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Under what conditions do "islands of stability" emerge in countries with failing central governments? This study proposes a theory of differential statebuilding, which posits that the emergence of regions with high state capacity depends on the presence of locally-bounded rulers. These rulers hail from a local majority group that is a national minority. Their identity’s local appeal thus does not extend to the national level, which bounds their political ambitions within the local sphere. As a result, they govern with a long time horizon and invest in building the local state’s capacity to consolidate their power. The study explores the theory's empirical validity through paired comparisons of regions with similar size and geography in Somalia, Afghanistan and Iraq. Informed by in-depth interviews with local elites, it finds that the presence of locally-bounded rulers in Somaliland, Balkh and Iraqi Kurdistan is associated with relatively high state capacity, as indicated by the effective provision of security and public services in these regions. Conversely, the absence of locally-bounded leaders is associated with lower state capacity in Puntland, Herat and Basra. The findings suggest that the careful promotion of local solutions to insecurity and underdevelopment provides an avenue for more successful international engagement with fragile countries.