(FORTUNE Magazine) – THE FEUD that has trapped the U.S. and Cuba in a time warp for a whole generation is living its last days. On one side of the Gulf Stream sits the 32-year-old regime of Fidel Castro still pretending that socialism works even . as living standards fall further and further behind the developed West -- and political discontent builds. On the other side is the Bush Administration, acting as if Cuba were still the menacing outpost of an evil empire and enforcing more stringently than ever a 30-year-old trade embargo with the island. Neither stance is sustainable. Although the two haven't spoken civilly for three decades, their ties are binding. Only 90 miles of tropical water separate them. One million Cuban refugees and immigrants have become a potent political and economic force in the U.S., hypersensitive to what happens to Cuba. The 10.7 million Cubans remaining behind watch American movies, play American music, listen to American radio stations, and yearn for the American prosperity that they know their exile relatives enjoy. Even the island's humor looks north. Cubans say that what they need today is not the Pan American Games, which opened August 2, but pan y americanos -- bread and Americans. The Pan American Games have put Cuba back in the international spotlight and have drawn to Havana one of the biggest groups of visitors from the U.S. -- 1,100 athletes, coaches, and administrators, plus an ABC broadcast crew of over 300 -- since the 1950s. But they are not why I have come. With revolutionary change roiling the Soviet Union and its former satellites, I want to see, firsthand, how Cuba is faring. Sadly, the pungent observation of our well-traveled photographer, Diego Goldberg, says it all: ''This is worse than Albania.'' You still don't see the abject misery that exists in, say, Brazil and Peru. But since my last visit six years ago, Cuba's condition has gone from grave to critical. Motor traffic in Havana has dwindled to a sluggish flow of smoking Hungarian Ikarus buses from the 1970s and a few cars, many of them American models of the 1950s, pre-Castro imports kept going with love and ingenuity. Queues have become as commonplace as they are in Russia. Cubans can't go to market, catch a bus, buy a drink, go to a restaurant, or get a newspaper without standing in line, often for hours. What can they find in a supermarket? Mostly empty wooden shelves, at least in the one I visit. A pile of brown paper bags of sugar. Bags of red beans. Battered cans of condensed milk. Some bottles of rum. That's it. True, with their ration books, the meals they get at work or school, and through the ubiquitous black market, Cubans manage to feed themselves. But their diet is ! barely adequate and deadly dull. At my hotel a wiry, worried professor from the University of Havana arrives by bicycle to confirm a later appointment, his T-shirt drenched with sweat. He couldn't call because his phone has been out of order for weeks. He rode his bicycle in the 90-degree heat because the ration of 160 liters (42 gallons) of gas he gets every three months for his car isn't enough. The previous weekend he had taken his wife and children out for a treat at Coppelia, a well-known downtown ice cream parlor. The family stood in line for three hours for ice cream salads, a mixture of five flavors. They were delicious.

The professor, who doesn't want his name used because he still signs the traditional loyalty oaths that Communist governments require of their intellectuals, has little hope for Cuba. ''You see no real hunger or misery,'' he says, ''but there is a lot of discontent now. What irritates us most is the lack of daily supplies, like soap and light bulbs.'' The government likes to blame Cuba's problems on the U.S. and the Soviet Union. Mostly, though, they're the predictable outcome of state ownership and central planning. The economy has not grown since 1986, says Jorge Dominguez, Harvard's Cuba expert. Still, a sudden drop in Soviet bloc trade, much of it subsidized, in 1990 did help spur the present crisis. Soviet oil shipments to Cuba fell from 13.3 million tons in 1989 to ten million. Exports of food to the island were cut 25%. East Europeans reduced exports drastically because Cuba can't pay in hard currencies. Castro's reaction to his latest troubles is clear from the hortatory slogans plastered on walls all over Cuba. SOCIALISM OR DEATH they say, and ordinary folk grumble that the phrase is redundant. MOTHERLAND OR DEATH declares another official graffito. Scoffs the Cuban in the street, ''Motherland or Miami.'' Castro's policy shifts are only slightly more practical. To save gas and boost food production, the regime is replacing machines with human and animal power. The state vegetable-and-fruit farm our foreign ministry escort takes us to see at Guira de Melena, southwest of Havana, has doubled its permanent work force to 240 laborers. They are reinforced by hundreds of volunteers from offices and factories. Even clerks and ex-ambassadors on two-week stints from the foreign ministry slog through the sticky red mud, stooping in the tropical heat to pick cucumbers. One hundred pair of oxen now work the fields; the farm expects to double that number by December. Cuba marches backwards in the city too. The only new products to be found in Havana are shiny Chinese bicycles, paid for with sugar exports. Castro is importing hundreds of thousands of them as his public transport system collapses. Havana already has 250,000 new bikes and plans to have one million a year from now -- one for every two residents. They cost 130 pesos, about two-thirds of a basic month's pay, but students can get them for 60 pesos. WHILE Castro's public posture remains classically Marxist, he has tolerated one policy shift toward a freer market. To earn badly needed hard currencies, he now allows foreign companies to invest in joint ventures in Cuba. ''For a regime that was founded on the expropriation of foreign property,'' says Harvard's Dominguez, ''this is a spectacular change.'' Most of the activity is in tourism, which opened up to foreign ventures in 1987. That year, visitors spent about $100 million. This year Cuba will take in $300 million from some 400,000 tourists. The man who makes that expansive prediction to me comes as close to being an entrepreneur as present-day Cuba can offer. Abraham Maciques Maciques is president of Cubanacan S.A., which he describes as a ''capitalist company like any U.S. holding company,'' though it is state-owned, of course. His headquarters on the outskirts of Havana is the only place in the capital remotely resembling a modern office park. Cubanacan's biggest deal so far is a fifty-fifty venture with Spain's Grupo Sol, owner of the Sol and Melia hotel chains. The partners are putting $150 million into a resort complex on Varadero Beach, a finger of fine, white sand, barely marred by development, pointing 20 miles out into the Atlantic. The first unit of the complex, the Sol Palmeras, which can hold its own beside luxury resorts in Hawaii, has already opened, catering mainly to Canadians and Europeans. Canadians, who provide Cuba with 25% of its tourist trade, can get a package deal at the Palmeras for $800 for a week in the summer, air fare included. (Because of the embargo, Americans who vacation there break the law.) Cuba opened up the rest of the economy to foreign alliances two years ago. Julio Garcia Oliveras, president of the Cuban Chamber of Commerce (a group supported by state enterprises and a few joint ventures), counts 40 existing joint ventures, 40 more approved, and 70 under discussion. ! Garcia, like others helping to run or plan the economy, talks as if Cuba is already moving to a free market, though he acknowledges no official approval has come from the top. ''We will pass from a centralized socialist economy to one with mixed companies not subject to central control,'' he says. ''Privatization is a reality. If we want to be active in the world economy, we have to adapt.'' Cuba will need a lot more free market economics before ordinary citizens notice a difference. So far, the luxury of the new tourist facilities, available only to foreigners with dollars, just emphasizes their misery. That growing misery shows in the U.S. Coast Guard's count of Cubans who make the risky passage to Florida, many on inner tubes. In the first half of 1989, 57 Cubans floated across the Gulf Stream; in 1990, 196; and in the first half of this year, 1,173 made it. The Coast Guard doesn't know how many were lost at sea. Inside and outside Cuba, among politicians, economists, and exiles, the sense of impending change grows stronger. Economist Andrew Zimbalist, a specialist on Cuba at Smith College, just returned from one of his frequent visits to the island, says, ''For the first time I had the sense that the government might disintegrate.'' But at 65, after 32 years in power, Castro is vigorous, unrepentant, and too rigid to lead the change himself. What's the alternative to Castro? The small, brave opposition groups in Cuba, most of which are just a few years old, are tightly restrained and virtually invisible in a censored land. Oswaldo Paya, leader of the Christian Liberation Movement, glances about during an interview to see who might be watching or listening. Paya, a 39-year-old Catholic layman and an engineer at the Ministry of Public Health, is trying to collect signatures for a petition to reform the government. So far he has kept his job, but a mob, presumably inspired by the government, recently ransacked his home and destroyed the signed petitions they found. The leader of the human rights movement, Gustavo Arcos, one of Fidel's original comrades-in-arms, has been jailed twice but is free today. He reports that perhaps 200 political prisoners are in Havana jails. A small political movement that believes in social democracy and calls itself Armonia clearly irks the government. Plainclothes men recently beat up some of its members and later also attacked its leader, Yndamiro Restano. All these groups preach nonviolent opposition. + The place to find Castro's most passionate enemies is near the northwest corner of the Miami airport, at the headquarters of the Cuban American National Foundation. The foundation thrives on support from exiles nostalgic for the old Cuba and aroused by shrill Spanish-language radio stations in Miami. Well funded by successful Cuban-American businessmen, this right-wing group gets a lot of respect from Florida politicians. Its friends include the President's son, Jeb Bush, whose partner in a Miami real estate business, Armando Codina, is a director. The president of the foundation, Francisco Hernandez, believes that the longer the ''madman'' Castro holds on, ''the greater the possibility of a bloody outcome.'' But he wants no concessions to Castro now. VIRTUALLY by default, the foundation sets U.S. policy to Cuba. It's the only powerful lobby that cares about Cuba, and it treats any softening of policy as treason. Thus, the U.S. trade embargo gets tougher, sometimes in amazingly petty ways. Example: When the U.S. State Department allowed AT&T to replace a severed 1950s phone cable to Havana three years ago, the phone company could not install modern, high-capacity cable. Instead, it had to use pieces of old cable retrieved from the North Atlantic. Because the two governments and AT&T have yet to agree on how to settle accounts, the line lies inactive, and calling Havana remains almost impossible. Some politicians would like the U.S. to be even tougher. Senator Connie Mack of Florida has introduced a bill that would stop U.S. subsidiaries in foreign countries from trading with Cuba. New Jersey Congressman Robert Torricelli has suggested blacklisting ships that call at Cuban harbors. Not that Castro makes it easy to be nicer to him. He has finished bringing his troops home from Angola, but that's the only U.S. condition for better relations he has met. He still helps revolutionaries in El Salvador, if less than before, and jails opponents. On the other hand, the U.S. maintains relations with and even helps other countries that aren't exactly finicky about human rights, such as China and Saudi Arabia. Does the embargo still make sense? A growing number of Cubans and Americans think not. Says Smith's Zimbalist: ''If our policy were more benign, it would remove Castro's pretext for not changing.'' Inside Cuba, Paya agrees. Because many of his countrymen still savor the way Fidel stands up to the gringos, he says, ''the blockade strengthens Castro.'' Moderates among Cuban exiles are beginning to break the hegemony of the Cuban American National Foundation. Enrique Baloyra at the University of Miami represents a political group that wants peaceful change and a more flexible U.S. policy. Francisco Aruca, a Miami businessman, asks, ''Why isolate the Cubans when you could influence them by being there? If we were there with the management and 50% ownership of companies, we could create the conditions for a change to a democratic process. But now we are on the outside.'' Marazul Charters, Aruca's charter flight business, was bombed two years ago by people who apparently felt differently, but he says he feels safe today. Times are changing -- in Miami as well as Cuba. But while European and Latin American companies get a foothold in Cuba, U.S. companies can only stand by. True, most aren't panting to do business there yet. The country is still too hot politically and cannot provide the legal procedures and infrastructure they need to operate comfortably. Even so, as AT&T waits for permission to use its new-old Havana link, Italcable, the international branch of the Italian phone monopoly, is installing direct-dial international satellite systems on the island. And while France's Total runs seismic tests off Cuba's coast, Texaco studies the Cuban market and wonders if it will ever be paid for the refinery expropriated 30 years ago. The day will come, perhaps not too long from now, when Cuba opens up. The best way for the U.S. to encourage that process is not to tighten the screws, which helps Castro justify hanging on, but to open up itself. After all, increased travel, trade, and communication with the West have helped undermine -- or at least moderate -- Communist regimes from East Berlin to Beijing. Why should Havana be any different? The U.S. could start by permitting shipments of medical supplies and later perhaps food, both critically needed. Happily, the fact that America remains the key to Cuba's future doesn't altogether dismay the Cubans. They never really took to Marx and Moscow anyway. Or as Julio Garcia at the Chamber of Commerce puts it, ''We don't drink vodka, we don't walk around in boots and fur hats, and we still know how to dance.''