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Israel's GDP decreased following both the first and the second intifadas. It also decreased following the world financial crisis of 2008. The greatest damage was wrought by the second intifada, as the Bank of Israel stated clearly, ". . . we are experiencing . . . the longest recession in our history." The Bank went on to say, "The recession is the result of two negative shocks – escalation of the armed conflict with the Palestinians [the intifada] together with the slowdown in world trade and global slump in the hi-tech industry. Unlike 2001, when reduced GDP caused by the intifada was comparable to the loss from the decreased demand for Israeli exports [resulting from the hi-tech slump], in 2002 the intifada was the primary cause of the contraction of economic activity."

The economy experienced two years of negative growth (production not only failed to grow, it declined) and three years of negative growth in GDP per capita – that is, a real decrease in the standard of living.

For the standard of living to rise, Israel needs a long period of steady growth in GDP per capita.

The intifadas and the attendant economic crises seem to have happened a long time ago. However, absent a political settlement, such events are likely to return. Since the last intifada, there have been frequent violent clashes like "Protective Edge" and "Pillar of Defense," each of which resulted in damage to the Israeli economy.

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Since the first intifada, control and policing of the Palestinian territories has become Israel's primary ongoing military mission. The full scope of these expenditures cannot be ascertained, primarily because the Defense Ministry budget is not made public in its entirety. Even if it were, it would probably not be possible to establish which budget lines apply directly and exclusively to events on the Palestinian front and which relate to other matters.

Defense expenditures also include a good part of the budget of the Ministry of Internal Security. The forces under this ministry became an important element of Israel's defense apparatus, especially after Palestinian opposition to the occupation took the form of attacks on civilians.

Between 1994 and 2015, during which Israel experienced intermittent attacks on civilians, the budget of the Ministry of Internal Security increased by 350 percent.

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Israel – and the Palestinian Authority – is defined as a conflict area. The result is that although they are endowed with tourist sites no less attractive than those of their neighbors, they have fewer visitors. Thus, the number of tourists visiting Israel in 2015 was significantly lower than those visiting Turkey, Morocco or Saudi Arabia that year. It was even lower than the number of tourists entering Egypt or Tunisia, countries suffering from post Arab-Spring violence.

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Austerity policies are intended to convey a message of economic stability and fiscal responsibility and to cultivate the image of a state with which one can do business, despite political and military instability.

The policy of fiscal austerity began back in 1985, in the framework of the Emergency Economic Stability Plan. However, the crisis brought about by the second intifada gave it an extra push. The result of fiscal austerity: whereas in 2001 the state budget amounted to 44% of GDP, by 2016 it amounted to only 35%.

The policy of fiscal austerity has some positive ramifications: Government debt is lowered. And indeed, between 2004 and 2016, Israel's national debt decreased from 95.9% of GDP to 62.2%. The smaller the debt, the less is needed to pay out as interest. The savings in interest payments can be spent on schools, hospitals and social security (In actuality, the Ministry of Finance often used the money saved to further reduce the national debt).

But a fiscal austerity policy also has negative consequences, primarily for countries that are not affluent and require significant investment in infrastructure, economic development and public services in order to attain a western standard of living. In such countries, deferring investment in order to maintain a low debt-to-GDP ratio means long years of low investment and the sacrifice of a generation, perhaps several generations, who will have to make do with a low standard of living.

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The shock of the second intifada and the policy of fiscal austerity adopted at the time underlie one of the most harmful reversals in the history of social policy in Israel. Massive cuts were made in 2002 and 2003 to the benefits paid out by the National Insurance Institute. These increased the number of Israelis living in poverty and weakened the support systems of low wage earners, the unemployed and large families.

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The occupation led to new government priorities, the most prominent among them a preference for the settlements. This project began just a few years after another national project was abandoned even before it was completed – the absorption of more than a million Jews who had arrived in Israel between 1948 and the beginning of the 1960s. During this time, more than 300 immigrant farming communities and nearly 30 development towns were set up.

By 1967 most of the development towns were not yet stable and well established. Somewhat later, while the settlements were undergoing a wave of expansion, the development towns experienced negative migration that continued until there was a new wave of immigration from the former Soviet Union and Ethiopia in the 1990s. It was only then that the population of the towns began to grow once again; however, in the meantime they had become stigmatized as "periphery."

Arab localities suffered even more from under-development. One example of this concerns industrial parks. In many Arab localities there is no land available for the establishment of industrial parks or commercial centers, and lack of income from local taxes prevents investment in the development of productive infrastructure. This is in contrast to the development towns, each of which has an industrial park, and to the settlements, in which there are a number of quite large industrial parks. It was only in 1990 that the Israeli government extended the Law for the Encouragement of Capital Investment to Arab localities. In 2014, the income of Arab municipalities from taxes on industrial parks was 8 times lower than that of Jewish municipalities, and the average size of industrial parks per capita was 1.01 cubic meters, compared with 6.18 cubic meters for Jewish localities.

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The economic top 1% is, in great measure, the result of the Emergency Economic Stabilization Plan of 1985, in which neo-liberalism "made Aliyah" to Israel. The plan reduced government involvement in the economy, defined economic growth as the primary economic goal and passed responsibility for economic growth onto the business sector. The result: privatization of public corporations, weakening of trade unions, reduction of unemployment benefits and the growth of a wealthy stratum at the top of which is the one percent with which we are all familiar.

The second one percent is the result of the fact that the settlements are at the heart of the conflict, led by the "ideological" settlers. These settlers have become a strong political force that opposes any political solution that would lead to the establishment of a Palestinian state. We are talking about between seventy and eighty thousand persons – close to 1% of the population of Israel. This is the group we have termed the political top 1%.

The power of this one percent can be clearly seen in the Knesset. In the period between the Begin government and the second intifada, the representation of the development towns – representing an agenda of equality and social justice – was higher than that of the settlers, representing an impasse in peace negotiations. Ever since the second intifada, the representation of settlers has been higher than that of residents of development towns.

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In other words, one needs to take into account at one and the same time neoliberal policies that increase inequality in income and assets, and Israel's policy on the Palestinian question, which hampers economic stability and, in so doing, diminishes the possibility of reducing inequality by developing the parts of the country that Israelis have become accustomed to calling "periphery." The answer to the question of why there is a miasma between "start-up nation" and the rest of Israel is to be found in the ability of the two top one percent groups to determine the public agenda and to prevent actions that might reduce inequality and include the whole population of Israel in the "start-up nation."

The two one-percent groups are not identical. One owns a great deal of property within and outside Israel and can relocate abroad in times of trouble; the other squats on the hills of Judea and Samaria, claiming divine title to the land, and will wage battle when threatened. One has been out of touch for years with the 99 percent faltering under a mortgage and the high cost of living, and feels at home in global financial circles; the other has been out of touch for years with the 99 percent who want a normal life without a national conflict or military reserve duty, and sees itself as the advance guard in a never-ending national-religious struggle. One supports political accommodation in hopes of economic stability and accelerated growth, but feels comfortable with the status quo; the other opposes political accommodation and knows how to exploit violent clashes to elicit legitimacy for its cause. Under the slogan, "the business sector trumps the public sector in everything," one is actively striving to weaken the public services established in Israel over the previous century, reduce the state budget, privatize government services, and establish private schools and health services. Meanwhile, the other manages to avoid the fallout from neoliberal policies and enjoys enhanced state allocations for defense, bypass roads, subsidized education, and the financing of municipal services. One benefits from the fact that the government chose to cope with the crises engendered by the Palestinian uprisings, particularly the second intifada, with measures taken from the neoliberal toolbox, while the other sees the Palestinian uprising as justification for its claim that "there is no partner for peace."

The state tries to remain in the good graces of both groups. It curries favor with one by offering cheap credit, cheap labor, low taxes and toothless regulation; while it panders to the other by providing the comprehensive, daily protection of the strongest army in the Middle East. One is praised as the standard bearer of growth; the other is embraced as the latest incarnation of the Zionist pioneer spirit.