In the world of Palestinian politics, the recent weeks have been a study in contrasts. The international media has trained its focus off the shores of Gaza, where the flotilla fiasco has generated dramatic images of dead civilians and battered Israeli soldiers. The politics of this incident reflect the traditional sturm und drang of the Palestinian national movement: full of grand gestures and transformative ambitions that might result in bloodshed and embarrassment for Israel, but make no substantive contribution to Palestinian liberation.

But in Bethlehem, far away from the television cameras and breathless news reports, 2,000 Palestinian financiers also gathered recently at the second Palestine Investment Conference to quietly go about the business of building the economy of a viable Palestinian state. They discussed almost $1 billion in new projects targeting high-growth sectors, including information and communications technology, housing, and tourism. The politics of the conference represent a paradigm shift quietly taking place in the West Bank under the leadership of Palestinian Authority President Mahmoud Abbas and Prime Minister Salam Fayyad, in which Palestinians are increasingly turning to the mundane, workaday tools of governance and development as their principal strategy for ending the occupation.

This strategic transformation is the result of a conundrum facing the Palestinian leadership, which has gambled its political future on a two-state agreement with Israel. If they fail, it is likely that both the Palestine Liberation Organization (PLO) and the Palestinian Authority (PA) will permanently fade from history and the national movement will be captured by Islamists led by Hamas. Even PLO leaders, however, are still extremely skeptical about the ability of diplomacy to yield significant short-term progress, given the hard-line attitude of Israeli Prime Minister Benjamin Netanyahu's government. Therefore, Palestinians have gravitated toward solutions that avoid exclusive reliance on diplomacy, which depends on American determination and Israeli seriousness, or slipping back into counterproductive, self-defeating violence.

The most important of these initiatives is the state- and institution-building program adopted by Fayyad's cabinet last August. This program marks an attempt to build the administrative, infrastructural, and economic framework for a Palestinian state -- not only in spite of the occupation, but as a means of confronting it. The plan calls for every PA ministry to meet a series of administrative and institutional goals, from economic and infrastructural developments to good governance and transparency measures. A budget document released in January added even more details to the program. The idea is that, if you build the state, it will come.

Palestinian nationalism had previously been conceived of as largely a top-down affair, concerned with success on the battlefield or at the highest levels of international diplomacy. But rather than seeking an impossible military victory or waiting for the sudden achievement of a major peace treaty, the state-building program seeks to create Palestine as a practical reality. Even as they continue to insist on their moral right of self-determination, Palestinians are seriously taking up their practical responsibilities of self-government.

Palestinians have also adopted nonviolent tactics designed to confront the occupation -- particularly the PA's boycott of settlement goods and mass protests against abusive occupation practices, such as the West Bank separation barrier. These tactics are designed to ensure that both Israelis and Palestinians understand that the state-building approach is not, as is sometimes claimed, a form of collaboration or "beautifying" of the occupation, but rather a sophisticated form of resistance to it. This approach also seeks to achieve clarity on the status of the occupied territories and confront Israelis with a simple question: Is this land going to be part of our state, or is it a part of yours?

This strategy is making quiet but significant progress. Last year, the PA completed more than 1,000 community development programs. It has created the nucleus of a Palestinian central bank and developed a transparent and accountable system of public financing. Hundreds of major development and public-private initiatives are under way, including at least two major telecommunications companies and the first planned Palestinian city. With significant international support, the framework of the Palestinian state is starting to take shape before our eyes.

The bedrock of the state-building program is the new security services trained by multinational forces Palestinians have deployed 2,600 officers in five major West Bank cities, ensuring unprecedented levels of law and order and facilitating the removal of a number of Israeli checkpoints. Israelis themselves have commended the effectiveness of the forces and praised their security coordination with Israeli forces. The combination of security improvements, increased access and mobility for Palestinians, and the PA's economic development projects led to a growth rate of 8.5 percent in the West Bank last year, one of the highest in the recession-plagued world economy. Perhaps even more significantly, about half of the PA's budget is now provided by Palestinian taxes and not international support.

In addition to this paradigm shift in the West Bank, Palestinian diplomacy is finally back on track after a difficult 12 months. Abbas's June 9 visit to the White House revealed that the PLO is presenting itself, for the first time in many years, as a real political partner to the United States. Abbas was able to achieve broad agreement with President Barack Obama's administration on most key points, including the necessity of easing the siege of Gaza without benefiting Hamas and reaching an agreement that, though direct Israeli-Palestinian talks are important, more political and diplomatic preparation is still required before they can be launched.

There have been some significant failures, of course, particularly regarding the problem of Hamas's grip over Gaza. Hamas stymied plans to hold national elections in January and July, which represented the only viable peaceful option for reunifying the Palestinian national movement. For the foreseeable future, therefore, national reconciliation appears to be a slogan rather than a practical possibility. The PLO and Hamas currently agree on absolutely nothing, from how to deal with Israel to the cultural and religious foundations of Palestinian society. The future of Hamas will likely be determined by the success or failure of the PA's state-building project, and its diplomatic efforts. A decisive failure of the new Palestinian tactics will probably make an Islamist takeover inevitable, but its success will discredit Hamas and weaken the organization's appeal.

The recent Gaza flotilla disaster and Israel's unconscionable and counterproductive blockade of humanitarian aid to the people of Gaza poses a significant challenge to the PA's strategy. In the coming months, its leadership will attempt to deny Hamas the ability to reap political benefits from Gazans' suffering. Particularly after Israel's bloody attack on the flotilla, PLO leaders are determined to help find a way to ease the siege without strengthening their rivals. They think that the blockade has primarily strengthened Hamas's grip on power in Gaza and are calling for a new way to separate the interests of Hamas and ordinary Gazans.

Palestinian strategy must contend not only with the fallout from the flotilla debacle, but with the constant stresses imposed by the occupation's continued restrictions on Palestinian economic development and the meager progress of diplomatic negotiations. Recent World Bank and IMF studies confirm that, though the institution-building project is meeting its stated objectives, under present conditions it can only go so far: The occupation must continue to recede for it to develop further. This means that increased Israeli cooperation is essential. The PA's state-building approach and its nonviolent tactics are means for achieving progress on the ground, but in the end they cannot be a substitute for a negotiated agreement.

Although the flotilla fiasco and international outrage concerning Gaza may be more dramatic, all parties have an interest in ensuring the success of the groundbreaking developments in the West Bank. International support and Israeli cooperation are essential for this project to realize its full potential. If that happens, the creation of a viable Palestinian state might attract more than a few newspaper headlines of its own soon enough.