Sustaining and

Enhancing Londons
Leadership Position
Venkie Shantaram
Partner
McKINSEY GLOBAL INSTITUTE
Presentation to the LSE
March 2012
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

The McKinsey Global Institute (MGI) An overview

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Founded in 1990 as McKinseys business
and economics research arm

MGI research combines the disciplines of

economics and management

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understand the broad macroeconomic forces
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Research is funded by the partners of

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| 2

MGIs core research areas

McKinsey Global Institute

Productivity
and growth

Urbanization

Global capital
markets

The future
of work

Technology
and innovation

Resources

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| 3

MGIs report Urban World highlighted the importance of 600 cities in

driving future global growth
Today

1.5 billion people live in the top 600 cities 22 percent of

global population
$30 trillion of GDP in 2007 more than half of global GDP
485 million households, with average per capita GDP of
$20,000
$21 trillion of GDP in 2007 generated by the top 100 cities

Tomorrow

2.0 billion people will live in these 600 cities in 2025 25

percent of the global population
$64 trillion of GDP in 2025, nearly 60 percent of global GDP
735 million households will live in these cities, with average per
capita GDP of $32,000
235 million households in developing world cities will have
income above $20,000 per annum

1 The 600 are the top cities by contribution to global GDP growth from 2007 to 2025.
SOURCE: Urban world: Mapping the economic power of cities, McKinsey Global Institute; McKinsey Global Institute
Cityscope 1.0

McKinsey & Company

| 4

Successful cities will be the key to future economic growth in the UK

of English GDP growth from urban areas in last 10

78% share
years

73% share of English population living in urban areas

26% local government share of public sector expenditure
81% of central government targets are on local spending
SOURCE: ONS, DEFRA, CLG Local Government Financial Statistics England 2010, Barker Review,

McKinsey & Company

| 5

Key messages

London is one of the worlds great cities

An economic and cultural powerhouse
It has the potential to remain so, and generate
significant economic growth over the next 20 years
However, there are potential threats to Londons
pre-eminence
A clear strategy for London would increase the
chances of it achieving its full potential

McKinsey & Company

| 6

London is the third largest city in the world by GDP

Grey italic text Developing regions

2007 city rankings

Normal text Developed regions1

GDP2

Total population

Children3

Total households

Households with
annual income over
$20,0004

1
2

Tokyo

Tokyo

Mexico City

Tokyo

Tokyo

New York

Mumbai

Mumbai

Osaka

Osaka

London

Mexico City

Karachi

New York

New York

Paris

Sao Paulo

Kolkata

Shanghai

London

Los Angeles

Osaka

Tokyo

London

Rhein-Ruhr

Osaka

New York

Sao Paulo

Beijing

Paris

Chicago
Rhein-Ruhr
Nagoya
Randstad
Milan
Washington, D.C.
Houston
Dallas
Philadelphia
Belgian central metro
San Francisco
Boston
Moscow
Sao Paulo
Madrid
Mexico City
Atlanta
Miami
Rhein-Main

Shanghai
Kolkata
Beijing
Delhi
Chongqing

Dhaka
Delhi
New York
Kinshasa
Manila
Lagos
Buenos Aires
Cairo
Chongqing
Los Angeles
Istanbul

Sao Paulo
Rhein-Ruhr
Chongqing
Paris
Mumbai
Mexico City
Los Angeles
Moscow
Seoul
Buenos Aires
Delhi
Kolkata
Rio de Janeiro
Chicago
Nagoya
Milan
Tianjin
Istanbul
Randstad

Los Angeles
Moscow
Chicago
Nagoya
Mexico City
Seoul
Milan
Randstad
Istanbul
Fukuoka
Philadelphia
Taipei
Sao Paulo
Hong Kong
Miami
Dallas
Washington, D.C.
Madrid
Belgian central metro

Rank

8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

London
Dhaka
Buenos Aires
Los Angeles
Karachi
Paris
Manila
Rio de Janeiro
Rhein-Ruhr
Istanbul
Cairo
Moscow
Seoul
Bangkok

London
Osaka
Lahore
Rio de Janeiro
Paris
Baghdad
Jakarta
Lima

1 Developed regions comprise the United States and Canada, Western Europe, Australasia, Japan, and South Korea
2 GDP 2007 in predicted real exchange rate
3 Population below age 15
4 Households with annual incomes greater than $20,000 in purchasing power parity (PPP) terms
5 Mexico City Metropolitan Region
NOTE: For metropolitan regions, we use the first name of the region: e.g., New York for New York-Newark

SOURCE: McKinsey Global Institute Cityscope 1.3

McKinsey & Company

| 7

 and the largest in Europe

Grey italic text Eastern Europe

2007 city rankings

Normal text Western Europe

GDP

Total population

Share of retirees1

Children

Households with
annual income over
$70,000

London

London

Trieste

London

London

Paris

Paris

Genoa

Paris

Paris

Rhein-Ruhr

Rhein-Ruhr

Chemnitz

Rhein-Ruhr

Rhein-Ruhr

Randstad

Milan

Ravenna

Randstad

Milan

Milan

Randstad

Livorno

Milan

Randstad

Belgian central metro

Madrid

Parma

Madrid

Madrid

Madrid
Rhein-Main
Munich
Barcelona (ESP)
Rome
Vienna
Hamburg
Stuttgart
Lille
Athens
Stockholm
Birmingham
Oresund
Oslo
Dublin
Rhein-Neckar
Berlin
Noord
Venice

Barcelona (ESP)
Belgian central metro
Upper Silesian metro
Lille
Rhein-Main
Athens
Rome
Naples
Berlin
Vienna
Munich
Warsaw
Stuttgart
Hamburg
Birmingham
Budapest
Lisbon
Rhein-Neckar
Venice

Salamanca
Florence
Perugia
Lubeck
Nice
Turin
Leipzig
Rostock
Oviedo
Hannover
Toulon
Dresden
Braunschweig
Modena
Burgos
Limoges
Bremen
Kassel
Corunna

Lille
Belgian central metro
Barcelona (ESP)
Naples
Upper Silesian metro
Rhein-Main
Birmingham
Rome
Athens
Vienna
Munich
Stuttgart
Manchester
Budapest
Warsaw
Hamburg
Lisbon
Noord
Liverpool

Barcelona (ESP)
Rhein-Main
Athens
Munich
Rome
Lille
Vienna
Stuttgart
Birmingham
Belgian central metro
Rhein-Neckar
Luxembourg
Venice
Gelderland
Manchester
Hamburg
Noord
Stockholm
West Yorkshire

Rank

7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

1 Share of population aged 65 and above.

2 Households with annual incomes greater than 70,000 in PPP terms.

SOURCE: McKinsey Global Institute Cityscope 1.3

McKinsey & Company

| 8

The 3 largest economies in Europe have different profiles

UK is unusually dependent on London

Small cities & Rural areas

Middleweights
Top city

Number of cities

Share of GDP
%

Share of population
%

Per capita GDP gap to country

Indexed, country = 100

43
31

33

46
49

29
15

United
France
Kingdom

Germany

24

33

44

18

14

United
France
Kingdom

Germany

United France
Kingdom
33

SOURCE: McKinsey Global Institute Cityscope 1.2

26

Germany
29

McKinsey & Company

| 9

In terms of growth, while London outpaced the UK comfortably,

Paris and Rhein-Ruhr were unable to outpace middleweights
Share of country GDP growth 2000-07 by city type
%

United Kingdom

France

2.5
22

Middleweights

1.6

2.3
Middleweights
(examples):
Birmingham
Manchester

2.2

33

1.7

Middleweights
(examples):
Lyon
Lille

2.0

40

46

3.0

Middleweights
(examples):
Munich
Stuttgart

Paris
29

1.9

Rhein-Ruhr
14

SOURCE: McKinsey Global Institute Cityscope 1.2

1.7

1.5

London
39

Megacities

Germany
1.8

38

39

Small cities & Rural areas

CAGR, 2000-07, %

1.5

McKinsey & Company

| 10

Key messages

London is one of the worlds great cities

An economic and cultural powerhouse

It has the potential to remain so, and generate

significant economic growth over the next 20 years
However, there are potential threats to Londons
pre-eminence
A clear strategy for London would increase the
chances of it achieving its full potential

McKinsey & Company

| 11

Top 25 hot spots in 2025 from MGI Cityscope

Grey italic text Developing regions

2025 city rankings

Normal text Developed regions1

GDP2

GDP growth
2007-25

Total
population

Children3

Total
households

Households with
annual income over
$20,0004

1
2

Tokyo
New York

Shanghai
Beijing

Tokyo
Mumbai

Kinshasa
Karachi

Tokyo
Shanghai

Tokyo
Osaka

London

Shenzhen

Shanghai

Lagos

Beijing

New York

Guangzhou
Tianjin
Chongqing
Los Angeles
New York

Beijing
Delhi
Calcutta
Mexico City5
So Paulo

Mumbai
Dhaka
Calcutta
Mexico City5
Delhi

Chongqing
Osaka
New York
Mumbai

London

5
6
7
8

Los Angeles
Shanghai
Paris
Beijing
Osaka

London

Beijing
Shanghai
Paris
Rhein-Ruhr

9
10
11
12

Rhein-Ruhr
Chicago
So Paulo
Shenzhen

So Paulo
Wuhan
Moscow
Shenyang

Dhaka
Chongqing
New York
Karachi

Manila
Tokyo
New York
Los Angeles

So Paulo
Delhi
Paris
Lagos

Los Angeles
So Paulo
Moscow
Mexico City5

13

Moscow

London

Osaka

So Paulo

Rhein-Ruhr

Seoul

14

Houston

Hangzhou

London

Cairo

Mexico City5

Nagoya

15
16

Dallas
Guangzhou

Chengdu
Singapore

Lagos
Manila

Lahore
Buenos Aires

Calcutta
Tianjin

Chicago
Milan

17
18
19
20
21
22
23
24
25

Washington, D.C.

Dallas

Kinshasa

London

Shenzhen

Mumbai

Tianjin
Randstad
Mexico City5
Seoul
Nagoya
Singapore
Hong Kong
Atlanta

Nanjing
Tokyo
Foshan
Bangkok
Istanbul
Paris
Houston
Seoul

Los Angeles
Shenzhen
Buenos Aires
Cairo
Istanbul
Paris
Tianjin
Bangkok

Baghdad
Kabul
Luanda
Istanbul
Khartoum
Paris
Nairobi
Dar es Salaam

Hangzhou
Chengdu
Los Angeles
Moscow
Wuhan
Dhaka
Buenos Aires
Seoul

Istanbul
Hong Kong
Dallas
Randstad
Bangkok
Shenzhen
Taipei
Houston

Rank

1 Developed regions comprise the United States and Canada, Western Europe, Australasia, Japan, and South Korea.
2 GDP 2007 to 2025 in predicted real exchange rate.
3 Population below age 15.
4 Households with annual incomes greater than $20,000 in purchasing power parity (PPP) terms.
5 Mexico City Metropolitan Region.
NOTE: For metropolitan regions, we use the first name of the region: e.g., New York for New York-Newark.

SOURCE: McKinsey Global Institute Cityscope 1.3

McKinsey & Company

| 12

London is expected to both grow substantially

in absolute size and increase its GDP/Capita
above the European median

Small middleweights (<2 mn inhabitants)

Mid-sized middleweights (2-5 mn inhabitants
Large middleweights (5-10 mn inhabitants)
Megacities (>10 mn inhabitants)

GDP/Capita growth 2007-25

USD 000

Bubble size indicative of GDP/Cap, 2007

Oslo

Munich

Rhein-Ruhr
Randstad
London
Paris

Median=9.5

Milan
Madrid
Barcelona

100

1,000

NOTE 1: Only European Cities shown

NOTE 2: All figures relate to real exchange rate calculations

SOURCE: McKinsey Global Institute Cityscope 1.3

10,000

100,000

1,000,000
GDP growth 2007-25
USD million

McKinsey & Company

| 13

 the growth rate figures are in the mid tier of even the largest cities due
to Londons high initial size
GDP 2007
USD billion
Warsaw

GDP growth rate, 2007-25

Percent CAGR

112

Budapest

5.2%

66

Upper Silesian metro

3.9%

52

3.7%

Munich

115

Hamburg

2.5%

87

Rhein-Neckar

2.4%

59

Rhein-Ruhr

215

Stuttgart

68

Rhein-Main

96

Berlin

47

Vienna

65

Randstad

233

Manchester

25

4.0%

Upper Silesian metro

3.5%

Budapest
Stuttgart

2.2%

Rhein-Ruhr

2.2%

2.2%

Rhein-Main

2.0%

2.1%

Rhein-Neckar

1.9%

2.0%

Munich

1.8%

2.0%

Hamburg

1.7%

1.9%

Berlin

1.6%

1.8%

1.3%

Vienna

1.2%

1.6%

Lille

1.2%

1.6%

Belgian central metro

1.0%

1.5%

300

Paris

5.1%

Warsaw

Randstad

91

London

GDP/Cap growth
rate, 2007-25
Percent CAGR

1.7%

128

Belgian central metro

GDP/Cap 2007
USD 000

Paris

0.9%

1.2%

London

0.9%

Lille

37

1.2%

Manchester

0.7%

Barcelona (ESP)

42

1.1%

Birmingham

0.6%

1.0%

Lisbon

0.5%

0.9%

Athens

0.2%

0.9%

Venice

0.2%

Birmingham

27

Madrid
Lisbon

44
14

Milan
Venice

43
12

0.6%

Naples

0.2%

0.6%

Rome

0.2%

Rome

17

0.5%

Milan

0.2%

Athens

12

0.5%

Barcelona (ESP)

0.1%

Naples

Madrid

0.1%

0.2%

NOTE 1: Only European Megacities, large- and midsized middleweights shown

NOTE 2: All figures relate to real exchange rate calculations

SOURCE: McKinsey Global Institute Cityscope 1.3

McKinsey & Company

| 14

Key messages

London is one of the worlds great cities

An economic and cultural powerhouse

It has the potential to remain so, and generate

significant economic growth over the next 20 years

However, there are potential threats to

Londons pre-eminence
A clear strategy for London would increase the
chances of it achieving its full potential

McKinsey & Company

| 15

Potential threats to Londons pre-eminence

Reduced open-ness to skilled immigrants and international students
Loss of competitiveness in global financial services due to super-equivalent
regulation
Restrictions on Londons physical expansion
Reduced attractiveness as a HQ location due to poor infrastructure,
uncompetitive tax regimes and restrictions on skilled immigration
Under-investment in Londons cultural and artistic heritage a major driver of
quality of life and essential to under-pin its attractiveness to global talent
Under-investment in primary, secondary and tertiary education in London

McKinsey & Company

| 16

Despite the crisis, London remains the leading international financial

centre
2006

Financial services contribute 3-6X more to the overall balance of payments in the UK than they do in other countries
EUR billions

UK

Luxembourg

Switzerland

Financial services net

exports
EUR billions

Ireland

US

Banks

Securities dealers

Fund Managers

Baltic Exchange

Insurance

Other financial services

CAGR1 %
0005
9

50,557
41,849

40,426
29,893
24,914 26,692
24,283
22,195
15,784 19,307
15,881

1999 2000

01

02

03

Germany

04

1 Compounded Annual Growth Rate

05

06

07

08

Japan

France

Hong Kong

14

24

-10

52

-7

-11

20

38

2009

2008

Mexico

Spread earnings

Contribution of Banks to
financial services net exports
EUR billions

FISIM2

31,049

18,265

1999 2000

13,148 14,929
12,150
8,754 9,559

01

02

03

04

Fee
income
Other exports

05

06

07

0005
16

0509
14

28

16

18

19

12

12

-15

25,336

24,431

6,841 6,958

China

CAGR1 %

0509
15

16

2007

08

2009

2 FISIM stands for Financial Intermediation Services Indirectly Measured

SOURCE: ONS Balance of Payments Pink Book, IMF, The CityUK research

McKinsey & Company

| 17

Multiple factors drive Londons competitive success

Stable
legal
framework

Culture of
innovation
Magnet for
global talent

Strong arts
and culture

Benign
corporate
tax rates

Historically
predictable
tax regime

Low crime
rate
Open
migration

People
and
culture
Cost of
living

Overall
context

English
speaking

Noninvasive
approach of
tax
authorities

Openness
to foreign
ownership

Deep local
talent pool

Distinctive
professiona
l services

Primary
international
transport
hub

Leading, but
unsupportive
financial
media

System
and
services
Robust
technology
infrastructure/
future
capacity

Commercially
minded
employment
laws

Favourabl
e personal
tax rates

Regulatory
system
and
reputation

Must visit
road-show
destination

Proximity to
eurozone
Extensive
transport
network

Cutting edge
sophisticated
complex
client needs

Global centre
for research
Welcome
to foreigners

Customer
cluster

Time
zone
bridging
US and Asia

Strong ties
to US

Global client
base

London retains top position in the Global Financial Center Index for 2010
Source: Clusters and the New Economics of Competition (Michael Porter)

McKinsey & Company

| 18

However, the outlook is worrying on several factors

Competitiveness increasing
Competitiveness flat

Stable
legal
framework

Culture of
innovation
Magnet for
global talent

Strong arts
and culture

Benign
corporate
tax rates

Competitiveness decreasing
Historically
predictable
tax regime

Low crime
rate
Open
migration

People
and
culture
Cost of
living

Overall
context

English
speaking

Non-invasive
approach of
tax
authorities

Openness
to foreign
ownership

Deep local
talent pool

Distinctive
professiona
l services

Primary
international
transport
hub

Leading, but
unsupportive
financial
media

System
and
services
Robust
technology
infrastructure/
future
capacity

Commercially
minded
employment
laws

Favourabl
e personal
tax rates

Regulatory
system
and
reputation

Must visit
road-show
destination

Proximity to
eurozone
Extensive
transport
network

Cutting edge
sophisticated
complex
client needs

Global centre
for research
Welcome
to foreigners

Customer
cluster

Time
zone
bridging
US and Asia

Strong ties
to US

Global client
base

London retains top position in the Global Financial Center Index for 2010
Source: Clusters and the New Economics of Competition (Michael Porter)

McKinsey & Company

| 19

Key messages

London is one of the worlds great cities

An economic and cultural powerhouse

It has the potential to remain so, and generate

significant economic growth over the next 20 years
However, there are potential threats to Londons
pre-eminence

A clear strategy for London would increase

the chances of it achieving its full potential

McKinsey & Company

| 20

5 levers provide a common architecture to identify opportunities

for economic growth
Concentrations of
industries, functions,
and occupations

4 Physical
and virtual
infrastructure

Talent production,
attraction, retention,
and matching to jobs

1
Economic
sectors/
clusters

Enablers
5 Public
and civic
institutions

2
Human
capital

Linkages and
movement of goods,
people, and information

Innovation
and entrepreneurship

Government efficiency
and efficacy
Business environment
Tax value proposition

Innovation performance
Entrepreneurial ecosystem

Source: Team economic development plans; Brookings Metropolitan Policy Program, Chicago Plan for Growth

McKinsey & Company

| 21

Priorities for Londons economic development

Preserving Londons role as the leading

international financial centre
Expanding leadership in professional and
business services
Maintaining leadership in creative industries
Building on early success in High Tech and
bio science

Remaining open to skilled immigration

Building on Londons great universities
as knowledge factories and magnet for
international talent
Expanding affordable housing
Providing more rented accommodation
for young citizens

1
4 Physical
and virtual
infrastructure

Economic
sectors
and
clusters

Human
capital

Continued
leadershi
p

3
5 Public
and civic
institutions

Allowing London to expand

rethink green belt policy
Building more airport capacity
Investing in public transport
infrastructure
Eliminating road bottlenecks
through road-pricing and usage
taxes

Innovation
and entrepreneurship

Openness to global talent

Priorities
Creative industries
Tourism
Bioscience
High tech
Prof & Business Services
Financial services

Stronger decision rights for

London, as part of decentralisation of power in the UK to
cities
Investment in arts and culture, and
public spaces
Equitable distribution of planning
gains to encourage development
and reduce local taxes

McKinsey & Company

| 22

Sustaining and
Enhancing Londons
Leadership Position
Venkie Shantaram
Partner
McKINSEY GLOBAL INSTITUTE
Presentation to the LSE
March 2012
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited