Debates over the right economic order and the relation between politics and the economy have taken place since the early period of Zionism. The centrality of the “political” and the state-led economy in Israel (or the pre-state institutions) were challenged by demands for liberalization and for allowing private enterprise. In early statehood, however, while private capital played an important role, it was the state that dominated the economy. It was only in the 1980s that the market began to dis-embed from political control and the market economy became a dominant idea and political force. Thus, since the 1980s the Israeli economy has gone through a process of rapid liberalization, away from being state-led and towards becoming a Western-type liberal economy in lifestyle and division of labor, well integrated into the global economy and with growing gaps between rich and poor. These economic and social developments are related to and underscore many of the developments described in other chapters: the transformation of social cleavages, changes in the political system, land allocation, and the rise of “alternative politics.”

After a slowdown in 2000 – a result of the “local” conflict and the global recession – the Israeli economy is showing growth but also problems of inequality and poverty. Israel's GDP per capita of above 19,000 (or 27,000, based on purchasing power parity) and a growth rate between 4 and 5 percent in the past five years brings it to the lower levels of the Organization for Economic Cooperation and Development (OECD) states.