HAS Israel turned the West Bank and Gaza into a captive economic colony? Is an independent Palestinian economy a political threat to Israel?These questions have been thrust into the Israeli headlines these past few months after Defense Minister Moshe Arens announced he would "help Palestinians find new markets for their agricultural goods" and "make life easier for Palestinian businessmen." This was followed by a decision to embark on a series of economic reforms, including the creation of Palestinian-owned banks in the territories, the granting of dozens of new business licenses, and tax incentives for factories. The move was ostensibly motivated by the grave economic situation in the West Bank and Gaza. Up to 40,000 Palestinians have lost their jobs in Israel during the past year to new Soviet immigrants. Economists point to a 40 percent unemployment rate in the occupied territories. This comes on top of the Gulf war, which was an economic disaster for the Palestinians. Every day that the territories remained under curfew by the Israeli Army cost the Palestinian economy more than $50 million. The shutdown of the Kuwaiti treasury cost the territories nearly $300 million a year in contributions to social services. Nearly $200 million a year in remittances from Palestinians working in the Gulf was lost. The West Bank and Gaza population must now deal with as many as 300,000 Palestinians who have since returned to the territories. The Palestine Liberation Organization (PLO) lost financial backing from the Gulf states, drying up budgets that once funded newspapers, research centers, labor unions, and medical organizations in the West Bank and Gaza. It isn't clear whether the change in policy by the Defense Ministry will serve as a turning point in economic development, or if it signifies a recognition by the Israeli government that the residents of the territories must be left alone to build their own economic infrastructure. Some Palestinian economists believe that it is not a new policy at all but merely a political ploy by the Defense Ministry to keep Palestinians from entering Israel because of the surge in attacks on Israeli citizens. Arens, claims Samir Hulaileh, an economist with the East Jerusalem-based Economic Development Group, is talking about a few ad hoc regulations, not about any comprehensive change in policy. Simcha Bahiri, an Israeli economist who has carried out industrial surveys in the territories, says the change in thinking, even if real, is simply too little, too late. The Ministry of Defense has denied hundreds of licenses over the years to start new factories. The fact is, says Dr. Bahiri, billions of dollars in investment capital would be needed today just to find employment opportunities for the 100,000 or so Palestinians currently working in Israel. One major problem is lack of access to the Israeli market. Palestinian agriculture, the largest economic sector in the territories, is banned from Israel. With markets to Jordan and Iraq closed and Palestinian companies not allowed to export to Europe under Israel's free-trade agreement, Israel is obligated to open its markets to Palestinian goods, say Palestinian economists. Even if the political status quo continues indefinitely, the Palestinians must be given some control over their own economic development and future. Israel should, for example, turn over a portion of the management of economic development in the territories to an independent organization made up of Palestinians, but not controlled by the PLO. The world market is big enough for both Israeli and Palestinian produce. Rather than try to steer West Bank and Gaza produce to the Arab world, Israel should view Palestinian farmers as possible customers for the sale of Israeli agro-technology and even potential partners for manufacturing and marketing. Israel could help the Palestinians develop their own fruit and vegetable processing industry to absorb surpluses. But after almost four years of intifadah, isn't all talk of closer economic cooperation and of using prosperity as a replacement for national aspirations futile? Perhaps, but if a Palestinian state is a long, long way off, what about the immediate economic needs of the Palestinians? It's often contended that a Palestinian state is "inevitable," but it actually isn't. The Palestinians and their supporters might as well get used to the idea that, as long as the Likud is in power, Israel may never leave the territories. The current mood of the Israeli electorate makes these conclusions inescapable. SO is autonomy under Israeli rule a possibility? The idea is rejected for political reasons by Palestinians, but economically it could be of value to them, providing them with the necessary conditions to improve their socioeconomic status. Under such a scenario they would not have to invest huge sums in establishing a separate infrastructure - telephone, electricity, roads - but merely "lease" these services from the Israeli government. Under a fair autonomy plan, the Palestinians would have their own system of taxation. Through income and purchase taxes, they could finance cultural, educational, and industrial needs. Israeli production technologies would create a more productive industrial sector in the West Bank and Gaza, expanding the tax base. The Israeli and Palestinian economies could be planned together, not compete with each other. Granted, the Palestinians' political demands stand squarely in the way of addressing their economic needs along the lines discussed here. But that's not an argument for failing to consider the economics of the Palestinian-Israeli problem. Economics is the long-term key to solving most political conflicts. This one is no different.