The Victim Of Success

To his opponents, Boris Johnson was a joke. His gaffes and bumbling manner were as famous As his unruly shock of platinum-blond hair. But the new mayor of London—elected last week—had a clear enough idea of his electors' priorities. On the campaign trail, the 43-year-old M.P. and former editor of a right-of-center weekly magazine was short on detail, but canny enough to ram home a few key messages: he opposed new regulations on business and promised to put more police on the streets, improve the efficiency of public transit, increase the amount of affordable public housing and create a "clean, green city."

Clearly, the message resonated. For the past eight years, London Mayor Ken Livingstone presided over a city that prospered economically yet somehow failed to manage its growth. Infrastructure groans along. Londoners say crime is increasing. A survey last year by the consultancy Mercer ranked London 39th in the world for quality of life, far below many other major European capitals. One telling statistic: the city now boasts more billionaires than any other except New York—and some of the worst concentrations of deprivation in Britain. While a recent study by the European Union ranked London's inner city, including posh Westminster and Kensington, as the richest patch of Europe, measured by incomes, seven of England's 20 poorest local authorities are located in London. In the borough of Hackney, just east of the financial district, 25 percent of the population lack any academic or vocational qualifications, almost twice the national average. In inner London half of all children are still officially classed as living in poverty, a situation unchanged since 2000. The number of families forced to take temporary public accommodations has jumped 126 percent since 1997.

Prices are rising, too. Average home prices increased 50 percent since 2001, faster than any other major European capital but Dublin. The average price of a London home, despite a recent slide, tops $600,000. The shortest journey on the public bus can cost $4, nearly twice the equivalent in Paris. A UBS bank study this year found that London had outstripped Moscow to become the world's most expensive city. Result: "A Tale of Two Cities," according to the Conservative Party-backed Centre for Social Justice, in which the divide between rich and poor grows and the middle class gets squeezed out of town. "While the superrich move in, we are seeing a dramatic exodus of the people in the middle," says Daniel Dorling of Sheffield University. Last year a record 245,000 Londoners left the city for the outer suburbs or beyond. "It is becoming a city for the unimaginably rich and the stupendously poor in social housing," says Tony Travers, of the London School of Economics.

How did this happen? London's economy has been growing steadily since the "Big Bang" of 1986, when old restrictions on outside players in the financial markets were junked, relaunching the City as a world-class trading center. As the City flourished, salaries rose but property prices, even in the inner suburbs in easy commuting reach of the center, remained just within reach of the white-collar work force. But over the years, successive governments, Labour and Conservative alike, favored a hands-off approach both to the city and to its rich wealth creators, British and foreign. In the words of Tony Blair's former political intimate Peter Mandelson, now the European Union trade commissioner: "We are intensely relaxed about people getting filthy rich."

In practice, that meant light taxation for those who prospered in the city's boom years. Importantly, it also meant that foreigners who could claim "nondomiciled" status paid little or no taxes at all. Thousands of wealthy Middle Easterners and, later, Russians and others, made use of that tax break and bought homes in the capital city, turning Britain into something of a tax haven and London into a boomtown for real estate. The hands-off attitude extended to local government as well. In 1986 Margaret Thatcher scrapped the Labour-dominated city council, leaving London with no central authority. Fourteen years later, Britain's Labour government created a new post, mayor of London, and Ken Livingstone was elected.

A left-wing populist, he became known as much for his theatrics as for his wholehearted promotion of the city's financial sector. He reached out to wealthy foreigners setting up homes and businesses in the city, and listing their companies on the London Stock Exchange, and though the mayor's post came with limited powers and a modest budget—and notwithstanding his grandstanding—Livingstone proved to be an artful figurehead who won praise for his handling of the aftermath of the 2005 terrorist bombings and helping to secure London's place as host to the 2012 Olympic Games.