If delegates to the Palestinian donors' conference in Paris felt like a little light shopping after their work was done it was a mere step from their meeting hall to the Champs Elysees.

If they had worked up an appetite, there are restaurants where a modest piece of grilled fish can cost more than 60 Euros (US $86).

The trees that run along either side of the Champs Elysees were dripping with Christmas lights, and down in the Place de la Concorde an elegantly lit Ferris wheel turned slowly, giving its passengers an excellent view of the Eiffel Tower, and the roof tops of the French capital.

In other words, it is hard to think of anywhere in the world that felt so far away from the miserable realities of life in Gaza and the West Bank as Paris did in the week before Christmas.

Life is not just hard for Palestinians. It is getting worse.

Downward cycle

The World Bank, in a special report written for the Paris conference, says that income per head has gone down by 40% since 1999, the year before the Palestinian uprising started.

Since then violence, and Israel's response to it, have transformed the occupied territories.

Aid being poured into a leaking bucket. The challenge is to fix the leak not pour faster Oxfam

More West Bank land has been taken for Jewish settlements and the roads which connect them with Israel, and at the same time the occupiers have imposed a complex system of permits and barriers that allows them to control the movement of the Palestinian population.

Add to that the cuts in aid that followed the election of Hamas in 2006, and the result, the World Bank said, has been to put the "already-fragile Palestinian economy in a downward cycle of crisis and dependence".

The Gaza Strip is in an even worse condition. Its 1.4 million people live on a piece of sandy land measuring 360 square kilometres (slightly bigger than Washington DC and slightly smaller than Manchester).

Most of them can never leave, because of restrictions enforced by their neighbours in Israel and Egypt.

Economic collapse

In response to the firing of rockets into Israel, and to keep up the pressure on Hamas, which seized control of the internal affairs of Gaza from its rival Fatah back in the summer, Israel has stopped almost all goods going in and out.

About the only exceptions are aid supplies. That means no-one starves, but the private sector, especially industry, has collapsed.

By one measure used by the World Bank, 67% of Gaza's population now lives in poverty.

Our desire is to see one Palestinian state in Gaza and the West Bank, and if we manage to get momentum and drive into the process then we'll see all Palestinians wanting to be part of it Tony Blair
Quartet envoy To make matters even worse, the Palestinian Authority of Mahmoud Abbas is effectively bankrupt, as it has many salaries to pay and not enough income.

The message that the remains of the Palestinian economy were breaking into ever smaller pieces got through to the donors in Paris, who promised US $7.4bn (£3.7bn) over the next three years.

It helped that they liked a reform plan put together by the Palestinian Authority Prime Minister Salam Fayyad.

He is an economist, trained in the United States, who used to work for the World Bank and the International Monetary Fund.

Preparing a state

The money, assuming that they all keep their promises to donate it, is supposed to make it possible for the Palestinians to prepare themselves for the creation of their state.

The idea is that increased prosperity will allow their leaders to prepare the institutions that will be the state's building blocks, and that steady work will cut away support for Palestinian radicals who believe that negotiations are a waste of time because up to now they have been more like capitulations.

And the ambitions do not stop there. Another hope is that if a new model economy can be built, mainly in the West Bank, and if Mr Abbas and Mr Fayyad can get credit for it, then support for Hamas in Gaza will wither away.

KNOWN DONOR PLEDGES UK: £243m ($490m) over three years European Union: $650m in 2008 US: $555m in 2008 France: $300m over three years Germany: $290m over three years Japan: $150m South Korea: $13m over three years Where will the aid go? ICRC demands action

This is how Tony Blair, now the envoy of the Quartet of the UN, US, Russia and EU put it in Paris: "If we get this moving forward I believe that all the Palestinian people will want to participate in the process. Our desire is to see one Palestinian state in Gaza and the West Bank, and if we manage to get momentum and drive into the process then we'll see all Palestinians wanting to be part of it."

In Paris many of the speakers seemed to have absorbed one vital sentence of the World Bank report.

It says that "even with full funding but no relaxation in the closure regime, growth will be slightly negative, at around minus 2% per year".

In other words, they can pour in as many billions as they like, but if Israel does not relax the stringent restrictions it enforces on the movement of people and goods, then the Palestinian economy will continue to shrink.

President Nicolas Sarkozy of France, who is considered to be a friend of Israel, talked about what was necessary.

He said Israel would have to freeze settlement activities immediately, and find a way to reconcile its legitimate security needs with allowing Palestinians more freedom of movement. It should also reopen crossings into Gaza.

Oxfam put it more colourfully. It said: "[The aid money] is being poured into a leaking bucket. The challenge is to fix the leak not pour faster. Due to Israel's movement restrictions and the blockade of Gaza, millions of dollars of aid for Palestinians are being lost. Ending these restrictions is the only way to make the money pledged count."

The question is whether that is going to happen.

Acrimony

Many of the richest countries in the world seem to have decided that letting the Palestinian crisis fester doesn't help anyone.

But is it easier for them just to pay up than to do the hard diplomatic and political graft that is needed to change things on the ground?

The negotiations that were inaugurated at Annapolis earlier this month are supposed to do that.

Mr Blair, in Paris, accepted that they have perhaps three months to close the credibility gap between the hopes expressed in Paris and Annapolis and the reality in the West Bank and Gaza.

Three months? Not much time at all. Then they are supposed to deliver a Palestinian state before the end of 2008.

And since Annapolis it has been business as usual. The first meeting between Israelis and Palestinians to start negotiations ended acrimoniously.

Israel, after promising a settlement "freeze", decided to expand a Jewish settlement on occupied land between Jerusalem and Bethlehem.

Rockets are falling on Israeli border towns near Gaza and its armed forces have responded with air strikes and an incursion.

The formula for success that was adopted at Annapolis has been repeated a lot by all sorts of important people in the last month. It boils down to freedom and justice for the Palestinians and an end to attacks on Israelis.

Creating that new reality will take a lot of courage, and many unpleasant and painful political decisions.

It is now up to Israeli and Palestinian leaders - and their powerful friends - to show that it can be done.