When Usama Kuhail's construction business collapsed almost overnight following Israel's dramatic intensification of its siege of the Gaza Strip three years ago, he knew that the prospects for the 120 building workers he employed on a casual basis were grim.

Along with Kuhail's firm, 3,000 businesses were to go under in the ensuing months. For each job lost, another seven or eight people who relied on that income faced impoverishment.

So what did Kuhail's men do? About 40% now work in the tunnels under the border with Egypt that are used to smuggle huge amounts of goods into Gaza, a dangerous job only for the desperate. The rest, he said, probably either joined the Hamas security services or are paid piecemeal by militant factions to launch rockets into Israel.

"It's hard to blame them when there is no alternative," he said.

Was this what Israel intended when it tightened the noose around Gaza? Does it make Israel more secure to cripple a functioning economy, with trade ties to Israel, Europe and beyond, which provided a degree of stability and security? And to drive honestly employed men into the arms of black marketeers and those Israel sees as its enemies?

The traditional economy is now in such a parlous state that some here in Gaza question whether it can ever recover. But to do so it certainly needs more than simply the easing of the blockade to allow in more aid – crucial though that is for Gaza's population.

Before Israel began its regime of closures at the start of the second intifada, the Gazan economy was dominated by traditional businesses focused on construction, agriculture, furniture-making and textiles. Raw materials were imported; much of the resulting produce was exported. It was the kind of economic model, valued and promoted by western democracies, which forms an essential pillar of any functioning society.

Then, after Hamas's bloody and successful struggle with Fatah for dominance in Gaza and increasing rocket fire from the territory, Israel declared Gaza a "hostile entity" and almost totally sealed its borders.

Unable to either import or export goods, the legitimate economy collapsed. Gaza used to have almost 4,000 factories and workshops; following the blockade – and the destruction wrought in the three-week war of 2008-9 – only 500 or 600 are still operating. In their place there has sprung up a flourishing pirate industry bringing in goods through tunnels to Egypt.

"We are now a nation of tunnel diggers," said economist Omar Shaban. "The tunnels were seen as a tool to overcome the hardship. Now they have become socially, politically and morally acceptable."

There is a black market in most countries, he added, but it normally doesn't exceed 10% of the total economy. "Ours is now entirely black."

The tunnel entrepreneurs – "young men, who used be poor and now are rich," said Kuhail dismissively – are the new elite of Gaza, supplanting the old guard, buying up land, building new houses with smuggled concrete and generally swaggering around Gaza City.

"These emerging families who have never been in business before now have the upper hand over our economy," said Shaban.

Initially, the traditional businessmen shunned the upstarts. "Then they began to realise they were losing power and influence," said Shaban. "Now you begin to see a connection between the tunnel men and the old legitimate businessmen. They are crossing the line."

Some are investing directly, some are servicing the tunnels through related businesses such as haulage, he said.

But there is also another player on the scene: Hamas. Starved of funds after both Israel and the Fatah regime in the West Bank withheld tax revenues, the rulers of Gaza saw an opportunity for income and control.

Tunnel owners are now required to pay hundreds of dollars for licenses, giving Hamas badly needed revenue and the entrepreneurs a veneer of political legitimacy. Earlier this year, Hamas imposed taxes on smuggled goods, including fuel, to help pay its burgeoning salary bill.

But Hamas also understood that if unchecked, the tunnel operators' influence would grow. "The people who own the economy also own the political influence," said Shaban.

By controlling the tunnels, said Mkhaimar Abusada, professor of political science at Gaza's Al-Azhar university, "Hamas has turned the siege to its own advantage. Instead of being squeezed by the blockade, Hamas has become stronger and more powerful."

The net result is the legitimate businesses of Gaza have all but disappeared, dismantled by Israel's siege policy or destroyed in its military offensives, rendering impossible a normal functioning society or state.

Their place has been taken by what some call a new Islamic oligarchy – an alliance between Hamas and the pirate entrepreneurs.

Many question whether this is in the interests of either Israel or the west, which has, until the past week at least, failed convincingly to agitate against the blockade.

Abusada says the policy has backfired against Israel and its allies.

"Instead of weakening Hamas, it has consolidated its grip and its power over the Gaza Strip," he said. "Hamas has already won the battle of the siege."