We booked a tour to the Rio favelas for Monday. We almost missed it because, well, we are now in such vacation mode that we thought it was Sunday today :-). We were on the beach, and I came back to the hotel briefly only to be told the tour guide was waiting for us (5 minutes after the tour was to begin). Oooops. So I ran to the beach to get Cyndi and we went on the tour in bathing suits / cover ups - no biggie because the bikini is standard attire in Rio!
What an interesting tour. There are over 500 favelas in Rio. These are densely populated villages of many multi-story buildings sharing common walls. We went to Rochina Favela,

where about 95,000 very low income people live in 1 square kilometer of space. Our tour guide told us that three drug gangs run several of the favelas. If a resident steals something they cut his/her hand off, and on second offense kill the criminal.
The Brazilian government has worked to drive out the drug lords and clean up the favelas.
Brazil is a "big emerging country," one of four - (BRIC --Brazil, Russia, India, China), and the guide explained that this income and social division between the favela dwellers (20% of the Rio population) and rest of Rio is the only thing stopping Brazil from becoming a fully industrialized nation. With its winning bids for both the upcoming Olympicas and the FIFA World Cup and its desire to move foward in the world economy, the government is working hard to clean out the drug component and improve the favela infrastructures.
In our tour we saw some evidence of progress - better services, such as trash removal/internet connectivity and better education for the residents.
Of note, the guide said that the USA is the biggest customer for Brazil's drugs (that come from Bolivia, Chile, and Colombia). How can we in the US be critical of drug providing nations when we are the biggest customer and can't even control our own consumption of illegal substances? This is an interesting problem.
This was a fascinating tour and we felt welcomed by the favela residents - except that we weren't allowed to take photos in the favela run by drug lords. We saw no machine guns and saw lots of children on computers in a school and some public service projects to improve living conditions.