By the 1980s, Palestinians within the occupied territories started re-assessing their goals. Disillusionment with the liberation movement led them to question decisions made by PLO leadership, which was based in the diaspora.

After two decades under Israeli military occupation, Palestinians living in Palestine/Israel had experienced land-confiscation, water limitation, and an overall decline in agriculture. There had been a window of improvement in the occupied territories during the 1970s. The Palestinian economy improved as more Palestinian men were hired in Israel (becoming a reservoir of cheap labor for Israel and its second-largest export market). Remittances from family members in Arab countries increased with the oil boom. Money from trade, Arab governments, and Western development organizations also increased economic development.

However, in 1977, Israel voted out the Labor party and voted in the nationalist Likud party. Likud increased illegal Israeli settlements in the West Bank and the Gaza Strip; over 100,000 settlers moved in by the 1980s. Military rule in the territories hardened, as the government acted to protect the land and water resources of the new settlements. By the 1980s, economic life in the territories had deteriorated considerably. The Israeli labor market was in crisis, and the influx of Soviet Jews into Israel pushed Palestinians out of low-wage jobs to make room for the new immigrants. Palestinian unemployment went way up. The oil industry was also in crisis; the huge drop in the oil market meant a huge drop in remittances to Palestine. The West Bank and Gaza sunk into economic despair. This translated into political hopelessness – as no end to the occupation was in sight.

Palestinian society moved towards resistance. The increase in the economy in the 1970s had coincided with an increase in education, universities, press, and trade unions – all leading to growth in leadership and the spread of nationalist ideas. Palestinians in the occupied territories led a grassroots popular uprising in 1987 – the first Intifada. The Intifada effectively took leadership from the diaspora and re-established it in Palestine. The Israeli army lost control of the territories. Though the Intifada failed to end the occupation and bring independence, the 4-year struggle boosted the national Palestinian movement and brought the Israeli government to the negotiating table. The PLO once again took the role of international diplomat, but the local Palestinian leadership pushed them towards new steps: the acceptance of Israel and the direction towards a 2-state solution.

Through the Madrid conference in 1991, Palestinian national identity was asserted. Through the Oslo Agreements in 1993 and the formation of the Palestinian Authority, the Palestinians were officially recognized by the United States and other world powers as having a national identity – but not a state. And in reality, these agreements did little to change the daily lives of Palestinians within Palestine.

The Palestinian Authority still is not a state government. The Palestinian movement has yet to establish sovereignty, but the PA has more power over Palestinians in Palestine than any Palestinian entity in the 20th century.