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Between 1964 and 1971 China carried out a massive programme of investment in the remote regions of south-western and western China. This development programme – called “the Third Front” – envisaged the creation of a huge self-sufficient industrial base area to serve as a strategic reserve in the event of China being drawn into war. Reflecting its primarily military orientation, the programme was considered top secret for many years; recent Chinese articles have discussed the huge costs and legacy of problems associated with the programme, but these discussions have been oblique and anecdotal, and no systematic appraisal has ever been published.2 Since Chinese analysts have avoided discussion of the Third Front, western accounts of China's development have also given it inadequate emphasis, and it has not been incorporated into our understanding of China during the 1960s and 1970s. It is common to assume that the “Cultural Revolution decade” was dominated by domestic political conflict, and characterized by an economic system made dysfunctional by excessive politicization, fragmented control, and an emphasis on small-scale locally self-sufficient development. The Third Front, however, was a purposive, large-scale, centrally-directed programme of development carried out in response to a perceived external threat with the broad support of China's national leaders. Moreover, this programme was immensely costly, having a negative impact on China's economic development that was certainly more far-reaching than the disruption of the Cultural Revolution.

China's Emergence and Prospects as a Trading Nation CHINA'S ECONOMIC REFORM and its opening to the outside world have resulted in the phenomenal growth of its output and international trade. Manufactured export growth took off after 1984, and GDP growth accelerated as well. Between 1984 and 1995, real GDP grew by 10.2 percent annually, according to official Chinese statistics. The nominal value of exports grew by 17 percent annually, while manufactured exports grew by 22 percent per year.' The rapid growth of exports, combined with devaluation of the yuan, the Chinese currency, pushed the ratio of foreign trade (exports plus imports) to GDP from 10 percent in 1978 to 17 percent in 1984 and to 44 percent in 1994. In 1978, China accounted for only 0.75 percent of total world exports, but by 1995, it accounted for 3.0 percent. Together, these numbers indicate the extent of China's emergence as a trading nation.2 Barry Naughton 275 trade growth over the long run-it is likely to decelerate over the medium term, since the pace of structural change will slow down and China's size will tend to make the country proportionately less deeply involved in the world economy. Moreover, real appreciation and changes in policy will moderate China's heretofore spectacular reintegration with the world economy. Indeed, some of these changes have already begun. Chinese exports will post close to zero growth in 1996. And during the first half of 1996, the ratio of foreign trade to GDP had fallen to 35 percent from its peak of 44 percent in 1994.4 The paper begins with the domestic economy, since domestic changes are of fundamental importance in shaping the national economy. The first section briefly discusses the interactions between domestic and external economic reforms. The next section reviews the fundamental domestic changes, focusing on their relation to growth and to policy options in the external sector. The following section describes the existing foreign trade and investment regimes, highlighting the creation of a dualistic trade regime characterized by parallel export promotion and import substitution regimes. Since the export promotion regime is far more liberal than the import substitution regime, the result has been to divert trade as well as to create it. Some of the quantitative dimensions of economic change are traced in this section. The next section describes recent developments in trade policy. Most important 4. Rapid changes in the ratio of foreign trade to GDP serve as a caution that this ratio should not be taken as a summary measure of "openness" that is easily comparable with other economies. In general, China's economy is less open than one might expect from looking solely at the trade ratios. Some of the reasons are discussed below. For some purposes, but not all, measures based on PPP estimates of GDP would be superior. Compared with those in other countries, the prices of nontraded goods and services in China are particularly low relative to those of traded goods. As a result, PPP calculations lead to compa...