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Several of the steep roads winding upward in Rocinha have now been paved, a sign of the neighbourhood’s steady rise.

Nadia Sussman/The Globe and Mail

With this story, Stephanie Nolen launches The Globe and Mail's bureau in Rio de Janeiro. Ms. Nolen takes up her new post as Rio looks ahead to the World Cup and the Olympics.

Six months ago, Cristian Gomes de Souza mostly thought about cake.

He and his wife had launched a cake-decorating business from their home, and he was using new ideas from the MBA classes he was taking at night to boost business. Sales were doubling, month by month.

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Then his house started to crumble, a surprisingly unsurprising occurrence in the Brazilian neighbourhoods known as favelas, because of a hillside location and exposure to heavy rains. No one was hurt. And his cake pans were salvaged. But when Mr. de Souza started looking for a new place to rent, he discovered that his $400-a-month housing budget was no longer worth much in Rocinha. The community where he had lived all his life, once a one-word shorthand for Latin America's worst problems, had stabilized enough under the government of Luiz Inácio da Silva to fuel a real-estate boom.

"For what we had been paying for a whole house – now I could get half of someone's sitting room, with a divider down the middle and some other family on the other side," he says.

Mr. de Souza's situation points to both the pressures of a city in ascendance and a country in transformation, one being closely watched around the world for the lessons it may hold for other rising so-called BRIC nations.

Brazil is the world's seventh-largest economy. With that economic clout, the country has laid claim to new political influence: Its leaders are keen to drive trade deals and international discussions, rivalling traditional powers or displacing them all together. New oil finds promise vast wealth. Better yet: The World Cup and the Olympics – hard-won prizes – still lie ahead. And social welfare programs have helped change this from a country renowned for its inequities to one that buzzes with possibility.

For all this, Brazil's growth has slowed dramatically as global commodity prices cool. That puts the revolutionary progress of the "Lula" years at risk. And as Brazil's fortunes rise and fall, it will affect the rest of the world.

Brazil's economic fortunes certainly matter to Canada, because of the ever-closer trade and investment ties between the two countries. Last year, Brazil was the seventh-largest source of foreign direct investment in Canada. The money flows the other way too: More than 500 Canadian companies are active in Brazil, including heavyweights such as Brookfield Asset Management and the Canada Pension Plan Investment Board.

All of this plays out in some measure on the streets of Rocinha.

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The largest favela in Brazil, Rocinha squeezes 175,000 people (about the population of St. John's) up and over couple of very vertical square kilometres in the heart of Rio de Janerio. Until a very short time ago, it was run by vicious drug traffickers who strode the narrow streets carrying huge automatic weapons; it was all but devoid of social services, or any sign of the state, including piped water or garbage collection.

It was a colourful, impenetrable warehouse for generations of the urban poor who gazed down at Rio's beaches and the boutiques, less than a mile and whole world away.

But a rare convergence of factors – that booming economy, anti-violence interventions, smart spending on social welfare programs and bold urban redevelopment aimed at prepping the city for soccer in 2014 and the Games in 2016 – have combined in the past few years to make transformation happen here.

Today, Rocinha has a large public health centre, a mammoth sports complex, a chic library-cum-theatre – and the only visible guns on the streets are carried by police on foot patrols. In addition to cake shops, there are shiny new bank branches, bulging appliance shops and orthodontic clinics.

And Cristian Gomes de Souza can chat about how things have changed from the front of his family's shoe store, watching the shoppers and the school kids hiking up and down the steep street.

It's not something they would have done a couple of years ago. For more than a quarter century, traficantes, drug dealers, had ruled this place. They made money selling drugs and weapons, but also by extortion, and by charging for services such as bootleg electricity, filling in some of the gaps created by a government that ignored the favelas for decades. They provided a perverse level of security – there were few burglaries, for example – but they were the target of occasional police raids, and waged frequent inter-gang turf wars, that made the streets wildly dangerous.

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That changed, too, in November, 2011, when an elite police unit swept in on a much grander scale, looking for weapons and drug caches. It sounds like a recipe for open warfare, but the reclamation of Rocinha was a calm affair: part of a five-year pacificaçao effort in Rio, the police made clear when they were coming, and the drug kingpins had moved out or gone underground when they arrived.

When the streets were reclaimed, the city installed a Unidade de Polícia Pacificadora, or UPP: a permanent unit with an office three-quarters of the way up the hill with banks of television screens showing the lanes across the favela. Foot patrols fanned out on the twisting streets; pairs of police officers in bullet-proof vests and snappy berets took up positions on corners.

Relations with the community were not, initially, amicable – no one wanted to seem too welcoming, lest the police be supplanted once again by traficantes in a month or two. And the police themselves viewed their job as conquering and adversarial, explains Tião Santos, the co-founder and director of an organization called VivaRio that has worked for more than 20 years to end street violence across the city. The relationship has improved a bit, he says, but the idea of "community policing" still hasn't really taken hold.

In fact, stories of police abuses in the name of pacificaçao are legion. In the past few months, there have been frequent demonstrations in Rocinha focused on a bricklayer and father of six named Amarildo Gomes Da Silva, who disappeared in July after being summoned to a police post for questioning, apparently about his knowledge of drug activity. Many people think police abducted him and may have killed him. The police deny any involvement, but the force's own statistics show that even as the numbers of murders have fallen here, disappearances have risen. The walls of Rocinha are splashed with graffiti reading Onde está Amarildo?

Some residents argue that the traficantes haven't really left – they've just moved into the shadows, or down the road to favelas that have not been brought under state control. "The people who sold drugs still sell drugs," says Cristian Gomes de Souza's mother, Helena. "They just don't pass by with big guns. And the people who rob are still robbing. What's changed is that the shootings don't happen as often."

For all this, people are living in the streets in a new way. And benefiting from the boom in Brazil's economy. GDP has risen from $3,000 a person to $13,000 over the past decade. "Things are good," says Roberto Araújo, who owns a small hardware store on a hairpin turn in the middle of Rocinha. "People come here now from Ipanema and Copacabana, people who would have been terrified to come here two years ago."

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They come because favela prices are better, he says – the rent for his shop is lower, and he pays far fewer taxes than people down in the famous beachfront neighbourhoods less than a mile away, so he can afford to sell for less. In a wildly expensive economy, it's worth the trip to save 50 reais on plumbing.

(Perversely, he is also doing a roaring trade in doorknobs and locks, sold to favela residents whose doors are jimmied open in burglaries: Since the traficante reign of terror ended, there has been a rash of house break-ins.)

A $60 solution

The biggest change, however, has been a shift in government thinking. And Rocinha credits Lula, the peasant farmer's son turned union leader who was elected president on a socialist platform in 2002.

Lula rejected the idea that the residents of the favelas – in Rio, 1.5 million of the city's 6 million people – were less than full citizens or simply beyond the reach of the state. His government embarked on a range of anti-poverty programs that, coupled the economic growth, have been remarkably successful. Thirty-six million people moved out of poverty in the past decade, a success unparalleled anywhere in the world.

Lula's flagship program was the Bolsa Familia – a monthly cash payment of about $60 – that went to women who kept their kids in school and took them for regular health checkups. Maria de Barros Araújo, who lives a few hundred metres up the hill from the de Souzas' shoe store, enrolled for the payment when it was first launched 10 years ago. "It isn't much money, but many months it made the difference between my kids eating bread and water and eating proper meals," she says.

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Ms. de Barros Araújo, 40, had fled an abusive boyfriend, and slept many nights with her toddler son on the sidewalk, wondering how they would eat. "I had in my head that somehow I could make it, that I wouldn't have to go to the wrong side," she says, using a common euphemism for the drug trade. "But that seemed like the choice."

Then she met a new partner, a man who was also on the streets off and on. They managed to rent a tiny room (albeit with a leaky roof above a sewage drain) and she applied to have her child taken into a day-care centre newly subsidized by Lula's government. When centre staff heard her story, they offered her as a job as a cleaner, she says. She took some of the new, free training courses the government was offering, and eventually became a qualified day-care worker. She earns only minimum wage, but it has risen steadily – more than 100 per cent in a decade, to $313 a month; 17 per cent of Brazil's formal work force earns at this rate.

Ms. de Barros Araújo now has three children. Her daughter swims at the giant sports complex built at the bottom of Rocinha a couple of years ago; her son goes to the gleaming new library just down the road to read magazines and watch movies. And luck has improved their lives even further: a few years ago, she was chosen by lottery to receive a free home, a small ground-floor apartment, in a large public housing scheme. "I never dreamed I'd have these things: a fridge, a stove, a TV. Me, who slept on the ground – I have a proper bed. I'm going to make this house even nicer."

Of course, the Lula government's array of social investments was made possible in large part by an economy that was booming – despite fears in the business community when his Workers' Party was elected, his government continued steps to open up Brazil's once heavily protected economy and maintain fiscal stability. They pushed for energy self-sufficiency, with ambitious hydroelectric projects, huge investments in the ethanol industry, and stepped-up oil and gas exploration. The national energy company, Petrobras, announced the massive oil finds (offshore, lying thousands of metres under layers of rock and salt) that Lula said amounted to a "second independence" for the country.

For all this feel-good development, there is still a long way to go to "solve" the poverty problem in favelas like Rocinha. And many residents are impatient for the state to finish the job it started.

"There has to be health, education, livelihoods, housing, culture, opportunities for young people," says community leader Mr. Santos. If those other parts of the state don't come to [the favelas] then the peace won't last long. And right now, in a lot of places, the state is still only present as police."

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Eduarda La Roque knows there is frustration. A former city comptroller who oversaw Rio's credit rating upgrade from "junk" status, she now heads the institute co-ordinating public and private services in the favelas. "It's not happening as fast as people would like," she says, "but they have to understand that it's new territory for us."

The human density (seven times that of Rio itself) and the Escher-like construction of the favelas on a hillside makes it hard to do the most basic things, she says, such as picking up garbage. "We need to design new sanitation equipment, even." But learning indicators are already up in schools, she says, and the numbers of people accessing primary health care has too.

The discontented

So far, Lula's hand-picked successor, President Dilma Rousseff, has shown no intention of backing away from his social spending. Education is a particular priority. Lula created bursaries like the one that sent Cristian Gomes de Souza back to school for an MBA in his late 30s, and Ms. Rousseff speaks often of her intention to turn Brazil into a science and technology powerhouse.

Right now, the country lacks the foundation for that: at present, the school day for public elementary students is only four hours long, with kids attending in double shifts. The schools in Rocinha are cramped, dingy and lacking in basic supplies; teachers are abysmally paid, overworked, and often fitful in their attendance. The government has announced no plan to overhaul elementary education.

Two weeks ago, Ms. Rousseff did make a major move to finance learning, signing a law mandating that 75 per cent of royalties – an expected $50-billion in the next three years – from new oil developments be directed into education (with the remainder going to health spending). But that law will face challenges: like Canada, Brazil's resource revenues theoretically belong to the states where resources lie, in this case, mostly the state of Rio de Janeiro; some state governments are mounting a constitutional challenge.

And Ms. Rousseff's approval ratings have tumbled recently – just as she faces re-election next year.

The middle class, which she will need to woo, is among the discontented. The global slowdown of 2008 took some time to be felt here, but the growth rate, after hovering around six per cent for years, fell below one per cent last year, according to World Bank data. And that has affected those who live below the favelas, many of whom feel they have not benefited as much from Brazil's good years as people like Ms. de Barros Araújo – and have a rapidly dwindling interest in reducing inequality as they face their own skyrocketing rents and food bills.

This summer, the government was caught off guard as millions of the city's middle class took to the streets in angry demonstrations. Protesters complained about pervasive government corruption as well as the high cost of living.

At the same time, both those who live at the bottom of the hill and those who live at the top are increasingly united in their disenchantment with the city's "mega-events." Some 15,000 people have so far been displaced to make way for transportation and infrastructure projects tied to Wold Cup and the Olympics (another 21,000 were slated to move, but the government put those plans on ice after the street demonstrations began).

"This isn't the right moment for all these things – we have other priorities, not stadiums and arenas," says Julio Rezeda, a 22-year-old theatre graduate who works in the new Rocinha library. "Our schools don't have teachers and our hospitals don't have doctors."

'I don't know if this is good or bad'

Meanwhile, until the slowdown trickles down, the wild rise in Rocinha's real-estate prices continues. Library worker Mr. Rezeda says his rent on a 20-square-metre basement apartment has gone up twice in the past four months. "I don't know if this is good or bad," he says with a rueful laugh. He likes what it says about his neighbourhood, but not about his own future.

And the former favela's real-estate market is set to get more fierce in coming months, as residents receive formal title to the properties they have occupied for decades. That will make the process of buying and selling much more clear – and more attractive to outside investors, who may pay for a wobbly three-storey house to get land with a stunning sea-and-mountain view in central Rio.

It's a change a long time in coming. The area was first settled by migrant labourers from the drought-stricken northeast 80 years ago; they squatted on public land, but successive governments refused to recognize any claim to their hodge-podge of houses. Only late last year, the first few residents were given critical title documents that mean they can't easily be ousted, and can use their properties as collateral for loans.

The de Souza family has been trying to get title to both their house and the shoe store for 40 years. And Cristian's father believes the moment is about to arrive. "The mentality of government changed with Lula," says Raimundo Felix Gomes de Souza. "They think about other social classes now."

Still, the changes here are still visibly fragile; things could turn fast in Rocinha, and beyond. The ending of one of Latin America's great success stories – of the liberation of tens of thousands of people who have been held hostage to social inequality and violence – isn't written yet. That ending could still turn sour, leaving Rocinha once more violent and stagnant, a seeping stain in the centre of that city ascendant.

Nevertheless, the de Souza family is upbeat. They're delighted that Cristian is in college, taking advantage of bursaries to get an education he couldn't afford 15 years ago. The shoe shop is doing fine; and the cake business is flourishing.

"Really," says Cristian Gomes de Souza, gazing out at the street. "You couldn't have imagined this."

(Editor's note: A previous online version of this story incorrectly stated that Brazil is the world's sixth-largest economy. According to the World Bank's GDP ratings, it is the seventh largest.)

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