This thesis examines factors that have enabled and constrained economic diversification and modernization in Oman and the United Arab Emirates (UAE). Using a comparative case study based on a Most Similar Systems Design. The study addresses both economicstrategies and identity-building processes in order to analyze how legitimacy and social cohesion are constructed in two structurally similar yet developmentally divergent Gulf states. The analysis draws on rentier and late-rentier state theory to explain the variations in state-led diversification efforts. The thesis also applies social constructivist perspectives through the concepts of soft power and asabiyyah in order to explore how national identity strategically has been shaped to foster regime legitimacy. The findings show that the UAE have implemented a more effective diversification strategy through a pragmatic and proactive entrepreneurial state, backed by substantial oil revenues. In contrast Oman has faced a slower reform process characterised by a weak private sector, continued reliance on passive resource distribution through public employment and an ineffective traditional clan-based authority. While both states utilize identity-building strategies to foster legitimacy and cohesion, the two countries have done this with differing primary objectives. Oman has focused on preserving religious and cultural continuity through ibadi values. The UAE have projected a modern, outward-facing identity centred on global integration and economic attractiveness. This study ultimately argues for the limits of late-rentier states in shaping long-term political legitimacy. This is attributed to the fact that buying off political loyalty becomes a structural weakness in the prospect of a post-oil economic system.