The paper reviews the trends in domestic (or within-country) income inequality over the over the last two decades of contemporary globalisation placing them in a comparitive historical perspective with changes in income distribution during the globalisation wave of 1870-1914 so as to emphasise similarities and differences between these two periods. The paper then shows that the conclusions of the standard theory and existing empirical literature about inequality changes are often in contradiction with a substantial body of evidence indicating that the past trends towards falling domestic inequality were reversed since the early 1980s in the majority of the developed, developing and transitional economies. Finally, the paper explores the causes of these changes and of the discrepancy between theoretical predictions and observed trends, by emphasising in particular the distributive impact of liberalisation and globalisation under conditions of poorly sequenced macro policies, incomplete markets, weak institutions, asymmetric information, widespread protectionism and structural rigidities.

October 29, 2006.