Corruption and Growth in Developing Countries: Does Self-Employment Matter?

In developing countries where self-employment is a survival strategy forced on the poor due to their precarious circumstances, corruption and economic growth (growth) relationship cannot work in isolation. Insufficient earnings from self-employment can make people vulnerable to engage in corruption, or they might be victimized by it. The study aims to examine the impact of self-employment on corruption and growth relationship. A sample of 79 developing countries covering 2013-2018 is used. The empirical analysis is done using the two-step system GMM estimation technique. Self-employment is measured in male self-employment, female self-employment, and total self-employment. Following the comparability issues with the Corruption Perception Index (CPI) from Transparency International (TI) prior to 2012, the study employed CPI data after 2012. Further, the study has used marginal effects to provide substantially meaningful information on the impact of corruption on growth at varying levels of self-employment. Prima facie, evidence suggests that self-employment plays a vital role in moderating the effects of corruption on growth. This is because the effects of corruption on growth are not static, and they vary based on the levels of self-employment. In the case of all three forms of self-employment, i.e., male, female, and total, corruption and growth are negatively related at one standard deviation above the mean on self-employment levels. The negative relationship is less pronounced at the mean. Corruption and growth are positively related at one standard deviation below the mean. Substantively, these results imply that corruption decelerates growth when more individuals are self-employed. When fewer individuals are self-employed, corruption accelerates growth. These findings are robust to several sensitivity checks. As the effect of corruption on growth is found to vary based on the levels of self-employment, any anti-corruption policy that does not take on board the levels of self-employment might prove to be ineffective. Therefore, any policy intervention to mitigate the effects of corruption on the growth of developing countries should consider the levels of self-employment. Policies to foster self-employed and strengthen their skills to help them find better-earning jobs are a way forward.