If it were recognized as a state, it would need a lot of outside help. But if there was agreement on the territory and acknowledement of its sovereignty, an effective state could be worked toward in ways that aren't feasible when under seige or even simply occupation.
30 years ago, conditions for peace and the start of a newly recognized state seemed better, yes. But the situation hasn't resolved itself by being left as-is either.
It seems relevant that in the mid-90s the Israeli hard right reacted to the possibly of peaceful by engaging in some highly effective political assassinations which successfully restarted the cycle of violence, setting the stage for Netanyahu to prevent the two state solution.
