So you would say the number one reason that the Palestinian economy is in the state it is in is because they haven't embraced a "modern economy"? That may be one factor, but I would hazard to say there may be a little bit more going on there.
Of course there is, but its still a valid point that none of the economies of Arab nations are doing well, except for those based on oil. Many of the problems that exist in Gaza and the West Bank occur across the arab world, but without the attention that the Palestinian Israeli conflict gets. Look at Yemen, Sudan, Algeria, etc... The vast majority of people in these countries are not much better off than the Palestinians. There are several reasons, but imo a big reason is that these nations were drug from the 15th century to the 20th century without in the space of a few years, and they haven't handled it well. IMO, a far bigger problem for arabs than Israel is that most of the nations are theocracies, with all the limits that go with that style of government and culture.