nder pressure from visiting US Mideast envoy George Mitchell, Israeli cabinet ministers mulled easing a siege on the Gaza Strip that was designed to weaken Hamas.

Amid US-Israeli disagreement over the Gaza blockade, West Bank settlements, and other issues involved in restarting the peace process, there is one point both sides agree on: The promises to boost the Palestinian economy during the recent round of talks stretching the final year of the Bush administration have produced insufficient results.

Hampered by Israel's economic blockade of Gaza and its restrictions on movement within the West Bank, the Palestinian economy appears to have little life of its own. While donor aid is playing a crucial role in sustaining Palestinians, the business sector – and the initiative, innovation, and enterprise that make it the chief engine of any successful economy – has been stifled.

"As a result of the Israeli security regime, the Palestinian economy has hollowed out, with the productive sectors declining and the public sector growing, as more of the population looks to the public sector for employment and assistance in coping with the impact of unemployment," said a World Bank report released last week.

Public-sector salaries account for 22 percent of the economy, while donor aid represents a full one-third. In a recent report, the World Bank said that $2.8 billion is needed in 2009.

"All of the donor aid money at best can be a Band-Aid solution to a hemorrhaging patient," says Sam Bahour, a Palestinian American technology entrepreneur. "Damage continues to be done. The private sector is like a compressed spring waiting to be let go."

'The siege has killed all prospects'

When Abdel-Ghani Abdeen began manufacturing plastic sewage pipes after the 1993 Oslo accords, he invested based on the optimism driven by the peace process. But after the breakdown of talks in 2000, and the Israeli blockade of Gaza after Hamas wrested control of the tiny coastal strip in 2007, his business has only been getting worse.

"The siege has killed all prospects," says Mr. Abdeen, chairman of the Abdeen Group. "Gaza was 30 to 40 percent of our business."

Israel and the US focused on promoting development in the West Bank to prop up the government of Palestinian Authority President Mahmoud Abbas. Even Israeli Prime Minister Benjamin Netanyahu has emphasized the need to promote an "economic peace" by building joint industrial zones to sap the motivation of – and support for – militants.

Israeli measures taken under the 2007 Annapolis initiative to ease movement in the West Bank have had only a "marginal" effect on the economy, said the World Bank report. It also warned that the Palestinian economy won't be a viable one if Gaza remains cut off.

It's an open question how much Mr. Netanyahu is willing to push Israeli security authorities to relax restrictions. Under pressure from Mr. Mitchell, Netanyahu's security cabinet met Wednesday to discuss a possible easing of the Gaza blockade, which was designed to undermine Hamas.

Ray of hope in Ramallah housing project

Palestinian entrepreneurs such as Abdeen, hobbled at home, are looking to expand in other countries. The number of industrial businesses in Gaza, for example, has dropped from 3,900 from before Israel's 2005 withdrawal to 200 at the end of last year. Unemployment stands at 26 percent. Trade is virtually nonexistent.

"There's no trade. It's risky and dangerous because only the banks do business," says Jamal Hadad, a business adviser at the Palestine Investment Fund (PIF), an $850 million investment vehicle of the Palestinian Authority.

A pair of Palestinian investment conferences last year have failed to translate into infusions of foreign capital. The World Bank said that a series of projects aimed at kick-starting the economy – promoted by former British Prime Minister Tony Blair, an envoy for the Quartet (a four-nation team spearheading peace efforts) – have failed to take off. One of the projects, establishing a new Palestinian cellular carrier, is frozen because Israel has yet to release the telecommunication frequencies.

Meanwhile $4.5 billion in reconstruction aid promised after the January war between Hamas and Israel has been held up over concerns that the money could be funneled into Hamas hands and help shore up the militant group.

In 2008, the Palestinian economy grew at a rate of 2 percent, a respectable pace given the economic crisis.

Indeed, the Palestinian economy remained relatively stable compared with those of the rest of the world because it's largely cut off from it.

"We are a drop in the sea," said Mohammed Amin, the chairman of the Ramallah district Chamber of Commerce. "We don't have billions of dollars in foreign investment that others have."

Still, Mr. Hadad, the business adviser, remains optimistic. PIF is gearing up to lay the cornerstone on a 2,000-unit housing project in the Ramallah region that could bring in hundreds of millions of dollars in investment. But the economy won't reach its full potential unless Israel and the Palestinians free up trade from the West Bank and Gaza, he said.

"We need to trade like any other country," he said. "I'm not talking about politics."