What is allegorical about the entire story?

The entire story can be seen as an allegory because the setting itself represents a specific location. In Haroun, we have the Old Zone, which is at the south pole on the "second (invisible) moon Khatani." This place represents the earth and the older spiritual and religious stories of mankind. The dark lands of the Chupwalas, on the other hand, represent land that's been taken over by Muslim extremists, whereas the bright land, where the Guppees live, represents democracies.