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<s>[INST] The World Bank, for example, projects that over the next decade developing [/INST] countries will grow an average of 4.7% a year, or 5.3% if the countries of the former Soviet bloc are excluded. </s>
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<s>[INST] That compares with a forecast of only 2.7% [/INST] for the seven largest industrial countries: the U.S., Japan, Germany, France, Italy, Britain and Canada. </s>
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<s>[INST] "Annual corporate earnings growth of 15% to 20% over the next five years [/INST] in many Asian countries could even be considered conservative," says Sanjoy Chowdhury, Merrill Lynch & Co.'s chief economist for the Asia-Pacific region in Singapore. </s>
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<s>[INST] "We see the economies in Southeast Asia and Hong Kong growing at two to three times [/INST] the rate of the major industrial countries," adds Anne M. Tatlock, executive vice president in charge of institutional global equity investment at Fiduciary Trust Co. International, a New York-based money-management firm. </s>
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<s>[INST] "And in Latin America, the case is a similar [/INST] one: powerful growth, decelerating inflation and, particularly in the case of Mexico, very good valuations". </s>
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<s>[INST] Moreover, studies show that because emerging markets tend to rise and fall independently of the fluctuations [/INST] in the world's major stock markets -- as well as those in other emerging markets -- investing in them can help balance the risks in a portfolio and enhance returns. </s>
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<s>[INST] "The low correlation of movement in these stock markets relative to the more sophisticated markets -- most specifically [/INST] the U.S. -- provides a high degree of diversification to investors seeking to reduce overall risk," explains Mark Castelin, director of international equity manager research at Frank Russell Co., a consulting firm in Tacoma, Wash. </s>
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<s>[INST] Richard Watkins, chief executive of Latinvest Securities Ltd., a London-based firm that specializes in Latin [/INST] American finance, contends that in a developed economy, intense competition usually makes it extremely difficult to create a major successful company, except in the most sophisticated industries. </s>
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<s>[INST] At the same time, he adds, "investing [/INST] in new technologies frightens many investors; they don't feel they really understand them". </s>
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<s>[INST] In developing countries, by contrast, such basic businesses as [/INST] cement, supermarkets, telephones and retailing are growth industries that are also relatively easy to analyze. </s>
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<s>[INST] The circumstances that shaped [/INST] the emerging markets have long historical roots. </s>
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<s>[INST] During the century that preceded World War [/INST] I, major Western powers fostered a vast expansion of international trade and investment. </s>
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<s>[INST] But that came to a sudden halt amid the carnage of [/INST] the war, which was followed by a period of protectionism, the rise of communism, the Depression and a second world conflict. </s>
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<s>[INST] In Mexico's case, the retreat had begun even earlier: The revolution [/INST] of 1910 was fueled by a mix of populism and nationalism, and marked by a rejection of foreign economic influence. </s>
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<s>[INST] Later in the century, [/INST] a similar xenophobia took hold in India. </s>
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<s>[INST] "There was fear of the multinational [/INST] company taking over," says Mr. Banerji of Foreign & Colonial. </s>
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<s>[INST] "In India's case, it was almost folklike [/INST] fears of the British East India Co., which actually did take over India. </s>
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<s>[INST] After the end of World War II and [/INST] the decline of colonialism, many newly created Third World nations turned to central planning. </s>
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<s>[INST] Some felt it was fairer than a free-market [/INST] system; some saw it as a necessity, given their lack of trained administrators. </s>
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<s>[INST] In other cases, ruling elites [/INST] used it to seize the levers of control. </s>
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<s>[INST] Adds Mr. Banerji: "Third World leaders were impressed [/INST] with reports of the success of Stalin's Five Year Plans, which they believed. </s>
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<s>[INST] Also, the Great Depression of [/INST] the 1930s had discredited classical capitalist thinking". </s>
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<s>[INST] The Third World's antimarket policies culminated in a [/INST] blend of economic stagnation, hyperinflation and official corruption, along with the emergence of underground economies. </s>
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<s>[INST] They also led to a greater concentration of [/INST] wealth and a widening gap in living standards relative to the industrial world. </s>
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<s>[INST] Argentina, which in 1930 ranked fourth [/INST] in the world in per-capita income, fell by the wayside. </s>
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<s>[INST] By the early 1990s, Peru's per-capita [/INST] economic output had sunk to what it was in the 1960s. </s>
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<s>[INST] Czechoslovakia, the tenth-largest economy during the years between [/INST] the two world wars, became an economically ruined vassal of the Soviet Union. </s>
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<s>[INST] The Cultural Revolution of the late 1960s devastated [/INST] China's economy nearly as much as had the Japanese occupation of World War II. </s>
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<s>[INST] "There were fascists in Latin America, British Fabian socialists [/INST] in the Indian subcontinent and Marxist-Leninists in Russia and China," says Morgan Stanley's Mr. Dhar. </s>
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<s>[INST] "They all made the same mistake: [/INST] They all disregarded the price mechanism in resource allocation". </s>
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<s>[INST] In Latin America -- which for five decades cosseted domestic industry with high [/INST] import tariffs, blocked foreign ownership and indulged in a borrowing binge that led to the developing-country debt crisis -- the change began in Chile. </s>
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<s>[INST] Augusto Pinochet brought in a group of Chicago University-educated free-market economists, [/INST] who used debt-for-equity swaps to slash the country's foreign debt and began privatizing everything from telephone companies to pension funds. </s>
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<s>[INST] Across Asia, the success of such export-led economies [/INST] as Japan, Korea and Taiwan demonstrated that there were alternatives to central planning. </s>
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<s>[INST] In 1979, just three years after the death of Mao Tsetung, China reinstituted an incentive [/INST] structure that allowed farmers to sell part of their crops at market prices -- a move that in 10 years led to a 28% jump in per-capita agricultural output. </s>
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<s>[INST] China also set up special economic zones [/INST] in coastal areas, which today are the engine of its booming economy. </s>
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<s>[INST] "The story in emerging markets is the rise of [/INST] domestic demand, the rise of the middle class and the rise of market ideology," says Mr. Dhar. </s>
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<s>[INST] "You are disentangling a convoluted [/INST] mess in very different cultures, in very different regions". </s>
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<s>[INST] Purged of past dogmas and bad [/INST] economic policies, many developing countries transformed themselves almost overnight. </s>
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<s>[INST] Mexican inflation now stands at about [/INST] 9%, a fifth of what it was in 1988. </s>
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<s>[INST] The same political party that nationalized [/INST] Mexican industry is now carrying out the country's privatization program. </s>
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<s>[INST] "Chile has been so successful that they are actually exporting funds," [/INST] says Lincoln Anderson, chief economist at Bostonbased Fidelity Investments, which has $4 billion to $5 billion invested in emerging markets. </s>
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<s>[INST] Elections in Chile have brought to power a center-left [/INST] government, but it is one committed to maintaining the market-oriented programs of its right-wing predecessor. </s>
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<s>[INST] Chile, Mexico and Argentina have also [/INST] directly or indirectly tied their currencies to the dollar. </s>
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<s>[INST] That has helped to lower inflation in the [/INST] three countries, which in turn has made their securities more appealing to international investors. </s>
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<s>[INST] Many emerging-market countries, in order to attract investment, are "implementing laws [/INST] to protect foreign investment, permit the repatriation of profits and abolish capital-gains taxes for foreign investors," says Lehman's Mr. Smaller. </s>
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<s>[INST] As he explains it: "There's [/INST] a zero-sum game out there in emerging markets. </s>
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<s>[INST] If it's not attractive in [/INST] Morocco, the money will flow to Turkey. </s>
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<s>[INST] If Turkey doesn't provide investment [/INST] alternatives, the money will flow to Peru or Pakistan". </s>
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<s>[INST] He adds that even Tehran's [/INST] stock exchange prints its annual report in English. </s>
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<s>[INST] In a letter in June, Morocco's King Hassan exhorted his prime minister [/INST] to "accelerate the process of putting in place the structural and administrative reforms which will create a favorable environment for productive investment". </s>
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<s>[INST] These include the country's privatization [/INST] efforts and its program of stock-exchange reforms. </s>
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<s>[INST] During the first two months of 1993, foreign private investment [/INST] in Morocco had already jumped 71%, to the equivalent of about $60 million from some $35 million. </s>
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<s>[INST] Similarly, Peru's emphasis on selling off government-controlled companies has sent daily volume [/INST] on the Lima stock exchange to between $6 million and $8 million from about $100,000 to $300,000 two years ago, says Mr. Smaller. </s>
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<s>[INST] Indeed, privatizations have provided much [/INST] of the "product" for sale in emerging stock markets. </s>
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<s>[INST] Many developing countries are racing to sell state-owned industries [/INST] in whole or in part, including everything from utilities, banks and railroads to racetracks and bicycle makers. </s>
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<s>[INST] This process raises revenue, helps to expand equity [/INST] markets, attracts foreign investment and reduces the influence of often bloated and corrupt bureaucracies. </s>
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<s>[INST] What's more, "the productivity gains [/INST] can be enormous," says Fidelity's Mr. Anderson. </s>
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<s>[INST] "When Argentina privatized one of its phone [/INST] companies, management made all employees pick up their paychecks in person. </s>
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<s>[INST] They had about 2,000 no-shows: dead people, [/INST] former employees, nonexistent people, people who have moved out of Argentina". </s>
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<s>[INST] For the investor, privatizations often present the [/INST] opportunity to tap into a monopoly with a growing customer base. </s>
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<s>[INST] Foreign investors in particular have responded, buying up shares of the [/INST] Mexican, Brazilian and Chilean telephone companies, the big Argentine oil-and-gas company Yacimientos Petroliferos Fiscales SA, and Tenaga Nasional Bhd. </s>
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<s>[INST] U.S. investors now own so much of the Mexican telephone [/INST] giant Telefonos de Mexico SA that brokers say its price is set in New York, not Mexico City. </s>
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<s>[INST] Noting that 10 institutions each own more than $500 million of Telmex [/INST] shares, Mr. Watkins of Latinvest says: "Americans wouldn't have invested the huge sums in Mexico they have if it weren't for Telmex". </s>
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<s>[INST] Privatization, he adds, "has allowed people [/INST] to build up large stakes and take emerging markets more seriously". </s>
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<s>[INST] The shares of 207 emerging-market companies from [/INST] 23 countries trade in the U.S., according to the Bank of New York. </s>
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<s>[INST] The bank estimates that another 60 companies [/INST] from these countries will be added by the end of the year. </s>
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<s>[INST] If Hong Kong and Singapore are [/INST] included, the current number of corporations climbs to 264. </s>
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<s>[INST] In The two big themes [/INST] in emerging-markets investment are infrastructure and finance. </s>
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<s>[INST] As governments spend money initially to build roads [/INST] and utilities, a lot of business naturally goes to the companies involved in these fields. </s>
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<s>[INST] Once a developing country's economy begins to expand on [/INST] the back of this infrastructure investment, there is an increased demand for loans from the banking system. </s>
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<s>[INST] "Siam Cement Co. was the great stock a [/INST] few years ago; now, it's Bangkok Bank Ltd.," says Mr. Dhar of Morgan Stanley. </s>
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<s>[INST] By the same token, he says, "Cemex SA a cement company and [/INST] Telmex were the great Mexican infrastructure plays; they will hand off to institutions like Banacci SA," a big banking and brokerage concern. </s>
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<s>[INST] Investors in emerging markets often put [/INST] such knowledge to use with the help of mutual funds. </s>
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<s>[INST] Lipper Analytical Services estimates that world-wide there are [/INST] 677 funds, totaling $40.5 billion, that invest in emerging stock and bond markets. </s>
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<s>[INST] Of those, 494 are open-ended funds (which sell and [/INST] redeem shares at prices based on the asset value of their portfolios) with $22.5 billion in assets. </s>
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<s>[INST] The rest are closedend funds (which are traded on exchanges) [/INST] that invest mostly in the stocks of a single country, a specific region or emerging markets as a group. </s>
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<s>[INST] Still, investing in the stocks [/INST] of a developing country is far from a cakewalk. </s>
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<s>[INST] While Argentina, Brazil, Malaysia, Portugal and Turkey permit foreign investors to [/INST] repatriate their capital and income freely, Chile makes them wait a year before they can bring their money home. </s>
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<s>[INST] Money managers complain, too, [/INST] that the country's red tape is horrendous. </s>
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<s>[INST] "You have a bureaucracy that adopted the worst parts of the British [/INST] system and then took on the very worst of the Soviets," says Nigel A. Spence, an analyst at Lehman Brothers in London. </s>
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<s>[INST] While Thailand and Indonesia allow foreigners to hold as much [/INST] as 49% of most businesses, South Korea largely restricts them to a 10% stake in any single company. </s>
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<s>[INST] The net effect, says Mr. van [/INST] Agtmael, is that many of "the good companies are filled up". </s>
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<s>[INST] And because Taiwan doesn't want its currency to rise too far too fast, [/INST] fund managers say, the government makes it hard to register as an investor and restricts the amount of money flowing into the country. </s>
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<s>[INST] To get around some of these [/INST] obstacles, Baring Securities, Morgan Stanley and the International Finance Corp. </s>
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<s>[INST] Designed to help foreign investors measure their performance in emerging markets, the indexes [/INST] include only companies that foreigners can invest in and that trade in sufficient volume to allow them to buy and sell shares with ease. </s>
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<s>[INST] Another problem is that there [/INST] aren't many analysts with expertise in these stock markets. </s>
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<s>[INST] "There's an ocean of interest and a desert [/INST] of practical ability," says Bruce Johnson, head of global research at Baring Securities. </s>
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<s>[INST] At about $85 billion, the market capitalization of Baring's investable 12-country index is roughly equal to that of General Electric Co. [/INST] "But instead of having to analyze just one company, a fund manager is confronted with 12 different political systems and economies, at least four religions, half a dozen different ethnic groups and 12 different stock-market practices," says Mr. Johnson. </s>
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<s>[INST] Even traveling to a Third World [/INST] company for an on-site inspection can test one's stamina and patience. </s>
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<s>[INST] When Mr. Spence of Lehman Brothers last November asked Britain's thread maker Coats Viyella PLC the [/INST] best way to visit five of its plants in India, he says, "they replied that beyond a doubt the fastest, most reliable and efficient transport in India is the bullock cart". </s>
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<s>[INST] Mr. Smaller, too, remembers [/INST] a trip to check on potential investments. </s>
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<s>[INST] At one point, he and a fund [/INST] manager were crossing the Allenby Bridge, which links Jordan to the West Bank. </s>
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<s>[INST] "Here we were in starched white shirts on a bus [/INST] surrounded by veiled women, goats, sheep and chickens flying around with feathers in the air," he recalls. </s>
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<s>[INST] "We looked at each other and said [/INST] in unison, `So this is the exciting life of being an emerging-markets investor. </s>
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<s>[INST] '" --- Mr. Sesit, a staff reporter in [/INST] The Wall Street Journal's London bureau, served as contributing editor of this Report. </s>
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<s>[INST] --- Many Happy Returns Stocks in [/INST] many emerging markets have outperformed those in industrialized nations. </s>
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<s>[INST] In dollar terms, for instance, Mexican [/INST] and Philippine stocks have appreciated 20-fold since the end of 1984. </s>
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<s>[INST] By comparison, the Dow Jones Industrial Average [/INST] has risen 198% since 1984, and Japan's market is up 338%. </s>
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<s>[INST] Meanwhile, for most of the emerging markets, [/INST] the gains would have been even greater in local currency than in dollars. </s>
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<s>[INST] PERCENTAGE INCREASES IN STOCK PRICES, DECEMBER 31, 1984 TO AUGUST 20, 1993 IN DOLLARS IN LOCAL CURRENCY Philippines 1,909% 2,682% Mexico 1,868 31,555 Chile 1,747 5,717 Argentina 983 59,997,771 Colombia [/INST] 961 7,402 Thailand 581 531 Taiwan 425 255 South Korea 327 319 Venezuela 260 4,344 Greece 260 558 India 224 710 Pakistan 167 417 Malaysia 149 161 U.S. 198 198 Japan 338 83 Britain 242 162 Germany 290 108 France 428 222 Canada 59 59 Switzerland 354 159 Netherlands 292 109 Hong Kong 553 547 Sources: International Finance Corp. </s>