You also have to remember that when Baron Cohen first started performing the character (on the 11 oclock show - a terrible show on the whole, but it did spawn the careers of both baron cohen and ricky gervais) he had no idea that he would end up making a blockbuster film and that the Khazaks would ever hear of him. If he had changed the character to coming from a fictional place once he became big, the accusations would all have been of him selling out to political correctness. In addition, if he had Borat come from a fictional country, he probably wouldn't have fooled so many people into revealing their stupid ugly side.
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