Well, there are grains of truth in what Death says above, but I don't agree with the overall conclusion that it is the cause of English cricket being "soft, uninspired and flabby" and that the English set-up is based on favouritism rather than merit-based.
That is not to say that improvements to the English central contracts approach could not be developed - there are clearly some drawbacks and questions to be asked. In particular, long-term injury situations highlight the weaknesses in having only 12 central contracts available.
Still, the intention has been to bring a measure of stability in place of the revolving door methods that preceded the inception of the central contracts. Stability is good when you have a team playing at it's perceived peak of performance, as in the lead up to the Ashes of 2005. Stability is a challenge when you have players who are perceived to be on the wrong side of their peak abilities viz. Vaughan, Strauss, Hoggard and maybe Collingwood.
However, by taking away a central contract, established stars are going from hero to zero, and the end of their England career in all but the most exceptional circumstances.
The biggest problem here is that the next tier of talent has not yet pushed its way through - Bopara, Shah, a wicketkeeper - all might have made a cast iron case for being given a central contract, thereby shoving Vaughan and/or Strauss aside, but have so far failed to do so. Broad, on the other hand, established himself in ODIs and is on the cusp for Test cricket, and so Hoggard had to be dropped from a central contract.
Given the current state of England Test and ODI candidates, 12 central contracts - 6 for batsmen, 5 for bowlers and 1 for Freddie - looks about right to me.