After its arrival in Taiwan the KMT re-organized itself in many ways, but primarily it organized itself as a giant machine for pumping cash out of Taiwanese pockets and into KMT pockets. In southern Taiwan you can sometimes hear this policy encompassed in a saying that is a sardonic parody of sloganeering in Chinese: zhong bei qing nan (stress the north, ignore the south)
Back when Taiwan was primarily agricultural, in the 1950s, the government set up a system of milking agriculture to return income to the government. Throughout the 1950s and into the 1960s spent 80-90% of the budget on the "military" (read: the Party-state). As told in President Lee Teng-hui in his jawbreakingly titled PhD thesis, Intersectoral Capital Flows in the Economic Development of Taiwan, 1895-1960, the government (read: the Party-state) arranged prices between the agricultural sector and industrial sector so that the agricultural paid more for inputs from manufacturing than it got for its inputs to industry. The major tool for accomplishing this was manipulation of fertilizer prices, which were kept artificially high. The KMT also forced the farmers, when purchasing fertilizers, to purchase specified amounts of government-made fertilizers even when not necessary. In addition to being ripped off on the rice-fertilizer exchange, the government limited fertilizers for other crops to ensure it got its rice, reducing incomes by reducing farmers' ability to grow more lucrative crops.
The government also collected roughly 25% of Taiwan's annual rice production, through compulsary sales at below-market prices and other methods, which was redistributed to the military and the government's civilian employees, party apparatchiks who were largely mainlander. Remaining rice was exported through the government monopoly bureau (consult Ho's Economic Development of Taiwan, 1860-1970 for much of this discussion). This system was topped off with a regressive tax system and a system of currency and customs controls that chilled exports throughout the 1950s and became a leading target of US and local reformers.
Through these and other methods, the government was able to extract something like 22% of the value of agricultural production in the 1950s, as Lee and others have noted.
These policies continued to the present in several forms. Outstanding among them is the (mal)distribution of the tax revenue, of which Taipei takes the lion's share with Kaohsiung getting another big chunk. The government takes care of where it lives, and those who live there. So complete is Taipei City's dominance over the budget that in the last decade other metro areas have attempted to upgrade to municipalities so they have more budgetary clout. Taipei County did so in 2007....
"We have finally obtained the fair treatment to which we are entitled," he said, referring to long-standing complaints from Taipei County officials that the annual tax revenue allotted to the county is less than half the amount appropriated to Taipei City, despite the county having 1.15 million more residents than Taipei City.
"Taipei County makes the second-highest tax contribution to the state coffers, but the annual tax expenditure per person in Taipei County ranks lowest in the country," Chou said.
Taichung is currently attempting to do this by combining with its satellite communities, Kaohsiung is considering combining with Kaohsiung County, and Tainan has speculated on it. The magic number for upgrading is a population of one million or more; thus the cities are trying to annex outlying townships to grow bigger administratively, just as Taipei did when it annexed outlying townships like Neihu. Under ROC law, a "Special Municipality" like Taipei is the equivalent of a province, and thus has more clout than a mere county. It goes without saying that the executive of such a region would be very powerful (as the mayor of Taipei is), and that land values in such areas may shoot up, resulting in injections of illicit lucre into municipality councils as developers vie for the best plots. There's no downside here, except, of course, for the forgotten counties like Pingtung where the taxpayers are thoroughly plundered of their cash to pay for the system.
All that was by way of introduction to the issue of 18% interest. The DPP had been trying to kill that for years, since it is one of the most important ways, to individuals, in which wealth is transferred from productive Taiwanese pockets to unproductive KMT pockets.
以屏東縣為例，目前積欠台銀利息達四十億元，因為縣府財政困難，經向台銀爭取，預計以三十年分期攤還，但每年得攤還一億多元，是相當龐大的數目。Yunlin and Tainan all owe similarly large sums. The problem is that the 18% interest is paid jointly, half from the central bank and half from the counties. The counties must raise the money on their own. These funds thus represent an additional tax on the local areas, which must be paid out of funds that could have gone for roads, schools, or parks. It goes without saying that most of the county governments in Taiwan are flat broke. It is thus not a coincidence that the indebted areas, Tainan, Pingtung, and Yunlin, are all hotbeds of Taiwan nationalism.
To take Pingtung County as an example, the current interest owed to the Bank of Taiwan has reached NT$4 billion. Because of the financial difficulties of the county government, the Bank of Taiwan will not be able to amortize this debt for three decades, and the county has to repay more than one hundred million NT each year, a huge sum.
A significant driver of Taiwanese nationalism is a recognition of how Taiwanese were/are screwed by the party-state, and many DPP policies (like relocating the capital and getting rid of the 18% interest rate) can be best understood in this light. The Blue/Green divide and the nation's identity politics represent, in large part, a bitter struggle over resource disparities. Under Chiang Ching-kuo, the second president, the KMT brought in many Taiwanese to share in the resource redistribution, cementing its hold on the island.
To add another pixel to the image, bureaucrat retirement money is generally held in banks owned by the government (until recently) which then used it to back loans to large, government-friendly industrialists and developers while ignoring the island's productive and overwhelmingly Taiwanese-owned SME sector. At the same time, recipients of the 18% interest become strongly committed to support of the KMT, since it is highly profitable for them to do so.
Let's complete the picture: the KMT impoverishes the Taiwanese, reduces local development and educational opportunities -- especially in the South -- and then patronizes the locals for being low-class and poorly-developed, while blaming the DPP for fomenting ethnic hatred, a classic pattern of patronization and accusation anyone who has studied colonialism will be familiar with. This should provide a clue to why so often in Taiwanese circles the alleged crimes of Chen Shui-bian are shrugged at: for many locals, A-bian is simply getting back what was rightfully theirs to begin with, and against the systematic pillaging of Taiwanese resources by the KMT party-state, are the merest peccadilloes.