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-aging country could face a major collapse in growth.

In October, Korean companies exported a record amount in dollar terms of cars, smartphones and computer chips 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 shrank 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, she could end up sharing the fate of most Korean presidents, who become lame ducks halfway through their 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, a supplier to Samsung Electronics and LG Electronics. Viatron is one of more than 3 million small to midsize businesses in Korea.

According to the latest survey by the Small and Medium Business Administration, about 70 percent of such companies find current market conditions do not justify investment. Policy makers have sounded the alarm, but done little to change the mix of industrialization and exports that has dominated the economy for decades.
Koreans “ask why they are being told they are sitting someplace warm when they feel cold,” Bank of Korea Gov. Kim Choong-soo said of the disconnect among consumers, domestic economy and strong headline growth.

While chaebol - the large industrial conglomerates that grew out of the 1970s to become Korea’s primary exporters - provide secure jobs for many, they rely on a huge pool of temporary labor to keep costs down.

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 regular workers’ pay, according to company data.
The International Monetary Fund on Friday again urged Korea to allow its won to strengthen in order to rebalance its economy, liberalize the service sector and implement reforms, saying the country risked slower growth in the longer term.

“If 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, an economist at SK Securities in Seoul.

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, compared to 139 percent before the 2008-9 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 of their wealth was held in tangible assets last year. The Park administration has attempted to ease consumer debt with a forgiveness scheme, without much progress.

Sales at stores run by Hyundai Department Store, Lotte Shopping and Shinsegae rose for two months out of three from July through September, but the average value of customers’ purchases fell.

EBay Korea, which runs two of the largest open market online Web sites in Korea, said it had seen a 50 percent jump in sales of do-it-yourself products this year compared to 2012.

“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 sites.

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. Reuters