By Jeremy Laurence
SEOUL (Reuters) - The death knell for conservative rule is getting louder by the day in South Korea, where voters are rejecting the big-business friendly policies of the government and demand a fairer share of the country's growing wealth.
The Grand National Party's dramatic fall from grace in Asia's fourth largest economy raises the prospect of a shift in policy to a more welfare-oriented system, as well as change in its North Korea strategy and shift in ties with Washington.
The popular vote is not going to a rival left-leaning party, rather to so-called "people candidates" -- high-profile civilians with no political affiliation. Local media has cast this as a vote of no-confidence in the political establishment.
Less than six months before South Korea elects a new parliament and just over a year out from a presidential poll, the conservatives last week suffered their second big by-election loss this year, mirroring opinion polls which show it is in serious trouble.
In last week's vote for the mayor of Seoul -- the country's capital and the largest constituency -- the GNP was cast out of office for the first time in nearly a decade.
An analysis of the results translates into the GNP losing about 30 seats in the 299-seat national assembly, which signals an end to its majority rule. Moreover, no president has ever won office without carrying Seoul.
But the GNP is not alone in losing favor with the electorate. The main opposition Democratic Party failed even to make it through to the two-way run-off for Seoul mayor.
Analysts say young and working class voters are tired of both of the country's largest parties.
"Most of the votes in this election could be labeled as the vote against the establishment, voicing the need for change in the current politics, hence the clear loser of the election would be the GNP," said Hyun Jae-ho of Korea University.
While the Democrats themselves do not pose a direct threat in the general election, surveys show that if the left pool their vote in an alliance of liberal, or so-called "progressive" parties, they could end GNP majority rule in parliament.
"This election showed the strength of the civic groups in politics, but the problem is whether there are enough star players from civic groups who can act as the face of the people like Park was for the mayor election," said Woo Jung-yup of the Asan Institute for Policy Studies.
At the forefront of the anti-establishment movement are the winner in the mayoral race, Park Won-soon, a human rights lawyer and anti-corruption campaigner, and software mogul-turned university professor Ahn Cheol-soo. Both men's politics lean to the left.
Opinion polls show Ahn has bolted from the blue to emerge as the frontrunner for next year's presidential election, even though he has stated he has no interest in running. Analysts say there is a good chance he will change his mind given the current mood in the electorate.
GNP LEADERSHIP SHAKEUP?
Now, for the second time this year, the conservatives are bracing for a leadership shakeup amid criticism they are out of touch with ordinary voters. Analysts say voters are angry that while the national wealth has grown, their share has dwindled.
"Deaf and Dumb GNP" screamed the headline of an editorial in the conservative JoongAng Daily, which lashed out at the party for tolerating corruption, intransigence and self-indulgence.
If the GNP was shown a yellow card for its crushing defeats in last April's by-elections, it deserves a red card for failing to rectify its problems by the time of the Seoul vote, it said.
Young voters who propelled Lee Myung-bak into the Blue House in 2008, turned their back on the president and his party in last week's vote, with over two-thirds of them voting against the GNP's candidate in Seoul.
Rising college fees, jobs and the government's inability to improve the lives of average citizens were among the main reasons given for their anti-government vote.
Even as South Korea grows economically, mainly as a result of the earnings of its conglomerates -- or chaebol -- the middle and working classes say they are seeing nothing of the profits.
To the contrary, they argue inflation and stagnant wages mean they are losing out.
Hyun says the party simply must strive to become more "people friendly" as opposed to "business friendly."
"Although the economic environment for the corporations and the businesses in Korea is great, the economic situation for small business and the low middle class has been at its worst in the past few years," said Hyun.
Last year, South Korea's GDP rose to an eight-year high of 6.2 percent, but an indicator of how well the wealth was distributed fell to a six-year low.
NO WALK IN THE PARK
A few months ago, the GNP's Park Geun-hye, the daughter of former dictator Park Chuung-hee, was considered a shoe-in to succeed Lee next year in the December presidential vote.
Now, her victory is looking less secure.
The GNP 'sweetheart' has been targeted for her inability to galvanize the party, and her allies lament how she appears to have lost her Midas touch on the campaign trail.
The conservative Chosun Ilbo daily said Park needs to undergo a radical transformation to overcome her weaknesses.
Woo, of the Asan Institute, says Park's image as the leading candidate has been damaged quite severely. "Although she is very popular, she truly lacks the communication with the people.
"She needs to present more middle-ground policies and make emotional connections with the people. The current mysterious image has shown its limits in attracting the crowd."
Analysts say she is still the person to beat, but if a united opposition backs Ahn the race will be wide open.
Regardless of the outcome in next year's elections, change is in the air for both economic policymaking and on the foreign policy front.
Park has already indicated she will back away from the big business policies of the current administration and pursue more welfare initiatives, and has signaled a desire to more openly engage with rival North Korea.
Liberal victories would herald an even more flexible and cooperative approach to relations with Pyongyang, and a likely less embracing policy toward the United States.
Next year's votes are, however, expected to be fought over domestic economic issues, rather than foreign issues. That is, unless the mercurial North stages another provocation on par with last year's two deadly attacks.
(Editing by Sanjeev Miglani)