Respected international bodies including the World Bank and the IMF say that a major factor behind Palestinian economic woes is the Israeli restrictions on movement of goods and people, and other measures that choke growth.
But Romney made no mention of such issues.
"Culture makes all the difference," he told the Jerusalem audience before leaving for Poland.
"As I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things."
Palestinian negotiator Saeb Erakat said the remark was racist.
"Romney's statements are racist and this guy needs to learn a lot, as he lacks knowledge of this region, its culture and history," he told AFP. "Clearly he does not know that the Palestinian economy cannot reach its expected level if the occupation continues."
On Sunday, Romney outraged the Palestinians by hailing Jerusalem as Israel's capital.
"It is a deeply moving experience to be in Jerusalem, the capital of Israel," he said, in an apparent endorsement of a position held by the Jewish state but never accepted by the international community.
The Palestinians, who claim Israeli-annexed east Jerusalem as the capital of a future state were infuriated.
Most of the world, including the U.S., does not recognize the annexation. The U.S. and others keep their embassies in Tel Aviv.
Romney strongly suggested he would move the U.S. embassy to Jerusalem if he were president, supporting two key Israeli demands.
"Hamas considers the statement made by Republican presidential candidate Mitt Romney, saying Jerusalem is the capital of Israel, racist and extremist," the Islamic militant group's spokesman Sami Abu Zukhri said on Monday.
Erakat noted that Romney's positions on Jerusalem go against long-standing U.S. policy.
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