The first references to favelas in Brazil date back to the end of the nineteenth century, when soldiers of the Fourth Brazilian Expeditionary force, returning from a war against the separatist village of Canudos in the state of Bahia established residence in the hillsides of Rio de Janeiro, on the Morro da Providencia. Since this new pattern of urbanization resembled precisely the Morro da Favela settlement in Canudos, the name favela stuck and the Morro da Providencia became the first shantytown settlement in Rio. The idiosyncrasies surrounding the origins of the favelas notwithstanding, this type of informal, low-income settlement has over the decades continuously expanded to become, today, one of the city’s most recognized and ubiquitous characteristics.

The favela’s expansion and an increased segregation between formal city and the favelas have presented unique challenges for the formal city, as well as for the inhabitants of the favelas. From the point of view of the city the most obvious challenge is that favelas’ establishment in public land represented a failure of property rights, producing a “tragedy of the commons”. Lacking the appropriate price incentives, the pattern of informal urbanization holds little relation with the negative externalities imposed by their expansion, both in terms of environmental and health hazards, and in terms of a sub-optimal utilization of public land. On the other hand, the absence of state presence in the favelas and the uncertainty in tenure of informal settlements—particularly prior to the 1980s—has obvious welfare consequences to the inhabitants of favelas. Although there have been initiatives at the community level to fill the vacuum produced by the absence of the state, such as the establishment of neighborhood associations1, most public goods, such as water, sewerage, electricity, and security remained underprovided. The consequences of this are evident in the high rates of vector-transmitted disease in informal settlements, the high incidence of geological disasters (mudslides, etc.), and the relatively low quality of housing. In the case of security, the absence of the state has opened up spaces for illicit entities, mostly related to drug trafficking, to take up functions related to policing and enforcement of norms.