IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 8, Issue 3 Ver. IV (May - June 2017), PP 38-46 www.iosrjournals.org DOI: 10.9790/5933-0803043846 www.iosrjournals.org 38 | Page Trade, Education Externalities and Economic Growth: Evidence from Nigeria Taiwo Owoeye 1 , Dayo Benedict Olanipekun 2 1 Department of Economics, Ekiti State University, Nigeria 2 Department of Economics, Ekiti State University, Nigeria Abstract: An open economy requires a well-educated workforce to drive economic growth through technology transfer and spill overs. This paper investigates the impact of trade openness and human capital on economic growth for Nigeria using annual data for 1980-2015. The growth rate of per capita income is used as dependent variable while the sum of total imports and total exports as a fraction of GDP and gross secondary school enrollments were used as explanatory variables, inflation rates and exchange rates were also included as control variables. Using ARDL estimation technique the study finds that trade openness impact negatively and significantly on expansion of output per worker, and this may be attributed to the fact that Nigeria exports mainly primary products with no value-added. Also, human capital has insignificant impact on economic growth, and this may be because low quality schooling is incapable of producing human capital. A depreciating exchange rate and a low inflation rate expand output per worker according to the results while domestic investment returns a negative coefficient contrary to expectation. This study therefore shows that policy makers need to do two things to derive positive education externalities on economic growth through trade openness. One, they should improve the quality of education so that schooling can produce human capital. Two, diversify Nigerian exports to value-added goods and services so that trade openness can help in technology transfer and innovation diffusion. Keywords: economic growth, human capital, trade openness, technology diffusion I. Introduction For most developing countries one of the best ways to generate high economic growth is to integrate into global economy and this is done through trade. Trade integration is therefore an important driver of economic growth. Openness to trade has been shown to produce the possibility of an international product cycle, as the production of certain products previously produced by high income countries are shifted to low-income countries (Busse and Kroniger, 2012). This process has been shown to lead to diffusion of technology and innovation from developed countries to developing countries. This makes new technology available in developing countries and spread the frontier of new technology to developing countries. It also helps developing countries to adapt new technology and innovations to local conditions. However the most important driver of technological adoption and diffusion is the level of human capital development in the developing country(Benhabib and Spiegel,2004). For a developing country to be integrated into the global economy therefore there is the need to have a well-educated labour force that can adapt to changing times and conditions. Traditional trade theory predicts welfare gains from trade through specialisation, innovation and invention, improvement in productivity level and optimal resource allocation. However the ability of any developing country to have these trade benefits depends in how educated and well trained the labour forces are. For most sub-Saharan African countries trade liberalisation has not been beneficial because it has not benefited the poor (Goff and Sigh, 2014). Most sub- Saharan African countries have, since they adopted the World Bank supported structural adjustment programme in 1980s, significantly liberalised their economy. However, the large welfare gains expected from the opening up of their economies have not materialised partly because low-income countries have not be able to access the lucrative markets in developed countries especially in markets for labour intensive consumer goods. There are different reasons why trade liberalisation has not benefited the poor in Africa, and this includes, the pattern of the trade as most Africa countries export primary products, poor financial system, unfair trade rules, poor infrastructure, and high cost of production among others(see Fosu, 1990a,1990b). However, an important reason may be the low human capital development in most African countries. Nigeria, African largest economy and most populated country, represents a good example of how trade liberalisation has neither benefitted the poor nor improves the economy over a long period. Nigeria adopted the Structural Adjustment Programme in 1986 effectively liberalising its economy and implementing a wide range of policy reforms which opened up the economy, reduce government participation in some key sectors like banking and increase private sector participation. However the results have not been encouraging, economic growth stagnated during the 1980s and 1990s and only picked at the turn of the century due to increase in oil price, Nigerian main export