By Christine Kim
SEOUL (Reuters) - South Korean President Park Geun-hye took office in February pledging a "Second Miracle on the Han River", a reference to her father's rapid 1970s industrialization, but nine months into office little has materialized.
On the face of it, there is little wrong with what is one of Asia's industrial powerhouses, but longer term the lack of a viable domestic economy based on services means the world's fastest ageing country could face a major collapse in growth.
In October, South Korean companies exported a record amount in dollar terms of cars, smartphones and computer chips abroad and economic growth overall this year has been 1.9 percent compared to the same period in 2012.
While Korea long ago escaped the "middle income trap" for developing economies, its service sector had shrunk to 58 percent of value-added gross domestic product by 2011 from 61 percent in 2008, according to World Bank data.
That ranking puts it closer to developing middle income economies like Malaysia with 49 percent in services than advanced economies like Germany with 71 percent, even though Germany is still an industrial powerhouse.
Park clearly recognized the problem, but unless she delivers changes needed to redress the lopsided economy and she could end up sharing the fate of most Korean presidents, who become lame ducks half way through their mandatory single five-year term.
So far, the tangible change Park has to show is the creation of a new ministry charged with guiding Korea's transformation.
But critics say the ponderously named "Ministry of Science, Information and Communications Technology and Future Planning" lacks focus. Its mission statement contains 29 items, and its actions so far have yet to yield substantive change.
"The Park administration seems to have thought of a lot of projects touting the 'creative economy', but we haven't seen anything we feel can be of help to our business," said Kim Hyoung-june, founder and CEO of Viatron <141000.KQ>, a supplier to Samsung Electronics Co Ltd <005930.KS> and LG Electronics Inc <066570.KS>.
Viatron is one of more than 3 million small-to-medium sized businesses in South Korea. According to the latest survey by the Small and Medium Business Administration some 70 percent of such firms find current market conditions do not justify investment.
Policymakers have sounded the alarm, but done little to change the mix of industrialization and exports that has dominated economy for decades.
"(South Koreans) are asking why they are being told they are sitting someplace warm when they actually feel cold," Bank of Korea Governor Kim Choong-soo said of the disconnect between consumers, the domestic economy and strong headline growth.
While the chaebol -- the large industrial conglomerates that grew out of the 1970s to become Korea's primary exporters -- provide secure jobs for many, while also relying on a huge pool of temporary labor to keep down costs.
Hyundai Motor for example has 5,700 contract production workers at its domestic plants, which account for 16 percent of its 35,500 manufacturing workers. In-house contract workers assemble the same vehicles, but receive 75 percent of the pay of regular workers, according to company data.
The International Monetary Fund again on Friday urged South Korea to allow its won currency to strengthen in order to rebalance its economy, to liberalize the service sector and implement reforms, saying the country risked slower growth in the longer term.
"If South Koreans' wages rise, so would their spending. If the real estate market picked up, so would their borrowing. Both sides of the equation have just come to a halt, hurting the service sector in return," said Yum Sang-hoon, economist at SK Securities in Seoul.
LACK OF CONFIDENCE
South Korean households gross debt-to-gross disposable income ratio stood at 153.4 percent in 2012, according to the latest data from the Organization for Economic Cooperation and Development, greater than the 139 percent before the 2008-2009 global financial crisis and the OECD average of 121.3 percent.
People are saddled with large mortgages, having ploughed most of their savings into property -- Statistics Korea estimated 75.1 percent their wealth was held in tangible assets last year.
The Park administration has attempted to ease consumer debt with a forgiveness scheme, without making much progress so far.
Sales at department stores run by Hyundai Department Store <069960.KS>, Lotte Shopping <023530.KS> and Shinsegae <004170.KS> rose for two months out of three in July to September, but the average value of customers' purchases fell -- indicating that people were buying cheaper items.
"The number of people who are looking to make things themselves is growing as they seek to cut costs," said Yang Jong-soo, a manager at Auction, one of the websites.
The government says it has scored successes, changing regulations to help small businesses, including forcing big retail discount chains to close stores twice a month to boost sales at traditional supermarkets.
"It usually takes time for ordinary citizens to feel actual changes," said Choi Sang-mok, policy advisor to the finance minister. "We've changed regulations to revitalize businesses and once the global economy picks up, we're hoping that brings about changes."
Bok Eun-joon, 48, moved his small eatery to a more central location in Seoul two years ago in search of better sales, but still complains that business is barely warming up.
"I don't feel any improvement," Bok said, across rows of unsold dumplings.
(Additional reporting by Se Young Lee, Joyce Lee and Michelle Kim; Editing by Simon Cameron-Moore)