THE POLITICAL ECONOMY OF 'SUPPRESSED MARKETS': CONTROLS, RENT-SEEKING AND INTEREST-GROUP BEHAVIOUR IN THE INDIAN SUGAR AND CEMENT INDUSTRIES

This thesis examines the economic consequences of controls in what are for convenience called "suppressed markets." Suppressed markets are markets where the imposition of regulations and controls result in distortions to market behaviour and where alternative mechanisms are developed to substitute for free market activity. A significant feature of such markets is the rent-seeking and directly unproductive economic activity that results from the imposition of controls. Models of economic behaviour in two different kinds of suppressed markets are developed and empirically tested using data on the Indian sugar and cement industries.; The first part of this thesis examines consumer and producer behaviour in "partially suppressed" markets where government controls are imposed in a manner that attempts to replace market forces in a designated subset of a total market for a commodity, leaving "free" market forces to operate in the residual subset.; Models of economic behaviour in partially suppressed markets are developed and empirically estimated using data for the period 1951-82 for the Indian sugar industry. Elasticity estimates obtained from the empirical analysis of constrained demand and supply functions are then used to calculate the costs of protection and rent-seeking using Harberger and Tullock-type measures. Estimates of "leakage" or diversion of output from the controlled to the uncontrolled free-sale market are also developed using the properties of Engel Curves. Interest-group behaviour in the Indian sugar industry is then examined in order to investigate the possibility of "capture" of the regulators by the regulated.; The second part of the thesis investigates economic behaviour in "completely suppressed" markets where government price and quantity controls are applied to the complete output of the industry, both on the demand and supply side. Demand and supply functions for the Indian cement industry,a typical example of a completely suppressed market, are then estimated for the 1951-82 period. The magnitude of output black marketed is estimated by an indirect procedure using input-output coefficients. Interest group behaviour in the Indian cement industry is also examined. Controls in such markets result in the development of black markets and other directly unproductive profit-seeking activity.