I wonde how the Palestinians will feel when they can't get to their jobs? Or how the Arabs will feel when they have to build industries and educate their children in something more useful than Islamic studies?
Israel has deliberately targeted and destroyed Palestinian efforts at economic development. A number of foreign companies that had invested in factories there are quite annoyed about it.
As long as Israel and Palestinians are located where they are, Israel can't afford to allow Palestine to develop. On the other hand, Palestine must be freed from Israel's oppression if it's ever going to develop. Other Arab countries, who like neither the Israelis nor the Palestinians, are perfectly happy to have them continue fighting and to encourage the Palestinians to make ill-advised attacks.
Perhaps what's needed is for Israel to identify who its real enemies are (other countries are sponsoring Palestinian terrorism) and shift some of its efforts there. If, e.g., Lebanon is supporting the terrorists, perhaps Israel could capture some land from Lebanon and give it to the Palestinians. Obviously the Lebanese may not like it (and if they're not involved in sponsoring the attacks on Israel I wouldn't recommend this approach) but it might have some good effects on Israeli-Palestinian relations.