Asymmetric information and the EITI

George Soros has recently reminded us in a lecture published in the FT of the ubiquitous nature of the “principal-agent” problem. We can perhaps go one step backward to the core phenomenon that is behind the “agency” problem: asymmetric information. People or organisations do not have the same information about something: doctors know infinite more about medicine than patients; a plumber knows better than a desperate house owner about the cast to repair a busted pipe; bankers know more about risks than account holders; operators of an oil field know better than the owner of the field, especially when this owner is “the Nation”. And so on. How the “asymmetric information” gap is dealt with or narrowed (the best we can aspire in many situations) is crucial to understanding how markets, democracies and other systems function, to see how they benefit the public interest, and crucially to define how proceeds are produced and shared in a society.

Examples abound to illustrate how asymmetric information is dealt with. Regulation of medicine practices, health and safety standards, importing more plumbers to promote competition, are examples of some measures that attack the problem directly. Other ways to deal with asymmetric information include recognising that is hard to get rid of but then granting “constitutional” powers to various actors, aiming that each actor can check the abuses of others. A third way is mitigation or reducing the gap. This is to provide the public or relevant actors with information that is not spontaneously produced. The EITI is a good example to illustrate this.

Soros said in his lecture that he first thought of the agency problem in the context of the so-called resource curse. That rich owners of oil reservoirs or mines end up poor and/or trapped in bloody conflicts and/or totally disillusioned with governments is the conundrum usually attached to the resource curse or perhaps to a better label, the paradox of plenty. In the context of natural resources exploitation the asymmetric information problem is not only ubiquitous but perhaps shows in its most acute form. Why?

For oil or other mineral deposits to translate into a good thing for society (e.g. a hospital, a dam, a school, a road) many transactions have to occur. All of these transactions are vulnerable to the asymmetric information problem: government officials signing contracts granting exploitation rights; interpretation of these contracts to calculate taxes, collection of taxes; transfer of collected taxes to bureaucracies or other levels of governments; and finally those national or local bureaucracies contracting with builders of those schools, dams, hospitals and roads. In this simplified version of the long road from “reservoir to good things for society” there are at least five instances in which involved actors (who are principals or agents or both) are bound to have different sets of information.

The EITI goes to the core of this problem. It creates a mechanism to bring data about one of these instances: collection of payments (taxes, others) from operators to governments. By doing this it narrows the informational gap. It mitigates the overall asymmetric information problem. By recognising that the EITI is a mitigation not a panacea to the problem, we are being realistic. But you have to start somewhere and just to get it right is rather difficult. There is room for optimism as well. Bringing information in one instance facilitates or enables others to seek or follow information, both upstream and downstream in that long road from reservoir to “school-hospital-dam-road” . Closing one gap helps closing others. If this is done successfully the asymmetric information problem will be way less damaging to the prospects of development in those lands blessed with natural resources.

Francisco Paris is Regional Director for Latin-America, Burkina Faso, Cameroon, Equatorial Guinea and Togo at the EITI International Secretariat. He holds a PhD from London School of Economics