London is the very model of a global city—and thriving on it, says Emma Duncan. But there are threats to its future

STEVE VARSANO, A New Yorker who sells private jets, moved from America to London a couple of years ago. His showroom, which is kitted out as a luxury aircraft interior—cream leather seats, snakeskin walls, mahogany trimmings—is on Hyde Park Corner.

To some, Hyde Park Corner is a noisy roundabout. To Mr Varsano, it is an unbeatable location. Fifteen years ago, he says, 70% of the world's private jets were sold in America. These days, maybe 35-40% are. “Anybody that can afford a jet comes to London. The only bits of London they know are Belgravia, Knightsbridge and Mayfair [the areas that converge on Hyde Park Corner]. They all have to stop at that light,” he says, pointing at the traffic light on the southern side of the roundabout. “As the car swings round, the guy in the back seat has to look into my showroom. I have the best window on four continents.”

Mr Varsano is not alone in his enthusiasm for the city. Over the past quarter-century, unprecedented numbers of foreigners have come to live, work and invest in the city. Largely as a result, London has had an astonishing period of growth that has survived the recession in Britain and the economic crisis in Europe. It feels unstoppable; but that's how it felt a century ago, and it turned out not to be.

Out of darkness

London has been the centre of politics, administration, business and fun in Britain since the 11th century, but it was the Victorian age that made it great. The industrial revolution combined with the empire to supercharge London's economy. Raw materials from the colonies were shipped into the docks and manufactured goods shipped out. The banking system which grew up in the City of London channelled private savings into productive enterprises all over the globe.

As London produced goods, so it sucked in people. Its population grew from 1m in 1800, when it was already by far the biggest city in Europe, to 6.5m in 1900. That huge expansion spawned a massive construction boom. Most of the city's housing is Victorian, as are its great buildings. Confident in the greatness of their age, the Victorians had little time for the past. Between 1830 and 1901, 23 churches, 18 of them built by Sir Christopher Wren, the architect of St Paul's Cathedral in the City, were demolished. Suburbs ate up the countryside: William Morris, a 19th-century artist, designer and thinker, called the place a “spreading sore”.

In 1939 its population hit 8.6m. By then the belief that London was at once too rich and too poor, as well as too powerful, had taken hold. So whole neighbourhoods were bulldozed to clear slums; a Green Belt was established to stop it spreading; the construction of offices in central London was, in effect, banned. Meanwhile war battered the city, driving out people and industry. Manufacturing started to decline. The docks, London's core industry, were destroyed by container ships too deep for the river and by militant unions. The city went into a vicious cycle of decline. Schools emptied, crime rose and aspiring people left. By the late 1980s it had lost a quarter of its inhabitants.

Phoenix reborn Then the population started rising again. Nobody really knows why. It may simply be that the economic factors that had caused it to shrink—the closure of the docks and the disappearance of manufacturing industry—had run their course, the policies designed to empty the place out had been abandoned and the gravitational pull of a great city had reasserted itself. Cities are powerful networks. According to Geoffrey West, a physicist at the Santa Fe Institute who has looked into the maths of cities, there is an urban constant that holds good the world over: every doubling in the size of a city brings a 15-20% increase in wages, patent output, the employment of “supercreative” people, the efficiency of transport systems and many other good things associated with cities. There is a similar increase in crime and pollution, but the benefits of higher wages and greater opportunities evidently outweigh those disadvantages. And London had a great deal going for it: international connections, a useful time zone and, by the 1980s, a free-market government. In 1986 the Big Bang, which deregulated the City's financial services, set off a spate of growth that restored London to its place as one of the world's great financial centres. Growth drew in foreigners, who have arrived in ever larger numbers, bringing money (sometimes), skills (often) and a willingness to work harder than the natives (usually).

Some come for jobs, some for sanctuary, some for fun. London has a creative buzz that makes it feel more like New York than Paris or Rome. It may be the result of the density of art colleges or the mildly anarchic street culture, but it has been heightened by the arrival of young foreigners escaping more conventional or oppressive societies, and coming to find themselves and each other. The art world, where language is no barrier to communication, is flourishing as never before.

Study "The Knowledge", our interactive guide to London's demography and economy

The city has got better in duller ways, too. Devolution has improved its infrastructure. London's mayoralty, established in 2000, has far less power than those in, for instance, France or America. Yet the mayor can make a great deal of difference to transport, and has done so. Getting around the city is not quite as painful an experience as it was ten years ago.

The vicious cycle has turned virtuous, most visibly in education. Whereas private education in London was excellent, the state schools used to be particularly dreadful. But under both the previous and the current governments, money and effort have been concentrated on the capital. The academies programme, under which schools get more freedom and help from private-sector sponsors, has made most impact in London. The two most successful groups of academies, ARK and Harris, are there. The effects are showing up in the exam results.

Partly thanks to better education, fewer Britons are leaving the city. At the same time, foreigners are still coming and, because of recent immigrants' high fertility, the birth rate is accelerating. So the population is rising fast (see chart 1).

As Mr West's urban maths suggests, London's contribution to the country's economy has grown faster than its population. In 1997, the capital's gross value added per person was one-and-a-half times that of Britain as a whole; by 2010 the ratio had risen to nearly one-and-three-quarters. Londoners are also better paid and better qualified than their compatriots. And although the economic crisis has hit financial services hard, the city as a whole has got off relatively lightly. London subsidises the rest of the country by around £15 billion a year; only the south-east and east of the country, whose prosperity is largely derived from their proximity to London, are also in surplus. Altogether, the greater south-east contributes around £40 billion a year to the rest of the country's finances. Internationally, London also stands out. Whereas Britain has dropped down the GDP per person league to 7th, London is still 5th among cities in terms of GDP, and comes top or second in most of the rankings that include less measurable factors. But London is not just a bunch of impressive numbers; it is also an astonishing human artefact. A city that a generation ago was on the skids has become a place where the world meets to study, work, create, invent, make friends and fall in love. It is Britain's economic and cultural powerhouse, Europe's only properly global city and a magnet for rich and poor, from anywhere and everywhere. Londoners know they are living through something extraordinary. Many novelists have tried to capture the sense of heightened experience that comes from living at the centre of the world—John Lanchester in “Capital”, Sebastian Faulks in “A Week in December”, Oliver Harris in “The Hollow Man”, for instance—with varying degrees of success. The uneasy excitement that pervades the city is hard to bottle.

It seems inconceivable that a gravitational pull as strong as London's should weaken, but the city's moment will, inevitably, pass. Its core industry, financial services, grew because of the accumulation of capital and trade flows. These days, capital is accumulating elsewhere, and the fastest-growing trade flows are not between the rich world and emerging countries but between different parts of the emerging world.

Yet London is not entirely at the mercy of external forces. Policies matter. Just as the British government unwittingly accelerated London's decline after the second world war, so politicians today risk driving away some of the people on whom this city, and this country, depend for their future prosperity.