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.

Sustaining the capital's affluence required an army of ill-paid workers, many of them recent immigrants attracted by the promise of work at the minimum wage of $12 an hour, several times what they could make at home. In the last decade, the city's wealth—and the EU's expansion—attracted 700,000 immigrants, the vast majority of them relatively poor, raising the city's population to 7.4 million. They provided much of the unskilled labor that keeps London ticking. For instance, the vast Canary Wharf office development beside the Thames, now home to many of the largest banks including HSBC and Citigroup, employs more than 1,000 cleaners.

But longtime Londoners began to leave, driven out by high prices as well as the feeling that many publicly funded schools were substandard and that private schools were far too expensive for the average family. Londoners also bemoan the state of the city's infrastructure. Radical plans to overhaul the city's Underground network with a mix of public and private funding have foundered, and despite heavy investment its performance remains patchy. Traffic is horrendous. Five years ago Livingstone introduced the enormously controversial policy of congestion charges, forcing drivers to pay $16 to drive into the city center. Despite opposition, the plan worked—at first. But increases in road works projects and bus traffic have meant that traffic speeds have since fallen back to the sluggish level before the charge was introduced. One study last year found that average speeds were now the lowest of any European capital. The much-publicized woes of Heathrow airport's new Terminal Four put a further spotlight on the inadequacies of this global hub. Visitors also note a new shabbiness in once chic London. In a recent poll by the Internet travel agent TripAdvisor, London emerged not only as the costliest city in Europe but also the dirtiest. "In my view, the quantity of wealth may have improved but not the quality of life," says local M.P. Andrew MacKinlay.

Then there is the perception that crime is on the rise. More than one in four Londoners say they are "very worried" about violent crime compared with a national average of 17 percent. Whatever the reality—official figures suggest a drop in most categories—today's Londoners are fearful of their own streets. Earlier this year Home Secretary Jacqui Smith drew fierce criticism from the media for admitting she was afraid to leave her home in a grim patch of south London after dark. But other middle-class families are leaving in droves—and they're not coming back. That leaves some boroughs short of key white-collar workers, especially where rich gentrifiers are ready to pay hefty sums for older properties with easy access to the center. "The teachers and the social workers are selling up to the people with serious money," says Jules Pipe, the mayor of Hackney. As the next tenant of city hall should know, pleasing existing voters may be just as important as pulling in the next generation.

The question is whether Johnson can do anything about the problems. He has no background as an administrator and his record as an M.P.—he was fired from a senior party post for lying over an extramarital affair—is uninspiring. With a limited budget of $22 billion, the Tory mayor will be dependent on the good will of a Labour government that has been grudging in its support for the city. For instance, it took almost a decade to win government backing for the $32 billion Crossrail scheme—a new rail link across the city—approved last year. More important, the mayor is at the mercy of the same market forces that account for London's rise. Prosperity, after all, has its price.