London and the UK economy: dynamo or Great Wen?

When @bridges_tom posted that he thought the role of London in the UK economy would be “one of the big issues for 2014” I was initially sceptical – but there seems to be gathering interest in the topic. In his post, he states that “a rest of Uk versus London narrative is unhelpful for a number of reasons” but we will have to wait for his next post for details.

David Smith of the Sunday Times looked at the same topic last Sunday. David Smith asks the question directly: is London good or bad for the rest of Britain? He goes on to answer this in three parts: does London distort monetary policy? Secondly, does London prop up other regions fiscally, or drain resources from elsewhere? Thirdly, what are the dynamic and supply-side effects of London’s dominance? Smith acquits London  on the second and third charges – London contributes much more to the Exchequer than it takes out, and Smith quotes evidence that regional growth rates are correlated with London’s, suggesting a positive link. On the first charge, Smith argues that in general, London is not guilty here either, with the exception of 1996-2007 when a high pound – driven by international capital flows into London/UK – hit manufacturing and hence many regional economies. Smith concludes that “London’s success is Britain’s success. it does, on balance, benefit the rest of the country.” He goes on to say that improved growth prospects in the regions will increase (not detract from) London’s success.

I think this last is a very important point. The UK regions are, in effect, London’s prime export markets. Stronger regional growth in the rest of the UK will  increase demand for London’s export of goods and (mainly) services, just as much as faster Eurozone, US or BRICs growth. Sir David Higgins, the new chairman of HS2, the UK’s second projected high-speed railway, made a similar point: “For London to operate as a really efficient global metropolis it needs to have the regions and the rest of the UK being complementary to it, and that is the big point.” (Times 15.01.14).

This isn’t a new discussion of course. William Cobbett in the 1820s, famously compared London to an unhealthy tumour (a ‘great wen’), draining goodness from the rest of the country:  ‘But, what is to be the fate of the great wen of all? The monster, called, by the silly coxcombs of the press, “the metropolis of the empire?” ‘  Even earlier, King James I worried about the expansion of London: ” soon London will be all England”.  But what is perhaps new (or new-ish) is the greater importance of agglomeration economies and cluster effects in an ever-more globalised economic system. Seen from this perspective, it is not only London’s size, but its differences to the rest of the UK (younger, more diverse, better educated) that are significant.This generates important political and social differences – but its effect on overall economic growth is not clear.

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