Mahmoud is proud of the motorbike he bought two months ago for $700, now parked in the sand at the entrance of one of the tunnels used to smuggle the machines into Gaza.

It is all the more precious these days. After an influx of bikes through the deep underground passages between Gaza and Egypt resulted in carnage on the roads by young, untrained riders, the Hamas government ordered the imports to stop.

Mahmoud, 18, is one reason why. He has no licence and no helmet, but his Chinese-made bike makes him feel good. "It is what all the young men want," he says. "It is much better than driving a car."

The bikes are dismantled in Egypt and transported through the tunnels in pieces, in view of Egyptian border guards and Israeli drones, to be reassembled in workshops in the besieged Palestinian territory.

But the trade has come at a price.

According to Khalil Shahin, economic director of the Palestinian Centre for Human Rights (PCHR), a 25% increase in the number of motorcycles on Gaza's streets over the past seven months has caused at least 160 deaths and about 1,000 injuries.

Under pressure from the PCHR, the Hamas government has taken action. Motorbikes were banned along the busy coast road at weekends during the summer. Three driving schools for motorcyclists were opened, and licences and tax – costing 1,300 shekels (£210) a year – are now mandatory.

But the primary measure, the ban on importing motorcycles, has almost put Khaled Zannon's Rafah motorbike shop, a short distance from the packed rows of tents that cover the mouths of the tunnels, out of business.

"Before Hamas stopped them, we were selling 50 or 60 a week," he says. "Now we sell maybe two. Most buyers are aged 15 to 20. But some as young as 11 ride the bikes."

The motorbikes may have dried up, but the tunnels are still busy as the lifeline that keeps Gaza's beleaguered economy afloat. Much of what Israel doesn't allow in through the land borders comes underground, including live animals. Almost anything can be ordered at a price.

"The tunnels are supplying the Gazan economy of anything it needs," says Nicolas Pelham of the International Crisis Group. "It is a smugglers' economy."

At the other end of the Gaza Strip, in the market at Jabalia refugee camp, an electrical shop is packed full of smuggled goods: washing machines, vast silver fridge freezers, vacuum cleaners, toasted sandwich makers, kettles, mixers, microwaves, steam irons, blenders, hair dryers, TVs, halogen heaters – all are readily available and almost all came through the tunnels.

There is, however, little electricity to power the goods on display; the shopkeeper says the power is out for eight to 12 hours a day – and the thrum of generators is audible all over Gaza. Why sell items that people can barely use? "What can we do?" he shrugs. "This is our life."

Still, deliveries are vulnerable to the vagaries of supply in Egypt. One week Gaza is awash with a certain brand of detergent; the next it might be green T-shirts.

Back at the border in Rafah, a cross between a war zone and a massive – and unique – industrial park, Abu Rawhai, a tunnel owner who declines to give his real name or be photographed, is one of those exploiting the parallel world of Gaza's economy.

His new $220,000 (£137,000) tunnel is almost completed. It has been under construction for seven months, but almost at the point of opening there was a hitch. "There was a crash," he says, explaining that two tunnels collided while being built underground. "Now we have to fix the route."

A handsome man with a short beard and a broad smile, he is one of 17 partners who have invested in the new tunnel. "We are just mediators," he explains. "We have dealers in Egypt making requests to transport goods, and people in Gaza also making orders. You can order anything you need."

Tunnel collisions are not the only hazard. The well leading underground was bombed by the Israelis three months ago; two of Abu Rawhai's workers in the tunnel suffocated to death. Abu Rawhai paid each family 40,000 shekels (£6,500) compensation, and then set about building a new well a few metres away.

He gestures to a crane a short distance away on the other side of the border, and complains that the Egyptians are building a barrier deep underground to stop smuggling. His tunnel is 13 metres deep; the Egyptian barrier is reported to extend 30 metres underground. "Everything will be over if this wall is built," he says.

Are the tunnels good for Gaza? "Yes and no," he says. "They are breaking the siege, but it's dangerous work. The men are afraid whether they will come back up."

But Ismail, 19, barefoot with a red and white keffiyeh round his head, who emerges amid the steamy air that rises through the tunnel well after fixing a collapse, disagrees. "Of course I'm not scared," he says. "We are lions. And there is no work elsewhere."

Khalil Shahin of the PCHR estimates that 40-50,000 Gazans are working in or around the tunnel economy, including transportation and warehousing. He adds that a small proportion – "not more than 5,000" – are children. "Tunnel workers need to be slim and agile. Children make good workers underground."

Since the Israeli blockade on nearly all goods in and out of Gaza, the tunnels have become "a lifeline, crucial to breaking the siege and ensuring basic life can continue", says Pelham.

But they are also having a political consequence in tying Gaza's economy more firmly to Egypt and further distancing it from the West Bank – a result that some Palestinian leaders say is a deliberate Israeli tactic to divide and weaken the Palestinians.

And what little remains of the above-board Palestinian economy is struggling to compete, making it harder for legitimate businesses to recover if the siege is ever lifted.

The tunnels have also created a wealthy elite among the 5,000 tunnel owners. "You see it in the new restaurants in Gaza City," said Pelham. "People are making money through the tunnel economy, there is a new moneyed class in Gaza who can afford to go out to eat."

Hamas has also benefited from the tunnels. It licenses them through the Rafah municipality at 10,000 shekels (£1,630) a time, and charges for electricity to light the shafts.

Mohammed, another tunnel owner, says Hamas keeps a tight grip in other ways too. It no longer taxes goods coming through the tunnels but monitors movements to ensure that drugs, alcohol and weapons are not imported.

Down on the border, late into the afternoon, the pirates of Gaza are still loading the trucks with smuggled chocolate and yanson – aniseed suddenly hugely in demand as a remedy for swine flu. Business is good.

"We have no alternative," says Mohammed "This is the only way to work. If the border crossings were open, there would be no tunnels."