Brazil: The Resurrection of Rio de Janeiro

When Joaquim Levy quit his post as vice president for the Inter-American Development Bank to become the finance secretary of Rio de Janeiro early last year, more than a few people thought he was nuts. Who would forsake a chance to be a Washington-based power player of international development for a desk job in one of the hemisphere's unruliest cities? At the very least, Levy was punching under his weight. At worst, he was marching into a sinkhole. But Levy has always waved off the skeptics. His mantra: "It's important to spread the word that it's possible to change Rio de Janeiro." 

Brazilians would be forgiven for wondering. Rio's storied carnival can turn machos into maidens and street sweepers into emperors, but the artful Cariocas, as the natives call themselves, have been struggling for years to resuscitate their failing city.  A perverse spiral of neglect, predatory politics, and horrific street crime has driven away investors and kept the continent's fairest address in the yoke of mediocrity for nearly a quarter century. Decay has bred decay, driving away talent and investment, and cast a pall of insecurity and dread over a metropolis that had been synonymous with levity and grace.

Levy himself compares the besieged Cariocas to the terrified peddler in the classic movie "L'Armata Brancaleone" who tries to escape the marauding barbarians by climbing into his trunk of wares. In the end, of course, there's nowhere to hide. 

But Rio's fortunes seem to be turning. After a long drought, federal money is flowing again into public safety and infrastructure projects, including improvements in the tattered favelas, or shantytowns. Shipyards are humming, thanks mostly to Petrobras, the state oil monopoly that has announced massive offshore reserves in the last two years that could put Brazil among the world's leading oil producers. A number of giant steel plants are in the works that stand to turn Rio state into Latin America's largest producer. Most remarkably, perhaps, the chronically hemorrhaging state coffers are flush with cash.

Much of the credit goes to Sérgio Cabral, the publicity-seeking state governor who wooed Levy from Washington and then gave him a free hand to overhaul the state's chaotic finances. A former head of the national treasury, where he earned a reputation as a fiscal hawk, Levy wasted little time. He shed scores of dead-end jobs, has boosted tax revenues at a clip of close to 20 percent a year, and is paying down a mountain of debt.

The region is drenched in oil, with an economy as big as Colombia's ($130 billion). But former governments had blessed cronies and favored contractors with piles of cash and sweetheart deals. Suppliers needed a "godfather" and the patience of Job to get paid. "Before, no one had any idea who was paying whom and how much," Levy says. He found he couldn't even meet the payroll when he took office in January 2007. Buried in promissory notes and hooked on deficit spending, Rio was even barred by the federal treasury from taking more loans.

All this has changed. From a $125 million primary budget deficit (net revenues, excluding interest payments on debt) in 2006, the state treasury is solidly in the black, racking up a $500 million surplus in 2007 and $870 million in the first half of this year.

Even the lethargic state judiciary is showing some vital signs. After a cleanup, Rio's appeals courts now rank among the most agile in the country, dispatching corporate cases in weeks or even days instead of years, persuading many companies to try their cases in Rio. Setting up a business now takes days, instead of months. "For the first time in years, things are moving in the right direction," says Mauro Osório, an economist who has long tracked the decline of Rio. Investors have taken note. Lloyds of London recently chose "business friendly" Rio over São Paulo to set up its flagship operation in Latin America. All this has changed. "Levy brought credibility and a managerial competence to public finances that Rio has never seen," says Armínio Fraga, a former central bank president and head of Gavea Investimentos, a Rio asset management fund.

But minding money is not the only challenge. Rio's fiscal mess paled before the mayhem that still rules Rio's streets. With 39 murders per 100,000 residents statewide-- nearly four times the rate of São Paulo--Rio is still one of the most dangerous places anywhere. Its criminals are also among the best armed and most deeply entrenched. "One of the worst crises is to have urban territories that are beyond the control of the state," says José Vicente da Silva, a police scholar and former national security secretary. "Rio has dozens of them." Worse, police are part of the problem. According to official statistics, some 1,330 people were killed in "confrontations" with the police last year, making Rio's lawmen among the most violent in the world.

Reclaiming Rio is not impossible. São Paulo more than halved its murder rate in the last decade. "But it takes commitment and continuity, and Rio has had anything but that" says da Silva. Thanks to the official habit of elected leaders undoing their predecessor's work, Rio's security chiefs are constantly improvising and have little use for tools such as computerized crime mapping and data banks, which allow law enforcement to pinpoint crime hotspots and optimize manpower. It doesn't help that only 20 percent of the state police force is deployed in the city of Rio, where 40 percent of all murders are committed.

And yet there are glimmers of hope. Under orders from Cabral, security chief José Beltrame has tightened control over police brass, ending the habit of political cronies using police jobs for patronage. He is also initiating "productivity" rewards for good policing -- a $650 bonus for every rifle seized from outlaws, for example. Yet none of this will suffice unless the government can bring to the streets, and the cops, the same "management shock treatment" it applied to its wayward accounts. "Rio will not be able to reach its economic potential in the service and tourism industry as long as the cloud of violence and insecurity looms over the city," warns Maria Silvia Bastos Marques, deputy director of the Rio Chamber of Commerce.

Levy is not deterred. "It took years of reforms that no one paid attention to before the Brazilian economy started taking off," he says. "If we keep laying the groundwork, and provide physical and economic safety, the rest will follow." he says. Rescuing Rio won't be simple, he allows. But it's better than hiding in a trunk.