Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.3, No.4, 2012 61 Investigating the Effects of Privatization on the Economic Growth in Developing Countries: A Fixed Effects Approach Farhad Rahbar 1 , Mostafa Sargolzaei 2* , Razieh Ahmadi 3 , Marzieh Ahmadi 3 1. University of Tehran, Faculty of Economics, Tehran, Iran 2. University of Tehran, Faculty of Economics, Tehran, Iran 3. Department of Accounting, shirvan Branch, Islamic Azad University, shirvan, Iran * E-mail of the corresponding author: m.sargolzaee@ut.ac.ir Abstract Considering that the economic adjustment policies have been proposed by international institutions for achieving a sustainable economic growth in the developing countries, the latter adopted privatization trend in economy following the application of economic adjustment policies. In this study, we investigated the effects of privatization on the economic growth of developing countries in 2000-2008. We selected a suitable model based on the past experimental studies, use of qualitative and institutional variables in economy as well as use of controlling variables for different regions. Results of estimation in different areas show that privatization in the MENA region, Latin America and Caribbean region, and sub-Saharan Africa had not significant effects on economic growth (Similar results of previous research) but for west Asia and Pacific areas, Central Asia and Western Europe, and South Asia had significant positive effects on economic growth. Keywords: Privatization, Economic Growth, Developing Countries, Fixed effects JEL Classification: O4, O1 1. Introduction Privatization process is an approach to gradually access to the market mechanism in which the countries with government intervention allocate a part of public and governmental ownerships to individuals and private sector. It is generally believed that the private sector has a higher motivation for activity since it seeks to maximize benefit and in such a condition, limited resources of society are allocated optimally and efficiently. Now, if market mechanism has been a basic factor towards economic growth and prosperity of industrial advanced countries and if privatization process is considered as an effective step towards achieving a competitive society based on open market economy, it can be hoped that a certain ratio of higher economic growth and development will be achieved as the privatization process increases in the countries. The objective of this study is to examine the impact of privatization on economic growth in development countries between 2000 and 2008. The study therefore seeks to examine whether the privatization programs implemented by most developing countries between 2000 and 2008 had a positive effect on output growth as suggested by the advocates of privatization 2. Theoretical Framework Theoretical principles concerning privatization in the economy are associated with the following three theoretical principles: Property rights theory, Principal-agent theory, and Public choice theory. The main assumption of privatization theories is that the free forces of market increase the efficiency of a firm. Property rights theory states that people should respect the allocation of resources in social and economic relations. Owners of companies should address the losses they cause to others against the profit they gain (Starr, 1988). In fact, property rights establish a claim for its personal owners concerning the properties of a private company (Hanke, 1987). It can be said that since managers of public companies have no right to claim for the company's revenues, their managerial efficiency is