Dawn on November 28, 2010. The Brazilian Special Forces, Military Police, BOPE (Police Special Operations Unit), Forestry Police, Civil Police, Federal Police and Army Parachute Brigade surrounded the Complexo do Alemão, one of Brazil’s largest shanty-town communities, with an estimated population of 150,000 and site of the country’s most vicious drug wars. This coordinated military effort succeeded in securing the premises within two hours, as police arrested 30 warranted criminals and seized more than 10 tons of narcotics and weapons. Residents raised the national and state flags to claim victory in the “War of Rio de Janeiro.” The Complexo do Alemão, which had been responsible for receiving and distributing 90% of the drugs in Rio de Janeiro, was now in the hands of government security forces.

These days, just a few miles north of the multimillion-dollar apartments of Leblon, not far from Ipanema beach, the former “microwaves” of the Complexo do Alemão are still visible. These are intersections where, only a year before, gangs “cooked” their victims in stacks of rubber tires. The average family in this once war-torn favela earns 257 reais (US$140) a month (more than three times less than the rest of Rio de Janeiro). Twenty-nine percent of its residents bring home less than the minimum wage, and the average resident of this community expects to live nine years less than his “Carioca” counterpart. Part of this stems from an infant mortality rate five times higher than that of the city’s wealthy Southern Zone. The other part comes from the favela’s long history of violence and poverty.

The Origins of the Complexo do Alemão

Soon after World War I, Leonard Kaczarkiewicz migrated to Brazil from Poland in search of a new beginning. He purchased land just north of central Rio de Janeiro to build a plantation. The local workers thought he was German, and the entire area soon became known as the Complexo do Alemão — the German’s compound.

The construction of Avenida Brasil in 1946, in the midst of President Getulio Vargas’ campaign of nationalization and ISI (import substitution and industrialization), led to the opening of many factories around the Complexo, including the Cortume Carioca, which grew to be the nation’s largest leather producer. Thousands of workers migrated to the area in search of work, mostly from the rural northeastern part of Brazil. Seeing an opportunity in his real estate, Kaczarkiewicz divided his land into smaller plots, selling them to workers from the nearby plants. Brazil, like most countries in Latin America, suffered slow and uneven economic growth through the 1970s and 1980s, and many of the factories in the area were shut down. Drug trafficking became the area’s largest business, which led to a further deindustrialization of the complex as companies searched for safer work sites. The deindustrialization of the 1990s alone led to the loss of nearly 20,000 jobs in the area as the complex fell into a state of decadence.

Many attribute the Complexo’s population explosion and the proliferation of drug gangs in the region to Governor Leonel Brizola. His mid-1980’s reforms provided public services to, and recognized, housing property in favelas — thereby legitimizing them — and forbade police entry into favelas, which allowed the gangs to flourish. According to Walmir dos Santos, “The new immigrant wave was made up of poor migrants from northeastern Brazil who came in search of work. The problem was that there were no jobs, and there was nowhere else to go. With no education or opportunities for work, many residents saw drugs and gang life as their only alternative.”

On June 2, 2002, Tim Lopes, a Rede Globo journalist who had been investigating the drug and sex trade within the Complexo, was tortured and killed by Complexo gang members. President Fernando Henrique Cardoso condemned the killing, and Rio’s head of police vowed an appropriate response. Brazilians could no longer look away from the atrocities in their back yard. During the next eight years, until the successful action of 2010, the police conducted various raids and operations that yielded minor successes but did not completely quash the violence and crime in the Complexo.

One of the low points in the government’s battle against crime took place in June 2007. In advance of the Pan-American games, the police launched a mega action in the Complexo. Nineteen people were killed by the police in an operation that was condemned by Amnesty International and the Order of Attorneys of Brazil. “About 1,300 men came with so many weapons, with armored trucks and bullet-proof vests,” remembers Walmir dos Santos, a community leader in the Complexo. “They killed 19 people, some of whom were drug traffickers and others who were just residents, workers.”

This was a huge blow for the police, an already mistrusted group, and public pressure increased significantly. The residents of the Complexo were greatly affected by this attack. According to the testimony of Ashley Henderson, a former director at Community in Action, a local NGO, “When they have these operations to go after a couple of drug dealers, all the rest of the people who live right in the middle of this have to stop their lives completely…. Economies totally stagnate … and  schools close down.”

This preemptive attack was a complete failure, but it was also the catalyst that sparked a change in police strategy and tactics, ultimately leading to the successful 2010 raid.

With all eyes on Brazil’s economy and its ongoing plans to host the 2014 World Cup and 2016 Summer Olympics, the government is paving the way for a new economy. Many Brazilians see the pacification as a symbol of the end of drug-based societies and the opportunity for new economic beginnings in the favelas.

Entrepreneurial Initiatives

The government’s main economic initiative is channeled through the PAC, the government’s Growth Acceleration Program. Through PAC, launched in 2007, the federal, state and municipal governments have invested more than 700 million reais (approximately US$400 million)  in infrastructure, healthcare, education, public housing, transportation and social services in the Complexo. In particular, the PAC investments include paved streets and steps going up the hills; drainage and sewage systems; a teleférico, or gondola, connecting the various hills of the Complexo with each other; an intra-city train, the metro; schools; an integrated health services center; apartments for more than 7,000 families; a library, and various social service centers.

Caixa is another tool used by the government to stimulate entrepreneurship. Primarily through its emprendedor individual program, Caixa has extended financial support, including small revolving credit lines, such as crédito Caixa fácil and low-limit credit cards. Beyond direct credit and financial support, Caixa offers a wide range of benefits and incentives designed to help small entrepreneurs, including simplified accounting requirements and consolidated purchasing. In addition, Caixa offers direct benefits, such as reduced health care costs, tax breaks for hiring additional employees and technical support from other government agencies. However, as Filipe Vinicius da Silvera, a manager at Caixa’s complex branch noted, “entrepreneurship in an open Complexo still faces a number of challenges, including outside competition, resistance to formalization and lack of professional training. Caixa is offering a number of programs and financing options in order to expedite its advancement.”

The government is not alone in this. SEBRAE, a nonprofit organization that aims to promote the competitiveness and sustainable development of small and micro businesses, shares this view. According to SEBRAE’s José Luiz de Souza Lima, “the pacification of favelas opens the possibility of constructing an atmosphere of peace and developing productive activities, attracting public and private investment.” SEBRAE created a division for the Development of Entrepreneurship in Pacified Communities with this aim in mind. Within the Complexo, it is working with the government, financial institutions, local entrepreneurs, local organizations, research institutions and companies to promote entrepreneurship and to improve the local business environment.

In addition, SEBRAE, in collaboration with community leaders and businesses, is developing a promising tourism project in the Complexo that seeks to take advantage of the teleférico installation. SEBRAE sees the Complexo as a potential model for other pacified communities, a testing ground for experimentation. “The Alemão will be a great laboratory for SEBRAE,” says Souza Lima. “We are going to be able to test various methodologies of SEBRAE there.”

NGOs are not the only groups entering the Complexo. Various other corporate heavyweights are also moving into this new unchartered market. The bank Santander Brasil led the way by opening a branch in Grota, a main section of the Complexo, in May 2010, even before pacification. This was an unprecedented move: No international bank had ever had such a direct presence in a favela.

Natura, a socially conscious Brazilian cosmetics company with a small presence in the Complexo for several years, is now partnering with Santander Brasil, the third largest retail bank in Brazil, with a 10% market share, to expand in the community. Natura is the biggest door-to-door cosmetic company in Brazil and has a well-earned reputation for being environmentally friendly and socially focused. “We have been working in the Complexo do Alemão for three years, but the pacificação made it easier and safer for us to access the area and expand our work,” stated Luis Bueno, a regional director for Natura, in an interview for The Guardian. “It also provided us an opportunity to help the community at a time when they need it most, because after the drug gangs leave, the local economy dips as the money spent by dealers on services dries up.” The recent changes in the Complexo do Alemão have opened an avenue of entry for Natura.

Natura is known throughout Brazil through its consultants, or salespeople, who buy and sell the company’s products. The policy at the company is to not hire as a salesperson anyone who has incurred debt. However, after close analysis of the Complexo, Natura decided to offer a program for this indebted population and established Projeto Comunidade. This microfinance program finances the Complexo salespeople, who receive products from Natura with an obligation to repay the loan within 21 days. This option is available only to women who have debts of less than 500 reais (US$312).

For women with debts of more than 500 reais, Natura offers two options: either pay for the products up front or form a “solidarity group” microfinance loan. This latter option is distributed in partnership with Santander Brasil. The loan is taken out by several people, but the payment is collective. If one member of the group cannot pay, then the others must cover the shortage, thus ensuring a lower rate of delinquency.

Natura’s goal in providing these increased options is to include as many women as possible, thereby increasing the community’s chances of developing.

As a way to expand, Natura has partnered with AfroReggae, a music- and culture-focused NGO with a strong presence in the community. Through this partnership, Natura sponsors AfroReggae and, reciprocally, AfroReggae offers its infrastructure within the Complexo for Natura to sell its products. This method increases the safety of the distribution process and avoids some of the robberies, such as those experienced during the initial stages of Natura’s entry.

Oi (Telemar Norte Leste S.A.) is representative of the complete shift in position toward investment in the Complexo. Before the pacification, Oi was forced to interrupt the fixed telephone services to inhabitants of the Complexo due to violence in the area, which hindered maintenance and service. Another company, Light, an electric energy concessionary, faced similar problems. Due to illegal connections of its distribution lines and alterations in its electric meters, the company faced losses equivalent to 30% of the energy it supplied.

However, after the pacification process began in different favelas in Rio de Janeiro, more than 600,000 people stopped paying for the illegal services provided by the drug gangs that ran the favelas. As a result, new subscriptions to companies such as Oi and Light are soaring: “Our goal is to reach 50,000 subscribers in the Complexo do Alemão over the next year,” notes George Moraes, a director of Oi and vice president of Oi Futuro Institute.

The presence of these service companies in the Complexo has benefited the community in many ways. Families are now accountable and are eligible to get credit from Caixa. Entrepreneurs now have access to the key services necessary to manage a company effectively, and workers are contracting shop assistants and technicians as these companies open shops in these communities and provide maintenance services.

However, as promising as all this outside investment appears, the onus ultimately lies with the local entrepreneurs themselves to foster development. That is why the government and companies investing in the community hope that success stories such as those of CLD Info and Plantador Fiel are just the start of a developing trend.

CLD Info is an Internet provider company founded by Christiano and Daniel Da Silva. The two previously unemployed brothers benefited from the Empresa Bacana, a joint project between SEBRAE and the municipal government of Rio, to open a formally registered business. To expand their business to computer sales, they intend to take advantage of Caixa’s financial offering for the communities: the crédito Caixa fácil. The Da Silva brothers have managed to create a growing company by leveraging the new economic reality in the Complexo, and they foresee a promising future for business. According to Christiano, “Out of 160,000 people, only five percent have a computer. The market is huge.”

A second example of this developing trend is Plantador Fiel, a monthly newspaper of the Comunidade led by André Luís Ramos. Empresa Bacana was also the main instigator and supporting force behind this business. Ramos’ business plan placed third out of nearly 40 applications, and he wanted to move quickly on this opportunity. Benefiting from Caixa’s entrepreneurship program, called empreendendor individual, Plantandor Fiel has been achieving a monthly circulation of between 5,000 and 8,000 since December 2010.

The economic progress of what was once the center of the Rio drug trade is an essential component for improving the city’s safety and prosperity in the lead-up to the 2016 Olympics. Success will continue to rely on government efforts to maintain security and provide access. Those efforts have been overshadowed by the arrival of formal service offerings by large companies that will undoubtedly contribute to an improved quality of life. However, the role of public entities like Caixa and private entities such as Natura and Santander Brasil are essential for providing a crucial source of peace and stability: economic growth through local entrepreneurship. The Da Silva brothers and Ramos are a small part of a new chapter in the history of the Complexo do Alemão, one made possible by public and private efforts to provide access to capital and opportunities. While decidedly for profit, private enterprise has also managed to work with NGOs such as AfroReggae to guarantee better returns and to assure the continued existence of their operations.

The advances made in the Complexo do Alemão have gone a long way toward transforming the once-notorious community into a vital part of the city. There are already signs of change. On March 26, 2011, Fox Pictures chose to hold the national premier of the movie Rio within the Complexo da Alemão. More than a mere publicity stunt, the screening was a sign of the new-found commercial potential within the growing number of communities the government has singled out for pacification. This recent progress has not been without challenges for businesses and the pacification movement. The early September 2011 flair-up between ex-drug runners and the police demonstrates that the government and the community still have a long way to go toward complete pacification. Yet the Complexo is moving in the right direction, and the residents are heartened by the fact that their community is open for business.

This article was written by Donald Canavaggio, W. Malcolm Dorson, Peter Isaacson, Gonzalo Manrique and Pablo Pedrejón-García, members of the Lauder Class of 2013.