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Balbir Sihag on Chanakya (Kautilya) #5

This is publicly available (as PDF) on the website of Transparency International, and so I'm reproducing in full:

Kautilya on Governance, Self-Discipline, and Riches, by Balbir Sihag
Remove all obstructions to economic activity
Kautilya
 
Kautilya was a sophisticated, foresighted and farsighted thinker. He approached every issue methodically and comprehensively. He believed that good governance was required to create opportunities and good institutions, such as the rule of law, were essential for exploiting the opportunities. He had deep insights into various aspects of good governance: its role in creating prosperity, its comprehensive definition and, above all, devising various measures for ensuring its delivery. He proposed complementing the Vedic approach of building virtuous character along with legalistic approach of codification of rules and prescribing appropriate sanctions in case of their violation.
 
Kautilya’s Vision
He had a grand vision of building an empire encompassing the whole of Indian subcontinent, prosperous, secure against foreign threats, internally stable, and based on judicial fairness. He articulated its essential resource base and structure as thus: “The kingdom shall be protected by fortifying the capital and the towns at the frontiers. The land should not only be capable of sustaining the [native] population but also outsiders [when they come into the kingdom] in times of calamities. It should be easy to defend from [attacks by] enemies and strong enough to control neighbouring kingdoms. It should have productive land (free from swamps, rocky ground, saline land, uneven terrain and deserts as well as wild and [unruly] groups of people). It should be beautiful, being endowed with arable land, mines, timber forests,elephant forests, and good pastures rich in cattle. It should not depend [only on] rain for water. It should have good roads and waterways. It should have a productive economy, with a wide variety of commodities and the capacity to sustain a high level of taxation as well as a [large] army. The people shall be predominantly agriculturists [artisans and craftsman], devoted to work, honest, loyal and with intelligent masters and servants (6.1).”
 
Kautilya’s Arthashastra is essentially a treatise on how to make this vision a reality. His genius lay in conceptualising the relationships and feedback mechanism among the various elements of the polity, anticipating almost all possible hurdles and suggesting appropriate measures for their removal. According to Kautilya’s vision, people were expected to be hardworking, honest and patriotic. He also expected them to follow ethical values, which were first enshrined in the Rig Veda, of non-violence, truthfulness, compassion, tolerance and cleanliness. Kautilya put a lot of emphasis on ethical conduct but did not take compliance with rules and regulations for granted. He recommended, “Spies in the guise of ascetics shall be [directly] responsible to the Chancellor for reporting on the honesty or dishonesty of farmers, cowherds, merchants and Heads of Departments (2.35).”
 
Significantly, Kautilya noted that people would be ethical and hardworking only if the king and his administration were also ethical and efficient. He set high ethical standards for the king and offered various arguments based on moral duty and enlightened self-interest to uphold them. He wrote, “A rajarishi [a king, wise like a sage] is one who: has self-control, having conquered the [inimical temptations] of the senses, cultivates the intellect by association with elders, is ever active in promoting the security and welfare of the people, endears himself to his people by enriching them and doing good to them and avoids daydreaming, capriciousness, falsehood and extravagance (1.7).” Kautilya stated the ultimate requirement as, “In the happiness of his subjects lies his happiness; in their welfare his welfare. He shall not consider as good only that which pleases him but treat as beneficial to him whatever pleases his subjects (1.19).” Drekmeier notes, “Restraints on the king were not formal; these were restrictions imposed by the obligation to uphold custom and sacred law and to fulfill the requirements of rajadharma.”
 
Kautilya expected the king to be a source of inspiration to people. He wrote, “If the king is energetic, his subjects will be equally energetic. If he is slack and lazy in performing his duties, the subjects will also be lax and, thereby, eat into his wealth. Besides, a lazy king will easily fall into the hands of his enemies. Hence, the king should himself always be energetic (1.19).” Moreover, according to Kautilya, a king should have all the good qualities so that he could lift other elements (particularly his employees). He stated, “A king endowed with the ideal personal qualities enriches the other elements when they are less than perfect (6.1).” He added, “Whatever character the king has, the other elements also come to have the same (8.1).”
 
Moreover, according to Kautilya, “When people are impoverished, they become greedy; when they are greedy, they become disaffected; when disaffected, they either go to the enemy or kill their ruler themselves (7.5).” According to Kautilya, not only the king should be honest and efficient but his administration also should have those qualities. He suggested, “Thus, the king shall first reform the administration, by punishing appropriately those officers who deal in wealth; they, duly corrected, shall use the right punishments to ensure the good conduct of the people of the towns and the countryside (4.9).” The following table may be used to express Kautilya’s ideas.
 
Thus, according to Kautilya, either both the public and the administration were honest or both were dishonest. If the administration squandered the tax revenue, why would the taxpayers be honest in paying their taxes? Similarly, why would the administration be honest if the taxpayers cheated on their taxes? Kautilya tried hard to avoid Case IV. He understood the disastrous consequences since that was harmful both to economic growth and national security by creating political instability and tempting an enemy to attack the kingdom. Kautilya did not discuss Case II and Case III, perhaps realising that those were transitory.
 
Kautilya on the Creation and Preservation of Wealth
Kautilya identified quality of governance, human exertion, accumulation of physical capital, acquisition of land, and knowledge as the sources of economic prosperity. He observed, “Man, without wealth, does not get it even after a hundred attempts. Just as elephants are needed to catch elephants, so does wealth capture more wealth. Wealth will slip away from that childish man who constantly consults the stars (9.4).” It is worth noting that Kautilya understood, by more than 2,000 years earlier than Adam Smith, that accumulation of capital enhanced labour productivity. Additionally, he emphasised productive activities. Kautilya suggested, “Hence the king shall be ever active in the management of the economy. The root of wealth is economic activity and lack of it brings material distress. In the absence of fruitful economic activity, both current prosperity and future growth are in danger of destruction. A king can achieve the desired objectives and abundance of riches by undertaking productive economic activity (1.19).”
 
Kautilya was concerned not only about the creation of wealth but also in the preservation of the existing wealth. Kautilya wrote, “In the interests of the prosperity of the country, a king should be diligent in foreseeing the possibility of calamities, try to avert them before they arise, overcome those which happen, remove all obstructions to economic activity and prevent loss of revenue to the state (8.4).”
 
In fact, he believed in the virtuous cycle of good governance, riches, knowledge and ethical conduct. Accordingly, Kautilya put a very heavy emphasis on good governance. Kautilya’s definition of good governance consisted of provision of infrastructure and national security, formulation of efficient policies and their effective implementation and ensuring clean and caring administration.
 
Provision of Infrastructure and National Security
He understood the importance of infrastructure to the creation of economic opportunities. Kautilya suggested, “Not only shall the king keep in good repair productive forests, elephant forests, reservoirs and mines created in the past, but also set up new mines, factories, forests [for timber and other produce], elephant forests and cattle herds [shall promote trade and commerce by setting up] market towns, ports and trade routes, both by land and water. He shall build storage reservoirs, [filling them] either from natural springs or water brought from elsewhere; or, he may provide help to those who build reservoirs by giving them land, building roads and channels or giving grants of timber and implements (2.1).” He added, “A king makes progress by building forts, irrigation works or trade routes, creating new settlements, elephant forests or productive forests, or opening new mines (7.1).” Kautilya wanted to maintain national sovereignty at every cost and by every means available since its loss meant misery and squalor. He believed that a country either would have both prosperity and national security or lose both.
 
Sources of Revenue
He argued that both the provision of infrastructure and having a larger army were dependent on tax revenue, which, in turn, was dependent on the level of income. Kautilya understood the importance of tax revenue. He wrote, “All state activities depend first on the Treasury. Therefore, a king shall devote his best attention to it. A king with a depleted treasury eats into the very vitality of the citizens and the country.” Kautilya suggested that a king start his day by receiving ‘reports on defence, revenue and expenditure.’ Any government, which follows Kautilya’s following principles of taxation, will bring prosperity to the people and will never face financial crisis.
 
He suggested ways to increase the tax base and not the tax rate to increase revenue. He was against putting any excessive tax burden on the people. For example, he suggested for the king, “He shall protect agriculture from being harassed by [onerous] fines, taxes and demands of labour (2.1.37).” Similarly, he did not want the tax collectors to be overzealous and collect only what was due. He wrote, “He who produces double the [anticipated] revenue eats up the janapada [the countryside and its people, by leaving inadequate resources for survival and future production] (2.9).”
 
Kautilya’s insights into compliance issues are remarkable. According to him, ignorance of the work, neglect of duty, timidity, corruption, arrogance and greed on the part of tax officials were the main factors for causing the loss of revenue. Clearly, Kautilya emphasised both honesty and efficiency.
 
He noted that it was not easy to detect corruption. He stated, “Just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out when government servants in charge of undertakings misappropriate money (2.9).” He added, “It is possible to know even the path of birds flying in the sky but not the ways of government servants who hide their [dishonest] income (2.9).” Kautilya suggested heavy penalties on those officials, who misappropriated revenue. He suggested, “Those officials who have amassed money [wrongfully] shall be made to pay it back; they shall be transferred to other jobs where they will not be tempted to misappropriate and be made to disgorge again what they had eaten (2.9).” On the other hand according to Kautilya, “An officer who accomplishes a task as ordered or better shall be honoured with promotion and rewards (2.9).”
 
It appears that Kautilya did not recommend any punishment for bribing. Since he considered the people more like victims. In fact, he suggested compensating them for their losses. He wrote, “A proclamation shall then be issued calling on those who had suffered at the hands of the [dishonest] official to inform [the investigating officer]. All those who respond to the proclamation shall be compensated according to their loss (2.8).” That could be an effective way to combat corruption since the person, who is forced to bribe might be more than willing to provide some solid evidence against the corrupt officials. The current law by treating both the giver and the receiver of bribes as criminals unnecessarily protects the corrupt officials.
 
He recommended that some enterprises, such as liquor sales, betting and gambling be run by the Government to generate some surplus to complement the tax revenue. He wrote, “Income due to profit on sales; increase in the price of a commodity at the time of sale, profit from the use of differential weights and measures and increased income due to competition from buyers (2.6).” Kautilya would not, under any circumstances, have approved the continued operation of public undertakings draining tax revenue by generating huge losses.
 
Kautilya on Growth-oriented Government Expenditures
Two points are noteworthy. First, according to Kautilya, most of the tax revenue should be used to the provision of infrastructure. He wrote, “The [total] salary [bill] of the State shall be determined in accordance with the capacity [to pay] of the city and the countryside and shall be [about] one quarter of the revenue of the State (5.3).” It implies that according to Kautilya, India will get more mileage out of the tax revenue by constructing a few additional miles of highway than squandering resources on overstaffed government offices and some outdated and unproductive institutions/organisations, such as Planning Commission. Second, Kautilya emphasised the need for tax incentives to encourage investment. However, those were very few and only for a very short duration. He suggested:
 
Tax Holidays: “Any one who brings new land under cultivation shall be granted exemption from payment of agricultural taxes for a period of two years. Similarly, ‘for building or improving irrigation facilities’, exemption from water rates shall be granted (3.9).”
 
Subsidised Loans: “[On new settlements] the cultivators shall be granted grains, cattle and money which they can repay at their convenience (2.1).”
 
Exemption from Import Duty: “Any items that, at his discretion, the Chief Controller of Customs, may consider to be highly beneficial to the country (such as rare seeds)” (2.21) are to be exempt from import duties.

Kautilya on the Need for a Bureaucratic Setup
Kautilya understood the concept of ‘bounded rationality’ and consequently the need to set up a bureaucracy. He observed, “A king can reign only with the help of others; one wheel alone does not move a chariot. Therefore, a king should appoint advisers as councilors and ministers and listen to their advice (1.7).” He assigned the role of executing king’s orders to the ministers. He stated, “The ministers shall [constantly] think of all that concerns the king as well as those of the enemy. They shall start doing all that has not [yet] been done, continue implementing that which has been started, improve on works completed and, in general, ensure strict compliance with orders. The king shall personally supervise the work of those ministers near him. With those farther away, he shall communicate by sending letters (1.15).”
 
Kautilya listed the ‘responsibilities of a minister’ as: “All state activities have their origin in the minister, whether these be the successful execution of works for [the benefit of] the territory and the population, maintenance of law and order, protection from enemies, tackling [natural] calamities, settlement of virgin lands, recruiting the army, revenue collection or rewarding the worthy (8.1).”
 
Kautilya’s Approach to Elicit Honesty and Efficiency from Bureaucrats
Kautilya’s insights into human nature and how to design services and sanctions to elicit honesty and efficiency from bureaucrats are remarkable. He identified the problem of moral hazard (i.e., the problem of shirking) and suggested payment of efficiency wages and supervision. He wrote, “The king shall have the work of Heads of Departments inspected daily, for men are, by nature, fickle and, like horses, change after being put to work. Therefore, the King shall acquaint himself with all the details of each Department or undertaking, such as—the officer responsible, the nature of the work, the place of work, the time taken to do it, the exact work to be done, the outlay and the profit (2.9).”
 
Qualifications of a Councilor
Kautilya expected a councilor to be of impeccable character and with unique qualities. Kautilya wrote, “A native of the country, of noble birth, easy to hold in check, trained in the arts, possessed of the eye (of science), intelligent, persevering, dexterous, eloquent, bold, possessed of a ready wit, endowed with energy and power, able to bear troubles, upright, friendly, firmly devoted, endowed with character, strength, health and spirit, devoid of stiffness and fickleness, amiable (and) not given to creating animosities—these are the excellences of a minister (1.9).”
 
According to Kautilya, a person must be a native of the country to qualify for any powerful position. It requires no hard thinking in figuring out as to how many of the ministers in the present scenario in our country, would have been retained by Kautilya.
 
Kautilya Linked Pay to Performance and Qualifications
According to Kautilya, compensation should be based on qualifications, experience and effort. Kautilya stated, “Those who have all the qualities are to be appointed to the highest grade (as Councilors), those who lack a quarter, to the middle grades and those who lack a half, to the lowest grades (1.9).” He suggested, “Salaries and wages of any individual employee, permanent or temporary, shall be fixed in accordance with the above principles, taking into account each one’s level of knowledge and expertise in the work allotted (5.4).” Kautilya insisted on efficiency and honesty. Kautilya stated, “Every man shall be judged according to his ability to perform [a given task] (1.8).”
 
Caste system was not that rigid during Kautilya’s times. For example, he stated, “Envoys therefore speak as they are instructed to, even if weapons are raised against them. The shastras say that even if an envoy is an outcast, he shall not be killed (1.16).” Similarly, B.R. Ambedkar (1891- 1956) wrote, “This country has seen the conflict between ‘ecclesiastical law’ and ‘secular law’ long before Europeans sought to challenge the authority of the Pope. Kautilya’s Arthashastra lays down the foundation of secular law in India; unfortunately ecclesiastical law triumphed over secular law.”
 
Kautilya insisted on efficiency and honesty for maintaining independence and creating prosperity. He specified qualifications for each job. Although he showed a lot of compassion for the disadvantaged but it is unlikely he would have approved the quota system in any form or shape. He advised that a king should take care of his subjects like a father takes care of his children. He wrote, “Whenever danger threatens, the king shall protect all those afflicted like a father [protects his children] (4.3).” He added, “He shall, however, treat leniently, like a father [would treat his son], those whose exemptions have ceased to be effective (2.1).” Kautilya suggested, “King shall maintain, at state expense, children, the old, the destitute, those suffering from adversity, childless women and the children of the destitute women (2.1).”
 
Incidentally, it may be noted that during 1950s there was both, honesty and efficiency. Other than the police and the irrigation department, most of the employees were honest. Similarly, most of the politicians were honest. However, during the 1960s and 1970s, many bureaucrats and politicians became corrupt but still relatively speaking were efficient. But over the last 25 years, our Prime Minister and the President are all alone. A large majority of bureaucrats and politicians are both inefficient and dishonest. Kautilya relied on an efficient and honest intelligence service. Thus, in our context, unless the investigating agencies like the CBI and the courts functioned with due autonomy, honesty, efficiency and boldness, improvement in governance would have no chance. The CBI should investigate not only the past Chief Ministers but also the current Chief Ministers, Income Tax Officers and many others, who are amassing wealth at an unprecedented rate.

Accountability
Significantly, Kautilya was concerned, at least to some extent with accountability. For example, he recommended specifically the listing of revenue collected from ‘fines paid by government servants’ and ‘gifts’. He also wrote, “Expenditure will be classified according to the major Heads, as given below: The Palace [expenditure of the King, Queens, Princes etc.] (2.6).” He added, “Every official who is authorised to execute a task or is appointed as a Head of Department shall communicate [to the King] the true facts about the nature of the work, the income and the expenditure, both in detail and the total (2.9).”
 
Judicial Fairness
Kautilya wrote, “A king who observes his duty of protecting his people justly and according to law will go to heaven, whereas one who does not protect them or inflicts unjust punishment will not. It is the power of punishment alone, when exercised impartially in proportion to the guilt, and irrespective of whether the person punished is the King’s son or an enemy, that protects this world and the next. (3.1).” He elaborated on this theme as thus: “Whoever imposes just and deserved punishment is respected and honoured. A well-considered and just punishment makes the people devoted to dharma, artha and kama [righteousness, wealth and enjoyment]. Unjust punishment, whether awarded in greed, anger or ignorance, excites the fury of even [those who have renounced all worldly attachments like] forest recluses and ascetics, not to speak of householders. When, [conversely,] no punishment is awarded through misplaced leniency and no law prevails, then there is only the law of fish [i.e., the law of the jungle] (1.4).”
 
Ethics and Governance
Kautilya considered moral values as a means to prosperity in this world and to paving the way to heaven after death. He asserted, “For the world, when maintained in accordance with the Vedas, will ever prosper and not perish. Therefore, the king shall never allow the people to swerve from their dharma.” He added, “For, when adharma overwhelms dharma, the King himself will be destroyed.”
 
The insights contained in The Arthashastra are as relevant today as they were in his time and thus making it an ageless contribution. He truly possessed a modern outlook in formulating such universally relevant principles. According to Kautilya, so long as no effective remedy, legal or political, is devised to contain the extortionary tactics of the corrupt elected officials, India could not achieve her full potential. Since corrupt officials encourage socially unproductive, rent-seeking activities, distort the incentive system and discourage honesty, efficiency and hard work.
 
Second, Kautilya pointed out that one should always keep in mind that sometimes the effects of a policy might be irreversible, and therefore one should be farsighted as well as foresighted in formulating a policy.
 
Third, Kautilya proposed efficient, mutually reinforcing and consistent formulation and coordination of fiscal, labour, trade, judicial and foreign policies to promote prosperity, national security and fairness. His systemic approach should be used as the basis of current reforms in India. For example, according to him, economic efficiency depended on appropriate economic (including international trade) policies, judicial fairness, and ethical values. Therefore, along with economic reforms, judicial and political reforms might be necessary to achieve economic efficiency. How can a nation achieve economic efficiency when there are hardly any meaningful sanctions against economic crimes, such as tax evasion, adulteration, bribery, and extortion? Justice to a large extent is for sale and may be labeled as ‘green justice’.
 
Fourth, according to Kautilya, maintenance of law and order was a prerequisite for creating prosperity. He observed, “By maintaining order, the king can preserve what he already has, acquire new possessions, augment his wealth and power, and share the benefits of improvement with those worthy of such gifts. The progress of this world depends on the maintenance of order and the [proper functioning of] government (1.4).” Kautilya added, “Government by Rule of Law, which alone can guarantee security of life and welfare of the people, is, in turn, dependent on the self-discipline of the king (1.5). Also, according to Kautilya, every important task must get an undivided attention. For example, he stated, “If the [amount of actual cash in the] treasury is inadequate, salaries may be paid [partly] in forest produce, cattle or land, supplemented by a little money. However, in the case of settlement of virgin lands, all salaries shall be paid in cash; no land shall be allotted [as part of the salary] until the affairs of the [new] village are fully stabilised (5.3).” Clearly, according to Kautilya, supervision of a settlement of virgin lands required undivided attention. He reasoned if the officers were allowed to work on the land, most likely they would have spent very little time on the official duties and disproportionately more time working on the land, and thus, ignore their primary responsibilities.
 
The Deputy Commissioner of a district, who has a longer list of responsibilities than perhaps that of God, should be concentrating just on maintaining law and order, which has been worsening over the years. Moreover, the private sector (including the farmer) has become quite entrepreneurial and the many layers of State officials are there to create only hurdles in the developmental work. In fact, many other offices need a review. For example, the only role State Governors seem to play is to destabilise democratically elected governments. A Chief Judge of the high court can perform the oath taking ceremony. Unfortunately, these bureaucratic structures are more durable than the stainless steel structures in India.
 
References
Kautilya, Vishnugupta [4th Century BCE] (1992). The Arthashastra. Edited, Rearranged, Translated and Introduced by L.N. Rangarajan. New Delhi: Penguin Books.
————. [4th Century BCE] (2000). The Kautilya Arthasastra, Part II. An English Translation with Critical and Explanatory Notes, Second Edition, R.P. Kangle (ed.). Delhi: Motilal Banarsidass.
Sihag, Balbir S. (forthcoming). “Kautilya on Moral and Material Incentives, and Effort”, History of Political Economy (appearing next year).
————. (forthcoming). “Kautilya on Administration of Justice during the Fourth Century BCE”, Journal of the History of Economic Thought (accepted)
————. (forthcoming). “Kautilya on Institutions, Governance, Knowledge, Ethics and Prosperity”, Humanomics (accepted)
————. (2005). “Kautilya on Ethics and Economics”, Humanomics, Vol. 21(3/4): 1-28.
————. (2005). “Kautilya on Public Goods and Taxation”, History of Political Economy, Vol. 37(4): 723-751, Winter.
————. (2004). “Kautilya on the Scope and Methodology of Accounting, Organizational Design and the Role of Ethics in Ancient India”, Accounting Historians Journal, Vol. 31(2): 125-148.
The following five articles on Kautilya to appear in a Special Issue of Humanomics: ————. “Kautilya on Economics as a Separate Science”.
————. “Kautilya as a Forerunner of Neo-classical Price Theory”.
————. “Kautilya on Principles of Taxation”.
————. “Kautilya on International Trade”.
————. “Kautilya on Law, Economics and Ethics”.

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