one of the world’s most globalised property markets, with foreign ownership standing at a remarkable 52% in 2011 despite the global financial crisis.  Its darker side is exemplified by the current scandal surrounding the American-owned Westgate property investment group, which is threatening to hike up rents dramatically for tenants of a North London housing estate.

Beyond such cases, the City’s role poses grave challenges to Britain more generally.  It has been calculated that, from the late 1990s, a staggering 60% of increased income has gone to financial-sector workers – and this despite the fact that they have formed only around 5% of the workforce.  Within this process bonus payments were by far the most important contributor, driving the growth of extreme wage inequality in Britain.

If we think about the neoliberalisation of Britain’s political economy and the associated growth in inequality, then it’s London that has been the principal site for the production and reproduction of this process, transmitting these effects into broader national patterns of uneven development.  These, in turn, are rooted in vastly differential earnings potentials and the re-routing of public sector expenditure that effectively ‘picks winners’ in terms of Britain’s regional development.  The pre-eminence of the City within global financial markets is reinforced by its prevalence within the British state, as characterised by the longstanding dominance of the City-Bank-Treasury nexus within the formulation of economic policy.

Yet there is nothing natural or inevitable about the City’s continued elevated standing within the wider British political economy; it owes much to the lobbying and financial power of the City of London Corporation and the active support for the City’s financial services industry received from key state institutions and agencies.  This unparalleled institutional power behind the City is deepening uneven development across Britain, with the emasculated post-industrial regions no longer able (if ever they were) to provide counter-balances to City hegemony.  Thus, whilst Newcastle groans under the weight of swingeing austerity, London continues to absorb the vast bulk of public investment: a staggering 24 times as much per head than the North-East.

Clearly, when it comes to Britain’s public expenditure strategy, we are not ‘all in this together’.  There are now effectively two growth models in Britain: one for London, endowed with enormous institutional support and huge commitments of public resources; and one for the rest, bereft of a powerful institutional basis and deprived of the vital oxygen of investment.

The political consequences of this unevenness are manifold: the Scottish referendum was driven at least in part by growing cultural alienation from the neoliberal epicentre of London and the predilections of a political elite entangled with the interests of City finance.  Simply put, the growing calls for devolution emanating from the North of England and the fragmentary tendencies emerging within Britain as a whole cannot be understood in isolation from the political, socio-economic and ideological consequences of London’s status as a citadel of prosperity and the focus of a culture of aspirational mobility within an island of relative stagnation.

For the future of Britain, a great deal therefore hinges upon the role of the City.  If it is not made to work for Britain as a whole, then the gap between winners and losers, between the regions of plenty and those of misery, will likely widen to a point where pressures for sovereign dissolution become irrepressible.  Challenging the City’s sovereign privileges may be the only way to avert the break-up of Britain.

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Categories: Economics, Finance, Inequality, SPERI Comment | Leave a comment

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