It's failed. The Middle East will never accept Israel as a legitimate nation because it wasn't. It was finagled by manipulating international law toward the express purpose of handing over land that was already spoken for to a people who neither deserved nor earned it. It was an expression of western guilt and nothing more.
The failure is in thinking the "dumb camel jockeys" would forget and move on.
A number of points:
1. The territory in question was not a sovereign state.
2. The owners of the territory (Ottoman Empire and British Empire) legalized Jewish immigration.
3. Legal immigrants have basic rights and claims equal to those who are native born.
4. The Jewish people have historic roots in the region that are substantiated through abundant archaeological and historic evidence.
5. The British delegated to the UN the task for bringing sovereignty to the region.
6. UNSCOP recognized the two peoples' equal rights to self-determination and their shared historic legitimacy in the region. Neither side was entitled to become the sole inheritor of Britain's imperial possession.
7. UNSCOP and the UN's adoption of GA Res. 181 was consistent with international law (diplomatic documents, League of Nations Mandate, UN Charter, customary principles, etc.). Hence, Israel's re-establishment was legitimate under international law. That Israel's foes in the region take a different view has no bearing on that point. Certainly, there is nothing anywhere in international law that required that Britain's entire spoils be given to a single party.
8. Israel has become a prosperous and developed nation in spite of the adversity created from its enemies' rejectionism. Its standard of living is higher than that in many of the oil-rich Middle Eastern states. It has a number of genuine leading edge industries in the sciences and technology. It accomplished all that despite repeated attacks and other acts of aggression. In contrast, many of its most vocal foes offer little more than desperate and wild excuses for their lack of economic and social progress and still refuse to come to grips with the harsh reality that their stagnation is largely a home-grown situation for which they are primarily responsible.
9. Israel's success even proved to have been an inspiration to Singapore in the late 1960s, when that state was looking for viable economic models. It saw Israel as a leading case study on how a small state that lacked natural resources could become prosperous.
In sum, by no reasonable definition or measure of objectivity can Israel be described as a "failed state."