DAMASCUS, Syria -- The Jallad Co. is betting on peace.


Confident that Israel and Syria are on the verge of a treaty that will herald a new era of prosperity in the Middle East, the Caterpillar heavy-equipment dealer is forging ahead with expansion plans, breaking ground on a new headquarters and hiring 10 more engineers, according to general manager Oussama Marashli.


"This peace process will lift the boundaries, and there will be a lot of opportunities,'' said Marashli. "You can feel it. It has started.''


Syria's economic renaissance, however, may yet be a long way off.


Despite surprisingly healthy growth rates over the last three years, Syria's economy has begun to show signs of stagnation, according to Western diplomats. The slowdown reflects hesitancy on the part of the authoritarian regime of President Hafez Assad to confront Syria's burdensome legacy of Arab socialism, a task that is complicated by the country's long history of political instability.


For all the flashy new wealth in Damascus and other major cities, Syria still suffers from a bloated and inefficient public sector, widespread corruption and, most ominously, rapid population growth, which threatens to overtake economic growth within a few years.


"Syria has tremendous potential,'' one diplomat said. "The people are bright, they work very hard and they're basically technically competent. They have a window of opportunity that perhaps other countries don't have. But that period is going to end. If they don't do something now to create the infrastructure for future growth, they may miss the boat.''


The course of the Syrian economy is of more than passing significance, given the country's historical importance as the crossroads of the Middle East and, in particular, its pivotal role in the search for peace between Israel and its Arab neighbors.


U.S. Secretary of State Warren Christopher is due in Damascus early this week, the latest in a series of visits to the Middle East by U.S. officials aimed at breaking the deadlock over the Golan Heights, which Israel captured from Syria during the 1967 war. Syria has insisted on its return.


Syrian businessmen say a peace treaty would hasten this country's growth, releasing a flood of U.S. aid and investment and diverting funds from the military, which consumes more than half of government spending, into more productive channels.


This optimism stems in part from the recent performance of the economy, which has grown at a brisk annual rate of 7 to 8 percent over the last three years, according to official U.S. estimates.


While much of the growth stems from rising oil production and aid from wealthy Persian Gulf countries, it also reflects Assad's fitful economic changes, the most significant of which created tax incentives for new investment and allowed exporters to keep most of their hard-currency earnings.


This sparked a boom in textile, pharmaceutical, food-processing and other light industries, many of them built by wealthy Syrians who have started to trickle home from abroad.


Well-to-do Syrians are becoming indistinguishable from their Western counterparts, driving late-model Volvos, traveling frequently abroad and spending weekends in villas in the mountains near Lebanon or on Syria's Mediterranean coast.


Syria's economic bloom, however, is complicated by its long history of sectarian Muslim religious rivalry, whose fault lines have been concealed but not eliminated by 30 years of authoritarian rule.


In the absence of democracy, Assad fears that moving too quickly on the economic front could ignite social and political upheaval, according to Western diplomats.