The early city-state Roman Republic had a similar problem. They were yeoman farmers and simple villagers surrounded by larger, older, and more powerful enemies. Their solution was to become a military power and to impose puppet rulers, and direct rule over all of their enemies, eventually the known world. As the Middle Eastern outpost of the West, in the current world war between the islamists and the west, Israel may have to do the same thing with all of their Arab neighbors.
That of course is what Israel tried to do with Arafat. The Palestinians were to be answerable to him and he was answerable to Israel. That's why Sharon kept ordering him to arrest militants and terrorists.