Is change finally coming to Cuba? With the economy in desperate shape, the government may finally be loosening its grip.

• Author: Smith, Patricia
• Position: Cover story

For almost 20 years, it's been that Cuba's economy is in terrible trouble. But the Cuban government has continued to defend its socialist system, in which the government controls the economy.

So it came as quite a surprise when longtime Cuban leader Fidel Castro casually told an American journalist last month that Cuba's economic model "doesn't even work for us anymore."

Castro's comment, which he later said had been misinterpreted, came just a few days before the Cuban government announced plans to lay off more than half a million government workers. The hope is that those workers, once off the state payroll, will move into private businesses and jump-start the economy.

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"They are in the process of massively reducing the size and participation of the state in Cuban life," says Julia E. Sweig, a Cuba expert at the Council on Foreign Relations.

President Ratit Castro--who officially took over from his ailing brother, Fidel, in 2008-says the layoffs are part of a much-needed radical overhaul of the country's economy.

In his first weeks as President, Raul Castro allowed Cubans to buy cellphones, computers, and DVD players for the first time, which many hoped was a sign of more substantial changes to come. But bigger reforms did not follow--at least, not until now.

The proposed changes raise fundamental questions about how a Communist state goes about encouraging even limited free enterprise, which is the hallmark of capitalist economies. Where will Cubans get money to start new businesses? How much profit will they be allowed to keep? And will more economic freedom be accompanied by any political freedom, which is in equally short supply?

Cuban sociologist Haroldo Dilla predicts that the government will resist the development of a real free-market economy, and that the reforms announced won't make that much of a difference in the lives of most Cubans.

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The Revolution

Fidel Castro took control of Cuba in 1959, when he and his band of guerrillas overthrew the U.S.-backed dictatorship of Fulgencio Batista. At the height of the Cold War between the U.S. and the Communist powers, Castro aligned Cuba with the Soviet Union, embracing its repressive political system, state-rim economic model, and hostility toward the U.S.

He also nationalized, without compensation, American businesses in Cuba. In response to Castro's actions, Washington imposed a trade embargo...