London 2062: The Future of the London Economy

Jurgen Essletzbichler

Department of Geography

UCL

j.essletzbichler@ucl.ac.uk

Overview

• What makes cities grow? • What to do when confronted with uncertainty? • London’s economy now• Why growth is not enough? • How to develop a resilient and inclusive city?

What makes cities grow?

• Basic ideas go back to Alfred Marshall (1890) and Jane Jacobs (1969)

• Urbanization and localization economies• Externalities

– Specialization (Marshall-Arrow-Romer or MAR)– Competition (Porter)– Diversity (Jacobs)

• Path-dependent evolution at the intersection of novelty creation and lock-in

Externalities: Empirical results based on meta-analysis

Source: De Groot, H., Poot, J., Smit, M (2010) Cities and Growth: A Meta-Analysis

Diversity necessary to maintain adaptive capacity to uncertain future challenges

• Results depend on geography, time frame, choice of dependent variable, included control variables, etc.

• But: Studies focusing on long-run tend to result in positive and significant diversity effect

• This suggests portfolio-effect of diversity necessary to maintain the adaptive potential of an entity facing uncertainty (Stirling 1998; 2007)

• But probably at cost of short-term efficiency gains and innovativeness

• Possible solutions? Related diversity, clustered diversity, …(Frenken et al. 2007; Simmie et al. 2006, Neffke et al. 2011)

Related variety arguments

• New industries are most successful if cities branch into sectors that are related to existing knowledge base

• Branching into identical sectors results in lock-in• Branching into very different sectors impedes

spillovers

London’s economic structure, 2010

Source: ONS briefing note, BRES 2010: London

thousands PercentInner L. Outer L. UK Inner L. Outer L. UK LQ IL LQ OL

Primary and utilities 11.5 14.6 882 0.4 0.9 3.1 0.13 0.29Manufacturing 42.6 73.7 2,445 1.6 4.3 8.6 0.19 0.50Construction 64.3 85.3 1,395 2.4 5.0 4.9 0.49 1.02Wholesale 69.8 104 1,687 2.6 6.1 5.9 0.44 1.03Retail 191.1 188.1 2,955 7.2 11.1 10.3 0.70 1.08Transport & Storage 85.6 132.6 1,263 3.2 7.8 4.4 0.73 1.77Accommodation &Food Services 203.5 104.2 1,895 7.7 6.1 6.6 1.17 0.92Information & Communication 236.7 81.6 1,066 9.0 4.8 3.7 2.43 1.30Finance & Insurance 295 40.6 1,062 11.2 2.4 3.7 3.03 0.65Property 69.8 29.2 456 2.6 1.7 1.6 1.63 1.06Professional, Scientific & Technical 429.4 128 2,092 16.3 7.5 7.3 2.23 1.03Business Admin Services 262.4 189 2,217 10.0 11.1 7.8 1.28 1.42Education 160.3 169.9 2,603 6.1 10.0 9.1 0.67 1.10Health 213.3 190.5 3,678 8.1 11.2 12.9 0.63 0.87Public Admin 149.7 84.7 1,571 5.7 5.0 5.5 1.04 0.91Arts & Other Services 151.5 83 1,328 5.7 4.9 4.6 1.24 1.07Total 2,636.50 1,699.00 28,595.00 100.00 100.00 100.00

Source: ONS briefing note, BRES 2010: London

Finance jobs

2526272829303132333435

De

c-9

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7

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9

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1

De

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3

De

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5

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7

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9

Finance

Banking

Insurance, auxilliary

London as percent of UK

100000

150000

200000

250000

300000

350000

400000

De

c-9

5

De

c-9

7

De

c-9

9

De

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1

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3

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5

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7

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c-0

9

Employment trends, London

2

3

4

5

6

7

8

9

10

Dec

-95

Dec

-97

Dec

-99

Dec

-01

Dec

-03

Dec

-05

Dec

-07

Dec

-09

Percentage of total London emp.

Source: Nomis, ONS

Result on inequality

Because of it’s economic structure, income inequality more pronounced in London

In addition: over 20% youth unemployment rate (especially among those without formal education)

Spatial inequality: Median household income 2006

Source: ONS

Usual practice

• Provide better education for individuals (human capital theory)

• Make individuals responsible to get jobs• Vilify those that fail • Gentrification as “solution” at borough level to initiate inflow

of “desirable” and outflow of “undesirable” residents• But: why not providing jobs for those without formal

education and re-value skills not based on university degrees?

• This could improve adaptability and reduce inequality (especially if coupled with bold re-distributive policies)

Diversification into related sectors

• Example: use I-O matrices to identify– Relatedness (which sectors require inputs that are

available in London)– Similarity of input structure of sectors may indicate

greater knowledge spillover potential

Relatedness based on industry input requirements

Demand from Manufacturing

LondonLQ>1

FinanceBanking

Renting ofmachinery

Dot meansColumn Industry requires>2% of totalInput from Row industry

Advertising,Management consultancy, architecture services

Bottom line

• Even if London does not have a competitive advantage in manufacturing at the moment, it has competitive advantages in some key inputs for a large number of manufacturing sectors

• Not all of those will require proximity of manufacturing companies to those services, but supplier-customer relations could be used to build up a manufacturing base (eg. financing green energy technology, flexible solar cells to be draped around skyscrapers, etc.)

• The service firms would get a better understanding of novel manufacturing sectors to make informed investment decisions

• Manufacturing companies obtain information about financing…

Normatively driven diversification

• Urban agriculture (example New York)

• Vertical gardens (example Mexico City)

Source: NYT• Development of energy

visions (eg. hydrogen city)

• Housing and transportation systems are obvious places to start

Complementary measures

• London tax so companies contribute to infrastructure development (could be in form of required investment in particular businesses)

• Developing local visions (eg. energy visions) to galvanize businesses, government and local communities around particular themes

• Increase awareness of energy/waste/climate issues in primary schools (to obtain long-term shifts in attitudes) and sell the strategy to companies (probably in conjuncture with carbon disclosure projects but also through participation in visioning process)

• Increase living wage and penalize companies who do not comply• Higher tax rates on incomes/bonuses (75-90% rates were common

during and after WWII)• Together with well paid jobs for non-university educated this could

lead to a re-appreciation of diverse skill sets

Conclusion

• An unknowable future requires economic diversity to increase/maintain the adaptive potential of a city (this would also increase resilience)

• Gradual diversification into related sectors and/or normative targets around local visions possible– Outer London is probably better positioned to attract manufacturing

activity

• Could increase jobs for the less formally educated and, together with fairer tax structure, could result in re-evaluation of diverse skills sets

• Economic survival, equality and inclusive development are not mutually exclusive

Appendix: London’s economic structure: SIC-2-digit level

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

01 :

Cro

p an

d an

imal

pro

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02 :

For

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al o

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arry

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09 :

Min

ing

supp

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ce a

ctiv

ities

10 :

Man

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ture

of f

ood

prod

ucts

11 :

Man

ufac

ture

of b

ever

ages

12 :

Man

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ture

of t

obac

co p

rodu

cts

13 :

Man

ufac

ture

of t

extil

es14

: M

anuf

actu

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f wea

ring

appa

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15 :

Man

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of l

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nd r

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rodu

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17 :

Man

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aper

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pap

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and

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30 :

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32 :

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33 :

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air/

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of m

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59 :

Mot

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Pro

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and

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and

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activ

ities

72 :

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and

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73 :

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and

mar

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75 :

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activ

ities

77 :

Ren

tal a

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asin

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: E

mpl

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ent a

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ities

79 :

Tra

vel a

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pera

tor

80 :

Sec

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and

inve

stig

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tiviti

es81

: S

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to b

uild

ings

and

land

scap

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tiviti

es82

: O

ffice

adm

in,

busi

ness

sup

port

act

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es84

: P

ublic

adm

inis

trat

ion

and

defe

nce

85 :

Edu

catio

n86

: H

uman

hea

lth a

ctiv

ities

87 :

Res

iden

tial c

are

activ

ities

88 :

Soc

ial w

ork

activ

ities

with

out a

ccom

mod

atio

n90

: C

reat

ive,

art

s an

d en

tert

ainm

ent a

ctiv

ities

91 :

Libr

arie

s, a

rchi

ves,

mus

eum

s 92

: G

ambl

ing

and

betti

ng a

ctiv

ities

93 :

Spo

rts

activ

ities

, am

usem

ent,

recr

eatio

n ac

t.94

: A

ctiv

ities

of m

embe

rshi

p or

gani

satio

ns95

: R

epai

r of

com

pute

rs, p

erso

nal,

HH

goo

ds96

: O

ther

per

sona

l ser

vice

act

iviti

es

Location quotients

Agriculture/mining

Manufacturing

Electr/Gas supply

Waste

Airtransport