Special Report: London Calling

Past generations of megacities rose or fell depending on their access to resources or trade--coal mines and rail hubs. What counts today is the new global class of knowledge merchants, the folks with new ideas to share or sell. "Urban economic success really depends on smart, entrepreneurial people," explains Harvard professor Edward Glaeser. "Cities have recently succeeded because urban density can facilitate the transmission of ideas." Like New York (and few, if any, other cities), London provides the right environment for these people: a relatively compact layout, a vibrant mix of cultures and a service industry fueled largely by immigrants. It is one model for the 21st-century metropolis.

London's particular alchemy has little to do with deliberate policy. For much of the 1980s and '90s, the city survived without any form of central planning. London has grown haphazardly by fits and starts shaped by global trade and economic trends. Spasms of unplanned large-scale immigration are thus as much a part of London's heritage as the double-decker bus or the black cab. For hundreds of years the city thronged with economic migrants or fugitives from religious persecution on the Continent. In the 19th century its population leapt sixfold to 6 million, including a flood of largely Jewish immigrants from Eastern Europe and Russia. The post-war decades brought another mass influx from India and Pakistan as well as the Caribbean.

Diversity is both symptom and cause of the supercharged London economy. The city must attract immigrants to stoke that growth; the immigrants want the jobs that a flourishing London can offer, whether they're 1 million-pounds-a-year Japanese bankers or Polish art historians ready to scrub floors for 7 pounds an hour. "This is where I can make something of my life," says 32-year-old Carlos Cabral from Mozambique, now running a Portuguese deli. Without the migrants, London would be shrinking, not booming.

That experience has helped to instill a basic tolerance. Londoners have learned to live with--and sometimes relish--cultural differences. "What makes us different is that we love diversity. We celebrate it," says Tony Winterbottom of the London Development Agency. Londoners don't suffer the overt racial tensions to be found in Los Angeles, Paris or Berlin. Indeed, the potpourri of cultures is an attraction in itself for those fed up with life in the suburbs, or in blander European cities. Urban centers have shed some of their 1960s associations with crime and grime; today, they offer what a new generation most prizes: high-end urban amenities, shorter commuting times, more work and more opportunities for play. London's cosmopolitan feel is crucial to its prosperity.

The city has other advantages. Begin with the famous big bang of 1986, the deregulatory splurge that opened up the city's fusty financial services and let rip the forces of global capitalism. Foreign players, impressed by London's light-handed approach to regulation, snapped up the grand old names of British finance. The doomy predictions that Britain's decision to spurn the euro would cost London its position as Europe's financial capital have proved plain wrong. Yes, Frankfurt is home to Europe's central bank, but it's London that calls the shots. Mighty Deutsche Bank may be headquartered in Germany, but its big decision makers are in London. These days more euros are traded daily in London than in the rest of Europe combined.

With the big players comes the chance to make big money; one more good reason why London lures the brightest and best. Within a few years of the big bang, London was fixed in the world's imagination as a place of opportunity, where the elite can pick up eye-popping bonuses or seven-figure salaries that can't be matched outside New York. "This is the only place in Europe where you can make a 1 million pounds a year while working for someone else," says Tony Travers of the London School of Economics. Add tax rates that are indulgent by some West European standards--and it's easy to see why the high-fliers would opt for London over Paris.