The occupied Palestinian territory is characterized by a high degree of trade openness, particularly in view of the small size of domestic markets. Foreign trade represents more than 80 per cent of Palestinian gross domestic product, of which over 85 per cent are imports for direct consumption.
The economy is also highly dependent on capital inflows in the form of official development assistance and workers´ remittance from abroad. This external dependence has contributed to a high degree of income volatility, which is aggravated by the concentration of Palestinian trade with a few trading partners and a narrow-export mix of labour-intensive products.
Palestinian trade has historically been concentrated with Israel, which accounts for around 80 per cent of the total value of Palestinian exports and imports on average. This heavy dependence on Israel is underscored by a widening bilateral trade deficit, accounting for three quarters of Palestinian total trade deficit and 40 percent of Palestinian GDP in 2005.
With total trade deficit at 55 percent of GDP in the same year, international aid to the Palestinian people was not sufficient to pay for the unbalanced trade with Israel. Around fifty-five cents of every domestically produced dollar is a liability owed to the rest of the world, with 40 of those cents owed to the Israeli economy.
Income earned in Israel by Palestinian workers used to be a major component of the oPt´s domestic aggregate demand. About 20 per cent of the Palestinian labour force was employed in Israel on the eve of the second popular uprising, intifada.
The majority of these workers have since lost their jobs, owing to the tightened security and mobility restrictions. This aggravated the problems of poverty, unemployment and fiscal deficit.