For the past two decades, donor countries have propped the Palestinian economy by giving billions of dollars. The report said such aid has led to 7.7% gross domestic product growth between 2007 and 2011.
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The growth has been primarily in government services, real estate and other non-tradable sectors. In contrast, the report said manufacturing and agriculture have dropped significantly.
The report said sustainable growth will come only through an emphasis on trade, integration and creating a dynamic private sector. The bank urged Palestinians to follow the example of East Asian countries that have achieved steady growth through exports, saying those that have focused on local markets have stagnated.
Not ready for state
The study's author, John Nasir, said the Palestinian Authority has made steady progress toward establishing a future state, "but the economy is currently not strong enough to support such a state."
"Economic sustainability cannot be based on foreign aid, so it is critical for the Palestinian Authority (PA) to increase trade and spur private sector growth," he added.
The bank noted that Israeli restrictions remain the biggest impediment to investing, creating high uncertainty and risk.
Israel counters that it has eased travel and lifted restrictions, allowing the Palestinian economy necessary conditions to flourish, and that any constraints that remain are a result of vital security needs.
Earlier this year, an Israeli government report said the Palestinian Authority was not economically stable enough to sustain a state.
The World Bank's assessment contradicts that of the International Monetary Fund, which last year said Palestinian financial institutions were ready for statehood.
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