The importance of London

The Central Business District (CBD) including Canary Wharf is home to many of the capital’s core activities and businesses, including not just international finance and business, but also world-renowned retail and leisure functions. It is a business district of global standing employing one and a half million people and is also home to around 300,000 residents and a celebrated centre for culture, including theatres, museums and cinemas. This report is designed to support the development of various policy strands on Central London and is aimed at filling a gap in existing analysis. By focusing on how the various functions of the central area interact we can hopefully understand better what underpins its uniqueness and gives London’s economy dynamism.

Central London has a distinct economic geography containing a range of distinct concentrations and quarters. Notable examples are the financial district in the City of London, legal firms and functions around Holborn, retail and creative industries in the West End and higher educational institutions south of Euston. This report considers the characteristics and economic importance of these individual functions. The City is core to London’s global city role, but also crucial are the range of professional and supporting business services that have national and international linkages in their own right.

London holds a significant market share in most of the key internationally traded financial services and is home to the world’s international bond market and the London insurance market. Over the last decade it has strengthened its position relative to other financial centres, increasing its share of cross-border bank lending and foreign exchange turnover, while gaining an overwhelming share of the rapidly developing hedge fund market. Alongside the finance sector are world-class business services including legal firms, accounting and consultancy with their own distinct concentrations in and around the City of London and the West End. Together, financial and business services account for approximately 750,000 jobs – half of the total jobs based within the CBD.

The West End’s retail sector offer is unmatched anywhere in the UK, and is a major attraction to shoppers from not just the UK but all over the world. The range of theatres, museums and galleries is world-renowned, a key element of the capital’s tourist offer and a significant generator of export income.

Key to understanding the uniqueness of the CBD economy is how these various functions work in a cohesive manner. The critical mass (or agglomeration) of specialisations, including skills, knowledge, inputs and markets in the central area encourages growth and innovation. A location within the CBD is often a critical competitive advantage for a business. A ‘cross pollination’ of ideas occurs between different but interrelated business activities which enables further diversification and strengthening of the economic base. Nowhere has this been demonstrated more than in the rapid growth of London’s creative industries sector, or in the development of new financial products such as derivatives.

The process of agglomeration, competition and innovation has in some cases led to Central London ‘type’ activities developing on the fringes of these areas, resulting in the geographic extent of London’s CBD changing over time. The development of Canary Wharf can be seen from all over London, but change is also occurring in locations such as Paddington, riverside Southwark and Camden. These areas are becoming more ‘CBD like’ in the nature of the activities located there.

The opening up of international markets with globalisation and the continued economic development of emergent countries, notably India and China, throws up potential opportunities for London’s CBD. For example, the need to address the weakness of the Chinese financial system suggests opportunities for law firms and economic consultants to offer advice on regulatory reform and system architecture. In India the need for greater investment offers opportunities for London’s financial sector. London is well placed to take advantage of opportunities such as these given its concentration of world-class performing corporate financial and business services.

London is ranked as one of the world’s top business centres alongside New York. London is able to attract highly skilled and talented individuals from across the globe and this means that the diversity and quality of its workforce is at least on a par with New York and unrivalled elsewhere. Openness to foreign operators, and the regulatory and legal environments are also key factors contributing to London’s economic success.

However while progress is being made, improving the public transport network remains an ongoing challenge for all of London and particularly for the centre. A key argument that helped to secure the recent announcement of a funding package for Crossrail was how transport promotes agglomeration and productivity and this similarly applies to the Underground upgrade and Thameslink schemes. The economic primacy of the CBD means its linkages spread well beyond Greater London. Hence increasing transport capacity and reliability are key to strengthening these linkages if the central area is to fully realise its future job growth potential.

Ensuring that the CBD serves all of London cuts across a range of challenges. The concentration of employment at all levels in the centre is a potential opportunity to match workless individuals with jobs. This requires overcoming the barriers that prevent workers from entering employment and offering employers the skills and attributes they need.

Central London is a potential high profile target for terrorists as the events of July 2005 demonstrated. The Metropolitan Police continue to work with the Security Service and with Londoners themselves to combat this threat.

London’s CBD is economically vibrant and successful. Its continued success is not inevitable and depends on retaining its strengths, such as its highly skilled and talented workforce, whilst tackling those areas which could hold back its potential, such as the need for ongoing transport and other infrastructure improvements to match its growing population and employment levels.

The presence of finance and business services in the City of London is well known but Central London’s activities encompass retail, leisure, culture, art and government. It is necessary to consider the uniqueness of Central London not just in terms of each of its individual features but as a collection of inter-related specialisations with positive linkages and feedback mechanisms between them boosting the performance of all. London’s CBD is not an island – it sits as part of a wider London city-region economy. One and a half million people work in London’s CBD with the vast majority of these residing outside of the CBD’s ‘boundaries’ in the rest of London and beyond. Those boundaries have themselves changed in recent times – most notably with the development of Canary Wharf which is now a key part of London’s CBD.

Agglomeration economies explain both the existence and the economic performance of London’s CBD. These lie behind Central London’s position as the world’s leading international financial centre – and its ability to offer the widest possible choice of financial, business and professional services in a single location. These economic forces have become an increasingly fundamental asset amid the growing internationalisation of production and services characterised as globalisation. Globalisation and the progressive opening up of international markets offers increasing opportunities for London CBD-based businesses – most notably to supply finance for investment and sell a range of professional business services, but also rising tourism into London as globalisation leads to rising per capita incomes in countries such as Russia, India and China.

Agglomeration is not a static process but one where increasing the concentration of employment and businesses can be a virtuous cycle of growth and innovation. Innovation in London’s financial sector is also assisted by its relatively light touch regulation compared to New York. However the continued success of London’s CBD is not inevitable. The experience of declining employment in London and its CBD in the 1970s and half of the 1980s makes this clear. London’s CBD will only continue to thrive if the supporting infrastructure is in place to underpin its success. Transport infrastructure is key in this regard. The recent decision to go ahead with Crossrail linking Heathrow airport with London’s CBD is vital and welcome, but with employment in London’s CBD anticipated to rise from 1.5 million now to 1.9 million by 2026 further investment and improvements in public transport capacity into Central London will also be needed. As part of the wider London city-region the success of the CBD also depends on factors well beyond its ‘boundaries’; most notably, with the vast majority of CBD workers residing in the rest of London or the commuter belt beyond, the need to have a high quality of life, to attract and retain people. This requires dealing with a whole host of quality of life issues such as the cost of housing in London, the quality of public services and the public realm and the environment.

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