KARACHI, Oct 12: The stock prices fell on Friday due to the unexpected outcome of national polls that raised fears among investors that it may impact adversely on the Pakistan-US friendship, economic reforms and foreign capital inflows.

That the polls would throw up a hung parliament was anticipated. The element of surprise is the emergence of MMA, an alliance of religious parties, as the third largest group in the National Assembly. MMA is opposed to government’s Afghan policy, and fears are being expressed as to it’s possible reaction in the US and Europe.

As the PML(Q) and other parties and alliances have received about one-third of the National Assembly seats, with the two- third going to the opposition, there is some speculation that country may be faced with an uncertain future in case of confrontation between the president and the politicians. It would mean political instability and economic downturn.

However, a closer look at the split mandate given in the national polls, would indicate that none of the three major parties/alliances is in a position to dictate. The only option is to compromise, make adjustments and form coalition governments. Nor will it suit President Musharraf to confront the parliament because it may lead to the collapse of the restructured political system. National reconciliation and not confrontation will give the country much needed political stability and economic progress. This is more likely to happen.

Now, the fears about MMA. Whether as part of a coalition government or in the opposition, the MMA can influence policies but is not in a position to bring about strategic policy changes. The Amir, Jamaat-e-Islami, has said that he believed in “collective decisions.” As it is, the security concerns and foreign policy, have primarily been managed by the army even during constitutional rule in the decade of 1990s.

The US needs a durable relationship with Pakistan in its war against terror. It cannot go for an abrupt change. So, the possibility of any strains on the US-Pakistan relationship can be ruled out and differences of opinion on individual issues would be contained within the existing framework of co-operation. It is very unlikely that capital inflows would slow down because of MMA’s success at the polls. It is better to have religious parties in the parliament rather than to face them on the streets.

The induction of the coalition government would, however, impact on the economic reforms in two or three areas: Development spending will go up, budget deficits would mount and there would be more emphasis on poverty alleviation and generation of employment. All major political parties and players will compete to retain their influence on their constituencies. Experience in other countries with coalition governments is that budget deficits mount when compared to the performance of majority rule. The elected representatives are more receptive to the popular demands.

Yet the direction of the reforms are unlikely to be reversed though their speed and sequence would be adjusted with the political mandate received by elected representatives at the polls. If the elected government continues to support the war on terror, it would face no problem with international donors. A reversal of policy on this issue is highly unlikely. The major political parties should develop consensus on how to pursue reforms that suits the specifics in the country. And the multilateral agencies should accept the home grown model of economic growth. Ownership of programme would enhance the capacity to implement.

During the past three years, the political power has essentially been monopolized by the military. The” unity of command” has been combined by the unitary system of government. The exception has been the setting up of the district governments that is an essential feature of federalism. The election results indicate that the country is moving towards democratic federalism. Authority and responsibility would now be shared at the federal level and provinces by three major parties. As thelargest single parties in provincial assemblies, PPP, MMA and PML(Q) would rule Sindh, NWFP and Punjab respectively. They have numbers close to the majority. In Balochistan and at the federal level, there would be coalition governments.

So, if the verdict of the poll is respected, there would be more stable governments in the provinces and a relatively weaker coalition government at the centre. The over-centralized system will be weakened. Yet, all the three major parties have to deal and work together in the government and the parliament.

Keeping with the political trends, fiscal federalism would gain strength. Under the current thinking, the proposed NFC Award would reduce the share of the federation from 62.5 per cent to 56 per cent and the share of the provinces would increase from 37.5 per cent to 44 per cent.

With fiscal federalism strengthened, the ground realities would tend to change towards a stable political system. It is an over-centralized system that breeds instability. Authority and responsibility needs to be shared between the three tiers of the government, the federation, provinces and the districts to make each unit capable of solving problems falling within its jurisdiction.

Sustained economic development is linked to social progress and political stability.