Driving along a coastal road in northern Gaza, there's another surprise: a seaside resort - a glamorous villa dotted with outlying beach huts - which would look idyllic if it wasn't for the barbed wire, padlocks and the utter emptiness of the place. This was built in early 2000, before the intifada (uprising) started, when people thought Gaza's 18km of beaches were ripe for a tourism boom. It's a reminder that economic progress remains tentative and vulnerable to political surprises.

Take Ammer Aker, the chief executive of Palestinian mobile phone firm Jawwal. Smart and affable, he talks excitedly of the normal concerns of a young businessman, but with a Palestinian twist. His company has dreamed up new SMS gimmicks, such as free military curfew alerts.

He has ambitious growth plans - but they're constrained by the difficulty of importing and building new mobile phone masts. Some locals believe that the masts cause cancer, which is a widespread perception in developed countries, too. The difference is that here, people just burn the masts down.

On the morning of our meeting, I try to call Mr Aker from Jerusalem. I have three mobile phones with me, but can't get through. It turns out the Israeli network I'm roaming on doesn't allow me to call Palestinian mobiles.

It's absurd, although absurdity rapidly becomes a way of life here. Two out of the four Israeli mobile networks block calls to and from Jawwal numbers. Dialogue is barred if you've bought the wrong brand.

The block seems due to business, not politics. 'The West Bank and Gaza is the third-biggest market for Israel after the EU and US,' Mr Aker says. 'Everyone in Israel already has a mobile phone, so Israeli mobile companies want to keep hold of the Palestinian market, and they don't want us to increase our share.'

Between them, Israel's four mobile phone operators have a 50 per cent share of the Palestinian market. Jawwal, the only Palestinian mobile company, has the rest.

So blocking Palestinian numbers seems to be a case of cutting out the competitor, not a clash of civilisations. But it has a political impact, adding to a huge mass of obstacles to communication. And it adds to Palestinian suspicions that Israel doesn't want their economy to succeed.

Israel has good reasons for tight security measures, but the border closures and internal movement restrictions it has often imposed on Palestinians for security purposes also have the effect of stifling the economy, adding to resentment among Palestinians.

'They assume every Palestinian company is financed and managed by terrorists,' Mr Aker says. 'Our imports have been blocked repeatedly. We did not imagine this with the talk of peace and withdrawal.'

In mid-November, World Bank president James Wolfensohn expressed his frustration over the restrictions on the Palestinian economy. 'Gaza needs mobility, or it's a prison. How can you build an economically viable state without access, egress, ports, airports, mobility? Palestinians need hope. In my experience elsewhere, people who have hope don't blow themselves up.' At this point, Mr Wolfensohn had spent five months mediating between Israelis and Palestinians in an effort to ease the constraints on Gaza's economy, with no progress.

But US Secretary of State Condoleezza Rice was in town to bang a few heads together, and the next day, there was good news: an agreement to open Gaza's borders so people and goods could move in and out of the territory.

I was in Gaza when the news came, and just a day there showed me why the agreement is so important. In the Gaza Strip - a fertile area on the Mediterranean coast with miles of sun-drenched beach - a quarter of the population are unable to feed themselves, even with food aid. The World Bank said 43 per cent of young men (15- to 24-year-olds) were unemployed in 2002; locals say it's now more like two-thirds.

These are man-made problems, stemming from insecurity and immobility. In the first two years of the Palestinian intifada, the Palestinian economy experienced a deeper recession than the US' Great Depression of the 1930s. Security concerns led Israel to impose a highly restrictive system of checkpoints, temporary road closures and unpredictable, sporadic border closures on Palestinians.

The morning I visited Gaza, I came through the Erez crossing from Israel. This is a long, winding corridor, walled in by grey concrete slabs, under a corrugated iron roof. As a foreigner, I went through a wide lane for 'expatriates and VIPs'. Another lane, subdivided by metal fencing into much narrower gaps, is signposted 'Palestinian Workers And Business Man'.

On the way back out, everyone comes through the Palestinian lanes because that's where the metal detectors are. Passing through this way was quite a different experience. Unseen Israeli soldiers shouted contradictory orders at me through speakers, one shouting 'Move!', another simultaneously calling 'Stop right there!'.

There are good reasons for the tight security, for the closures, and the soldiers being on edge. The three border crossings - Erez and Karni into Israel and Rafah into Egypt - have all been attacked by Palestinian militant groups.

'Hamas attacked Erez partly because they see the thousands of Palestinians who work in Israel as a security risk,' said one local humanitarian worker. 'They think some of them are informers and they want to stop them crossing the border.' Or it may be that militants fear something more simple: that working together could encourage peace.

Israeli security and Hamas have both, at times, seen an interest in sealing the borders. Preventing cross-border travel may stop would-be suicide bombers or informers. But it's a poor guarantor of security, preventing the co-operation and the simple socialising that is essential if each side is to stop demonising the other.

On the other side of Erez, bored taxi drivers wait, complaining that all the business they had from journalists during the withdrawal has dried up. I get a lift to tour some former settlement blocs, now just rubble. We also pass through the Erez Industrial Zone, set up in Gaza as a joint business park where Israeli firms could benefit from cheap Palestinian labour and Palestinian firms took advantage of easier access to the Israeli market.

Once a symbol of how trade can overcome political hatred, the industrial zone is now a wreck. 'Just before the withdrawal, Israeli businesses pulled out, demolishing their offices,' said another humanitarian worker. 'The Palestinian firms can't access Israeli markets any more, so they're largely defunct.'

Israel's withdrawal of settlers and soldiers from the Gaza Strip was hailed internationally as a step forward for peace, but until the border agreement was reached, the withdrawal had actually worsened Gaza's economic prospects. The disengagement was not just a matter of giving land back, but of separating the two communities even further. But Gaza's economy is utterly dependent on Israel as the key export and labour market.

After the withdrawal - while most of the world cheered - internal movement became much freer, but border closures got worse. In Gaza City, after my tour of the rubble and barbed wire by the beach, crossing paths with kids in donkey carts and tough guys in expensive cars, I visited Palestinian lawyer Raji Sourani, head of the Palestinian Centre for Human Rights.

'I used to lecture in Israel once a month, but since the withdrawal, I can't even go to the West Bank,' Mr Sourani said.

But just two hours later, I heard the news of the agreement from Gazan journalist Yasser Abu Moalik. 'My friends used to say, the Israelis have left Gaza and taken the key with them,' he said. 'But now there is good news. The Palestinian Authority has actually achieved something.'

The border agreement suggests Israel may be realising that, while closures may boost security in the short term, sustainable security requires giving Palestinians hope - just as Mr Wolfensohn said. Similarly, Mr Sourani said: 'We have a choice between the rule of law and the rule of the jungle. Any agreement strengthens belief in the rule of law. With openness and hope, Hamas' support will fall. But you can't bring security unless people feel they have something to lose.'