In light of the overwhelming evidence (and domestic consensus) that Israel will not reach a durable peace treaty with the Palestinians anytime in the near future, Jerusalem has for some time opted to pursue an approach based on managing rather than attempting to solve a so-far insoluble conflict. Efraim Inbar discusses the pros and cons of this approach:
[N]egotiations toward the doubtful “two-state solution” keep a fictitious formula alive and prevent fresh thinking about alternative solutions from emerging. Moreover, the “peace process” requires moderation, which [for Israel] entails swallowing Palestinian provocations and restraining punitive action.
A second [problem] is related to the “carrot-and-stick” approach toward the Palestinians. In the absence of meaningful negotiations, Israel, particularly Prime Minister Benjamin Netanyahu, has advocated the promotion of “economic peace” as a part of conflict management, on the assumption that Israel has nothing to gain from hungry neighbors. This is why Israel does not oppose international financial support for the PA, despite the corruption and inefficiency of the latter. Jerusalem also provides water and electricity to the PA, and to Hamas-ruled Gaza, so that Israel’s Palestinian neighbors do not dive into total desperation.
But the carrot mitigates the impact of the stick. The Palestinians, it must be recalled, wage war on Israel. Exacting pain from opposing societies is what war is all about, and pain can have a moderating effect on collective behavior. Egypt, for example, decided to change course with regard to Israel because it grew reluctant to pay the costs of maintaining the conflict.
Since the Palestinians have chosen to pursue their goals by causing Israel continued pain—rather than by accepting generous peace deals offered by Ehud Barak (2000) and Ehud Olmert (2007)—Israel has every right to punish them, in the hope that a bit of pain might influence their future choices in a productive direction. But by adopting an “economic peace” approach, Israel creates disincentives to Palestinian moderation, and signals its desperation at the prospect of changing Palestinian behavior.
Read more on BESA: http://besacenter.org/perspectives-papers/israels-palestinian-dilemmas/