According to an article in yesterday's New York Times, it's both.
As Taylor Barnes points out, drag shows were popular in Rio de Janiero during the 1950's and 1960's. However, as we have seen, people's willingness to go to shows in which drug-addled men don garish clothes and layer crude makeup on their faces has little, if anything, to do with how much those same people would accept their children if they "came out" as gay, lesbian or transgender. In fact, sometimes the same people who go to drag shows commit violence--whether or not it's physical--against people who don't fit their culture's gender norms.
Then, of course, there is Carnival, which may well be the greatest concentration of men in drag as well as flamboyant gay men in the world. (Interestingly, in celebrations like Carnival or the Mardi Gras parade in New Orleans, one rarely, if ever, sees women dressed as men or butch lesbians.) And, as Barnes points out, the careers of transgender models are prospering in Brazil, perhaps more than in anywhere else in the world.
Same-sex marriage is legal in about half of Brazil's states, and laws about gender identity, while not quite as advanced as those in nearby Argentina or Uruguay, are still more in line with current knowledge about gender identity and expression than the laws in most US states. However, those states that allow same-sex marriage are--not surprisingly--the ones that include the country's largest metropoli. On the other hand, more rural areas still hold to their conservative beliefs (often based on the local priest's or politician's interpretation of faith) about sexuality and gender.
Now, I've never been to Brazil, so I can't tell you whether it's "better" for trans people than other places. However, at every Transgender Day of Remembrance commemoration in which I've participated, a fair number of the victims' names we read were Brazilian. To be fair, plenty are Americans, too. But I can't help but to think that transgenders face as precarious a situation in Brazil as we do anywhere.
And I don't know how much things will improve if people continue to associate us with the gross misinterpretations--or perhaps unintentional parodies--of womanhood exhibited by the drag "queens" of Carnival or Mardi Gras--or, for that matter, the Pride March. As long as we're seen that way, we are in the same situation of African Americans in the days of Sambo.