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Sustaining and Enhancing London’s 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. MGI location.

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Sustaining and Enhancing London’s Leadership Position


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    1. Sustaining and Enhancing London’s 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

    2. MGI location Overview MGI mission and aspirations • Founded in 1990 as McKinsey’s business and economics research arm • MGI research combines the disciplines of economics and management • Micro-to-macro methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy • Research is funded by the partners of McKinsey independent from any business, government, or other institution • Help leaders in the commercial, public, and social sectors develop a deeper understanding of the evolution of the global economy • Provide a fact-base that contributes to decision-making on critical management and policy decisions • Focus on long-term fundamental research and maintain very high standards of peer review and intellectual rigor in its work The McKinsey Global Institute (MGI) – An overview

    3. McKinsey Global Institute Productivity and growth Urbanization Global capital markets The future of work Technology and innovation Resources MGI’s core research areas

    4. MGI’s 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

    5. 10 78% share of English GDP growth from urban areas in last 10 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 Successful cities will be the key to future economic growth in the UK SOURCE: ONS, DEFRA, CLG Local Government Financial Statistics England 2010, Barker Review,

    6. Key messages London is one of the world’s 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 London’s pre-eminence A clear strategy for London would increase the chances of it achieving its full potential

    7. Grey italic text Developing regions Normal text Developed regions1 London is the third largest city in the world by GDP 2007 city rankings Households with annual income over $20,0004 Rank GDP2 Total population Children3 Total households Tokyo Tokyo Mexico City Tokyo Tokyo 1 2 New York Mumbai Mumbai Osaka Osaka London 3 Mexico City Karachi New York New York 4 Paris Sao Paulo Kolkata Shanghai London 5 Los Angeles Osaka Tokyo London Rhein-Ruhr 6 Osaka New York Sao Paulo Beijing Paris 7 Chicago Shanghai Dhaka Sao Paulo Los Angeles 8 Rhein-Ruhr Kolkata Delhi Rhein-Ruhr Moscow 9 Nagoya Beijing New York Chongqing Chicago 10 Randstad Delhi Kinshasa Paris Nagoya 11 Milan Chongqing Manila Mumbai Mexico City London 12 Washington, D.C. Lagos Mexico City Seoul Houston Dhaka Buenos Aires Los Angeles Milan 13 Dallas Buenos Aires Cairo Moscow Randstad 14 Philadelphia Los Angeles Chongqing Seoul Istanbul 15 Belgian central metro Karachi Los Angeles Buenos Aires Fukuoka 16 San Francisco Paris Istanbul Delhi Philadelphia 17 Boston Manila London Kolkata Taipei 18 Moscow Rio de Janeiro Osaka Rio de Janeiro Sao Paulo 19 Sao Paulo Rhein-Ruhr Lahore Chicago Hong Kong 20 Madrid Istanbul Rio de Janeiro Nagoya Miami 21 Mexico City Cairo Paris Milan Dallas 22 Atlanta Moscow Baghdad Tianjin Washington, D.C. 23 Miami Seoul Jakarta Istanbul Madrid 24 Rhein-Main Bangkok Lima Randstad Belgian central metro 25 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 6

    8. Grey italic text Eastern Europe Normal text Western Europe London London London London Trieste 1 2 Paris Paris Genoa Paris Paris 3 Rhein-Ruhr Rhein-Ruhr Chemnitz Rhein-Ruhr Rhein-Ruhr 4 Randstad Milan Ravenna Randstad Milan 5 Milan Randstad Livorno Milan Randstad 6 Belgian central metro Madrid Parma Madrid Madrid 7 Madrid Barcelona (ESP) Salamanca Lille Barcelona (ESP) 8 Rhein-Main Belgian central metro Florence Belgian central metro Rhein-Main 9 Munich Upper Silesian metro Perugia Barcelona (ESP) Athens 10 Barcelona (ESP) Lille Lubeck Naples Munich 11 Rome Rhein-Main Nice Upper Silesian metro Rome 12 Vienna Athens Turin Rhein-Main Lille Hamburg Rome Leipzig Birmingham Vienna 13 Stuttgart Naples Rostock Rome Stuttgart 14 Lille Berlin Oviedo Athens Birmingham 15 Athens Vienna Hannover Vienna Belgian central metro 16 Stockholm Munich Toulon Munich Rhein-Neckar 17 Birmingham Warsaw Dresden Stuttgart Luxembourg 18 Oresund Stuttgart Braunschweig Manchester Venice 19 Oslo Hamburg Modena Budapest Gelderland 20 Dublin Birmingham Burgos Warsaw Manchester 21 Rhein-Neckar Budapest Limoges Hamburg Hamburg 22 Berlin Lisbon Bremen Lisbon Noord 23 Noord Rhein-Neckar Kassel Noord Stockholm 24 Venice Venice Corunna Liverpool West Yorkshire 25 … and the largest in Europe 2007 city rankings Households with annual income over $70,000 Rank GDP Total population Share of retirees1 Children 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 7

    9. Number of cities The 3 largest economies in Europe have different profiles – UK is unusually dependent on London Small cities & Rural areas Middleweights Top city Share of GDP % Share of population % Per capita GDP gap to country Indexed, country = 100 43 46 31 49 44 33 33 29 24 18 15 14 United Kingdom France Germany United Kingdom France Germany United Kingdom France Germany 33 26 29 SOURCE: McKinsey Global Institute Cityscope 1.2

    10. CAGR, 2000-07, % 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 % Small cities & Rural areas Middleweights Megacities United Kingdom France Germany 2.5 1.8 1.6 2.3 22 1.7 38 1.7 40 Middleweights (examples): Birmingham Manchester 39 Middleweights (examples): Lyon Lille Middleweights (examples): Munich Stuttgart 2.2 33 46 2.0 1.5 London Paris 3.0 39 1.9 29 Rhein-Ruhr 1.5 14 SOURCE: McKinsey Global Institute Cityscope 1.2

    11. Key messages London is one of the world’s 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 London’s pre-eminence A clear strategy for London would increase the chances of it achieving its full potential

    12. Grey italic text Developing regions Normal text Developed regions1 1 Tokyo Shanghai Tokyo Kinshasa Tokyo Tokyo 2 New York Beijing Mumbai Karachi Shanghai Osaka London 3 Shenzhen Shanghai Lagos Beijing New York London 4 Los Angeles Guangzhou Beijing Mumbai Chongqing 5 Shanghai Tianjin Delhi Dhaka Osaka Beijing 6 Paris Chongqing Calcutta Calcutta New York Shanghai 7 Beijing Los Angeles Mexico City5 Mexico City5 Mumbai Paris 8 Osaka New York São Paulo Delhi Rhein-Ruhr London 9 Rhein-Ruhr São Paulo Dhaka Manila São Paulo Los Angeles 10 Chicago Wuhan Chongqing Tokyo Delhi São Paulo 11 São Paulo Moscow New York New York Paris Moscow 12 Shenzhen Shenyang Karachi Los Angeles Lagos Mexico City5 London Moscow Osaka São Paulo Rhein-Ruhr Seoul 13 London Houston Hangzhou Cairo Mexico City5 Nagoya 14 Dallas Chengdu Lagos Lahore Calcutta Chicago 15 Guangzhou Singapore Manila Buenos Aires Tianjin Milan 16 London Washington, D.C. Dallas Kinshasa Shenzhen Mumbai 17 Tianjin Nanjing Los Angeles Baghdad Hangzhou Istanbul 18 Randstad Tokyo Shenzhen Kabul Chengdu Hong Kong 19 Mexico City5 Foshan Buenos Aires Luanda Los Angeles Dallas 20 Seoul Bangkok Cairo Istanbul Moscow Randstad 21 Nagoya Istanbul Istanbul Khartoum Wuhan Bangkok 22 Singapore Paris Paris Paris Dhaka Shenzhen 23 Hong Kong Houston Tianjin Nairobi Buenos Aires Taipei 24 Atlanta Seoul Bangkok Dar es Salaam Seoul Houston 25 Top 25 hot spots in 2025 from MGI Cityscope 2025 city rankings GDP growth2007-25 Total population Total households Households with annual income over $20,0004 Rank GDP2 Children3 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 11

    13. Small middleweights (<2 mn inhabitants) Mid-sized middleweights (2-5 mn inhabitants Large middleweights (5-10 mn inhabitants) Megacities (>10 mn inhabitants) Bubble size indicative of GDP/Cap, 2007 London is expected to both grow substantially in absolute size and increase it’s GDP/Capita above the European median … GDP/Capita growth 2007-25USD ‘000 Oslo Munich Rhein-Ruhr Randstad London Paris Median=9.5 Milan Madrid Barcelona 100 1,000 10,000 100,000 1,000,000 GDP growth 2007-25 USD million NOTE 1: Only European Cities shown NOTE 2: All figures relate to real exchange rate calculations SOURCE: McKinsey Global Institute Cityscope 1.3

    14. … the growth rate figures are in the mid tier of even the largest cities due to London’s high initial size GDP/Cap growth rate, 2007-25 Percent CAGR GDP 2007 USD billion GDP growth rate, 2007-25 Percent CAGR GDP/Cap 2007 USD ‘000 Warsaw 112 5.2% 5.1% Warsaw Budapest 66 3.9% 4.0% Upper Silesian metro Upper Silesian metro 52 3.7% 3.5% Budapest Munich 115 2.5% 2.2% Stuttgart Hamburg 87 2.4% 2.2% Rhein-Ruhr Rhein-Neckar 59 2.2% 2.0% Rhein-Main Rhein-Ruhr 215 2.1% 1.9% Rhein-Neckar Stuttgart 68 2.0% 1.8% Munich Rhein-Main 96 2.0% 1.7% Hamburg Berlin 47 1.9% 1.6% Berlin Vienna 65 1.8% 1.3% Randstad Randstad 128 1.7% 1.2% Vienna Belgian central metro 91 1.6% 1.2% Lille London 300 1.6% 1.0% Belgian central metro Paris 233 1.5% 0.9% Paris Manchester 25 1.2% 0.9% London Lille 37 1.2% 0.7% Manchester Barcelona (ESP) 42 1.1% 0.6% Birmingham Birmingham 27 1.0% 0.5% Lisbon Madrid 44 0.9% 0.2% Athens Lisbon 14 0.9% 0.2% Venice Milan 43 0.6% 0.2% Naples Venice 12 0.6% 0.2% Rome Rome 17 0.5% 0.2% Milan Athens 12 0.5% 0.1% Barcelona (ESP) Naples 4 0.2% 0.1% Madrid 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

    15. Key messages London is one of the world’s 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 London’s pre-eminence A clear strategy for London would increase the chances of it achieving its full potential

    16. 1 Reduced open-ness to skilled immigrants and international students 2 Loss of competitiveness in global financial services due to ‘super-equivalent’ regulation 3 Restrictions on London’s physical expansion 4 Reduced attractiveness as a HQ location due to poor infrastructure, uncompetitive tax regimes and restrictions on skilled immigration 5 Under-investment in London’s cultural and artistic heritage – a major driver of quality of life and essential to under-pin its attractiveness to global talent 6 Under-investment in primary, secondary and tertiary education in London Potential threats to London’s pre-eminence

    17. 2006 2007 2008 Spread earnings Fee income FISIM2 Other exports Despite the crisis, London remains the leading international financial centre 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 Ireland US Germany Japan France Hong Kong Mexico China Financial services net exports EUR billions Banks Securities dealers Contribution of Banks to financial services net exportsEUR billions Fund Managers Baltic Exchange Insurance Other financial services CAGR1 % CAGR1 % 00-05 05-09 00-05 05-09 9 15 16 14 50,557 31,049 16 14 41,849 25,336 40,426 24,431 24 8 28 16 29,893 18,265 26,692 24,914 -10 52 24,283 14,929 13,148 22,195 15,784 12,150 19,307 18 19 -7 -11 15,881 9,559 8,754 6,841 6,958 4 12 20 38 6 3 12 -15 1999 2000 01 02 03 04 05 06 07 08 2009 1999 2000 01 02 03 04 05 06 07 08 2009 1 Compounded Annual Growth Rate 2 FISIM stands for Financial Intermediation Services Indirectly Measured SOURCE: ONS Balance of Payments – Pink Book, IMF, The CityUK research

    18. 37 Benign corporate tax rates Stable legal framework Historically predictable tax regime Favourable personal tax rates Open migration Overall context Noninvasive approach of tax authorities Openness to foreign ownership Culture of innovation Regulatory system and reputation Magnet for global talent Low crime rate Commercially minded employment laws Global centre for research People and culture Must visit road-show destination Welcometo foreigners Strong arts and culture English speaking Leading, but unsupportive financial media Distinctive professional services Customer cluster Proximity to eurozone Strong ties to US Cost of living Deep local talent pool System and services Primary international transport hub Extensive transport network Cutting edge sophisticated complex client needs Global client base Robust technology infrastructure/future capacity Time zone bridging US and Asia Multiple factors drive London’s competitive success London retains top position in the Global Financial Center Index for 2010 Source: Clusters and the New Economics of Competition (Michael Porter)

    19. 37 Competitiveness increasing Competitiveness flat Benign corporate tax rates Competitiveness decreasing Stable legal framework Historically predictable tax regime Favourable personal tax rates Open migration Overall context Non-invasive approach of tax authorities Openness to foreign ownership Culture of innovation Regulatory system and reputation Magnet for global talent Low crime rate Commercially minded employment laws Global centre for research People and culture Must visit road-show destination Welcometo foreigners Strong arts and culture English speaking Customer cluster Proximity to eurozone Strong ties to US Cost of living Deep local talent pool Cutting edge sophisticated complex client needs Global client base Time zone bridging US and Asia However, the outlook is worrying on several factors Distinctive professional services Leading, but unsupportive financial media System and services Primary international transport hub Extensive transport network Robust technology infrastructure/future capacity London retains top position in the Global Financial Center Index for 2010 Source: Clusters and the New Economics of Competition (Michael Porter)

    20. Key messages London is one of the world’s 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 London’s pre-eminence A clear strategy for London would increase the chances of it achieving its full potential

    21. 5 levers provide a common architecture to identify opportunities for economic growth Concentrations of industries, functions, and occupations Talent production, attraction, retention, and matching to jobs 1 2 4 Physical and virtual infrastructure Economic sectors/ clusters Linkages and movement of goods, people, and information Human capital Enablers 3 • Government efficiency and efficacy • Business environment • Tax value proposition 5 Public and civic institutions Innovation and entre-preneurship • Innovation performance • Entrepreneurial ecosystem Source: Team economic development plans; Brookings Metropolitan Policy Program, Chicago Plan for Growth

    22. Preserving London’s 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 London’s great universities – as knowledge factories and magnet for international talent • Expanding affordable housing • Providing more rented accommodation for young citizens • 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 • Openness to global talent • Priorities • Creative industries • Tourism • Bioscience • High tech • Prof & Business Services • Financial services • Stronger decision rights for London, as part of de-centralisation 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 Priorities for London’s economic development 1 2 Continued leadership Economic sectors and clusters 4 Physical and virtual infrastructure Human capital 3 5 Public and civic institutions Innovation and entrepre-neurship

    23. Sustaining and Enhancing London’s 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