Bani Naim, Hebron - In mid-August, Avigdor Lieberman, Israel's defence minister, announced that Israel's policy towards Palestinians in the occupied West Bank would include "colour-coding" its communities into "good" and "bad".

"We will implement a differential policy," said Lieberman, who belongs to the far-right, nationalist Yisrael Beiteinu (Israel our Home) party. "Its purpose is to continue to give benefits to those who desire co-existence with us and make life difficult for those who seek to harm Jews."

Lieberman's colour-coding policy - green for good and red for bad - would include increased punitive measures against communities from where attackers or alleged attackers originate.

His policy includes establishing a direct dialogue with Palestinian figures or "anyone who wants to talk to us", circumventing the mediation of the Palestinian Authority.

Bani Naim, a Palestinian village 8km east of Hebron, has recently seen the sharp end of Lieberman's "carrot-and-stick" policy. Last month, the town was sealed for the second time in less than three months, when two teenagers from the town were shot dead by Israeli forces after alleged attacks.

Last July, the town was sealed for 34 days, and as many as 2,771 residents had their permits to work in Israel revoked following attacks in which two Israelis were killed.

"We are a business city, famous for trading marble. There are many traditional factories here, selling inside and outside Israel," said Mahmoud Manasra, Bani Naim's mayor, told Al Jazeera. "The movement of these people has been severely limited by the closures, in addition to many getting their permission revoked."

While about half of the Israeli work permits were reinstated, 1,500 residents are still unable to renew their permit to enter Israel, where they normally work as traders, or in construction. Human rights groups say such measures amount to collective punishment, illegal under international law, and the measures were slammed as counterproductive by top UN officials.

Following last month's violence, Israel announced that an extra army brigade would be deployed in the area, and re-imposed strict movement restrictions on residents of Bani Naim and Hebron city. These have since been partially lifted.

"They are ready to destroy the whole economy here," Rawhi Abu Sneineh, 45, told Al Jazeera at the blocked entrance. Sneineh, who works in the marble industry, said it normally takes him 15 minutes to go to work, while during closures it takes at least five times as long.

Ryad Tarayra, 42, from the extended family of the alleged attackers, said his permit was revoked last July.

Lieberman's plan in fact is to prevent any possibility for a two-state solution, in which the Palestinians can establish their own independent state. Khalil Shaheen, director of the Palestinian Centre for Policy Research Masarat

"Everything in our work is at a standstill now," Tarayra, a trader for 15 years, told Al Jazeera.

"We still pay money for storage in Israel. I lost about 80,000 shekels [$21,000] since July. If this continues, I will have to take it all back and look for a job here to support my children," said Tarayra, who has seven school-age children. "Revoking permits from workers only leads to more chaos in the area."

Khalil Shaheen, the director of the Palestinian Centre for Policy Research Masarat, told Al Jazeera that while the idea of collective punishment is not new, what is new is the manner of its implementation.

"We are seeing an idea turn into official policy," Shaheen said. "The idea behind the carrot-and-stick policy is to encourage the emergence of Palestinian local leaders, even inside areas controlled by the Palestinian Authority.

"I think the goal is to weaken the Palestinian Authority, but to prevent it from collapsing, aiming to turn it into a weak central authority," Shaheen added, noting that while Prime Minister Benjamin Netanyahu started the process and former Defence Minister Moshe Ya'alon talked about "autonomy" for Palestinians as opposed to statehood, Lieberman appears on track to accelerate it.

Since last October, tensions have boiled over into escalated violence in Israel and the occupied West Bank, including East Jerusalem, and the blockaded Gaza Strip.

During that period, the Israeli army has killed at least 230 Palestinians, including protesters, bystanders and alleged attackers. Of that total, at least 57 were from the Hebron area, where tensions have been particularly high due to the presence of about 500 Israeli settlers in the the middle of the Palestinian city. Palestinian attackers have killed 34 Israelis in stabbing and shooting incidents.

A renewed bout of violence in the Hebron area has left seven Palestinians dead since last month.

Parallels have been drawn between Lieberman's approach and the establishment of the Village Leagues in the 1980s - an attempt by Israel to prop up a local leadership that would be a more "moderate" alternative to the Palestine Liberation Organization, but came to be seen by Palestinians as collaborators with the Israeli occupation.

Shaheen pointed out that the major difference between then and now is that the Village Leagues were fostered and encouraged by the Israelis to transform local leaders into negotiators.

Today, the idea, according to Shaheen, is to weaken the Palestinian Authority by establishing a direct dialogue with Palestinian business leaders and notable figures and by-passing the Palestinian Authority as an intermediary - eventually paving the way for more autonomous local cantons.

"Lieberman's plan in fact is to prevent any possibility for a two-state solution, in which the Palestinians can establish their own independent state," Shaheen said.

Mohammad Shtayyeh, a minister in charge of the Palestinian Economic Council, dismissed Lieberman's "carrot-and-stick" claims. Shtayyeh told Al Jazeera that Israel has been implementing a "stick-and-stick" policy under Netanyahu that includes an "acceleration of colonisation and settlement building as part of a wider government policy".

Shlomo Brom, a senior research associate at the Institute for National Security Studies, where he heads the programme on Israeli-Palestinian relations, told Al Jazeera that Lieberman's strategy fits the paradigm of "economic peace", with a negative approach towards the Palestinian Authority.

"In this context, [Lieberman] is willing to do things that the previous administration didn't do, like allowing Palestinians more use of Area C, under Israel's control. He is willing to approve economic projects in these areas. Because he wants to weaken the Palestinian government, he wants businesses and communities to report directly to the Israeli authorities, bypassing Palestinian government and ministries. [Lieberman] gives the impression he will not mind if the PA collapses," Brom added.

According to Tareq Baconi, a policy fellow at the Palestinian think-tank Al Shabaka, this may lead to a return to a more direct kind of occupation, which bypasses the Palestinian Authority as an intermediary.

"Lieberman's approach … accepts the economic aspirations of Palestinians, but it rejects any kind of political aspiration," Baconi told Al Jazeera.

At the end of the 1980s, it had become clear that the Village Leagues had failed; 1987 saw the breakout of the first Intifada.

"It was a clear indication that Palestinians wanted political rights as well. You can improve quality of life, remove any form of uprising in the short term. But in the longer term, Palestinians will seek equality, civil rights and political representation. They won't acquiesce."