There was a lot of fuss last week when the Policy Exchange produced a report highlighting the failure of initiatives to regenerate old industrial cities in Britain’s provinces. It claimed that many of the old single-industry towns had lost their raison d’etre. Sunderland, Liverpool, Bradford, Hull, Scunthorpe and Blackpool were written off as dying cities at the end of the line, the ship-building, coal mining, steel, textiles and docks that had sustained them being long gone. Most controversially, the report suggested that the inhabitants of these unfortunate places should move to the South-East because their towns would never again be able to support even their current populations.
But in its editorial yesterday, responding to Merrill Lynch’s attempt to dodge taxes by posting its US losses in the UK, the Financial Times pointed out that London, too, is effectively a one-industry town.
Financially based cities are facing the same challenges as others that were heavily dependent on single industries did in the past. The decline of western coal-mining, shipbuilding, steelmaking and car manufacture have afflicted cities such as Leeds, Glasgow, Sheffield, Pittsburgh and Detroit.
Investment banking is not dead but it is in a cyclical downturn. It has occupied an outsized role in western economies in the past decade and is now shrinking. This cyclicality, and its tendency to make losses every few years, make it an unreliable financial partner.
At the moment, London’s status as a financial centre looks unassailable but, within living memory, people were saying the same about Bradford and textiles or Tyneside and ship-building. For most of the nineteenth century, it was said that Bradford had more millionaires than anywhere else in England. Like London today, its wealth created a class of super-rich people who built fine houses and wielded considerable political power.
The decline of Bradford took almost a century as Asian countries began to produce textiles more cheaply. A similar process affected industries like shipbuilding and steel-making, bringing about the decay of cities like Liverpool, Sunderland and Scunthorpe. These industries, though, are capital intensive. Even with cheaper labour, it takes the competition time to build up the resources, infrastructure and expertise to challenge the world leaders, which is why the decline of Britain’s industrial cities happened so slowly.
Financial services, though, are much more portable. With today’s technology, it is much easier for other cities around the world to challenge London. The banks are international organisations. They can shift their operations from one city to the next in a relatively short space of time.
The City often warns the government that London could lose its position as a world financial centre. Usually, it’s a tactic to scare politicians away from raising taxes or tightening regulation. But I wonder, even if London remains a low-tax low regulation environment, how long its top-dog status will last.
Much of the reason for London’s pre-eminence is historic. It was at the centre of largest trading empire the world had ever seen. It was natural that finance and trade flowed through London. The balance of economic power in the world is shifting away from Europe and North America and towards Asia. If most of the people with money to invest and most of the companies in which to invest it are in Asia, isn’t it probable that financial services firms will start to base themselves there too?
In a speech last year, the Vice Chairman of Standard Chartered Bank quoted the following figures:
Twenty years ago just 10% of manufactured goods came from developing and emerging markets; in ten years time the figure could be as high as 50%. This increased activity is feeding across into the financial markets. While European exchanges increased their market share by 30% last year, Asian exchanges doubled their share. In 2005 and 2006, five of the eight largest emerging market IPOs came from China and all took place in Hong Kong. In Singapore 62% of all IPOs in 2006 came from foreign issuers compared with just 1% in 2002. Both New York and London face some natural erosion in market share as wider economic forces prompt Asian markets to grow even faster in the years ahead.
In future, if most of the world’s economic activity were to move to Asia, why would the world’s financial centre still be based on a small, rainy island off the coast of Europe.
One day, and it might be sooner than we think, London’s skyscrapers may look as out-of-time as Bradford’s satanic mills do now. Weeds might grow between the pavements of a near-deserted Canary Wharf; a few of the old banking buildings turned into art galleries or tourist attractions while the rest act as outposts for companies whose main business is in Bombay or Shanghai.
Like all single-industry towns, London will have to learn to apply its skills to other things if it is to avoid the fate of Bradford, Liverpool and Sunderland.