Hamish McRae: It's not water London needs, but growth

London is the most expensive place on earth to base a business; office costs are the highest anywhere
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The Independent Online

We cannot build more homes in London and the South-east of England because there isn't enough water. It is all the fault of the "we cannot build more homes in London and the South-east of England because there is not enough water for their needs" view. It is all the fault of the Deputy Prime Minister, John Prescott, who wants to build all these houses. So something should be done to stop him.

That is a caricature of the argument of course. But it is accurate enough to demonstrate how we are wasting energy debating issues that are ultimately of second order importance, while hardly thinking about an issue of absolutely prime importance. We are fussing about the problems associated with economic growth in London and the South-east, while neglecting the forces driving that growth, as well as the opportunities and dangers that these generate.

The key point here is that the London region has embarked on a huge experiment of quite breathtaking audacity. It is to become the financial and - in some respects - the economic capital of the world. There is no plan for this to happen, no single brain or committee that says this is to happen. It is driven entirely by market forces, forces that can be resisted but which if sensibly accommodated will bring vast benefits to these islands.

There seems to be room for one such centre in each time zone. I don't think we fully understand why this should be but that seems to be what is happening. New York remains unquestionably the dominant centre of the Americas, though perhaps one should say the New York region, for the base of the booming hedge fund industry is Greenwich, Connecticut, not downtown Manhattan. London is the dominant centre for Europe, the Middle East and Africa. It looks as though Shanghai will emerge as the dominant centre for east Asia, though Hong Kong will give it a hard run.

New York and Shanghai have huge domestic markets, as indeed does Tokyo. But for international business London is now level with New York. It is measurably ahead in some areas and if anything it seems to be gaining ground.

The litany of London's economy is familiar: more international money managed than anywhere else; more international air passengers; the largest non-national professional community on earth; and so on. Less familiar is the sheer size of the operation.

Gordon Brown keeps reminding us that the UK has become the second richest of the G7 nations in terms of income per head. He does not add that this is driven by London and the South-east. If you add Essex and the rest of East Anglia, logically part of the same economic region, the total population is about 21 million.

With more than one-third of the country's population and most of the financial services industry in the region its gross national income would make it the eight or ninth largest economy in the world - about the size of Spain or Canada. Unsurprisingly more people want to come here, witness the flood of young professionals moving to the region. It has become a magnet, arguably the magnet, for global talent.

If you accept this there then follow two sorts of questions. There are the practical questions, such as planning and water supplies. And there is the more far-ranging one as to whether this gigantic bid for global financial leadership will pay off.

On the practical questions, some facts might help. Population: people reasonably worry about London's rising population and the strains it throws on transport. The population, now 7.5 million, seems set to rise to about 8.1 million over the next decade. Well, that would still be a lot lower than the peak in the middle of 1939 of 8.6 million.

Water: there is a problem because this is a relatively dry region but take with a pinch of salt that South-east England has "less rainfall than the Sudan". Technically that may be correct but it is irrelevant. The more appropriate comparison is with Paris and Berlin and they get almost exactly the same amount of rain - 24 inches a year.

You might also like to know that while there are problems at the moment with parts of the water table in the South-east, the London water table has been rising, not falling, in recent years. In 1905 it was some 350 feet below Nelson's column, whereas now it is about 100 feet.

Now to be clear, there is a shortage of water in the South-east. London's borehole supply, it seems, is the wrong sort of water - too dirty - and therefore does not solve the problem. But the general point surely stands that at a price the problems of water in the South-east are fixable. The Romans would have fixed it.

Much the same case can be made for transport and indeed housing. There are plenty of countries that have higher population densities than even the quite crowded South-east: city states such as Singapore and Hong Kong; nations such as Bangladesh; even European neighbours such as the Netherlands. Money on infrastructure and housing, wisely spent, can make it possible for more people to live in the South-east and have a better quality of life than they have at present. If the region did not have so much of its wealth siphoned away by successive governments there would be plenty of money to make the necessary investment.

The bigger question is whether this growth run will continue. Hardly anyone predicted it. Two decades ago, when the revival began in earnest, the chattering classes were banging on about decline. Now we take continued success almost for granted.

I think we need to realise that we are making an enormous bet on the continued globalisation of the world economy. We are making a bigger bet than any other country. The economy of the entire region has become a very high cost operation. Central London is the most expensive place on earth to base a business. The office costs the highest on the planet. Skilled professional labour is in some areas the highest paid too. I learnt a couple of weeks ago that the charge-out rate for staff at one of our giant accountancy groups was higher in London even than in New York and Hong Hong. And apparently the average income for male workers in the Canary Wharf complex is now over £100,000 a year; yup, average.

How on earth can we justify charging so much? If we are charging the highest rates in the world we have to be the best in the world, which is hard enough. In addition the global economic circumstances that enable us to do this have to continue. The answers to these matters seem to me to be much more important than trying to figure out how to persuade people to take showers instead of baths or to fit loos that flush with less water.