That sounds like an interesting situation. I haven't played the game yet, but the only way I can think of to avoid a situation where the inner counties don't become more powerful and prosperous is if everyone agreed to 1) Contribute significantly to any war efforts. Everyone would have to work together and actually plan attacks and defenses to make this work. 2) Help rebuild any damages received as a result of raids and wars. 3) Help prepare defenses, such as walls and castles.
To simplify things so it's slightly more organized, a leader could be selected by a vote from each of the counties. It should use the
Alternative Vote to avoid everyone simply voting for themselves and avoid a 2 party system. It may be complicated, but having an organized group of people with such a complicated system is both impressive and allows for a larger number of counties to be involved. This encourages growth as people want to be a part of something cool and have an opportunity to make a difference in it.
Naturally, the elected leader would have to have fairly limited powers, since you don't want a tyrant getting elected and causing trouble. His sole purpose should be overall strategy, information, and diplomacy. Big decisions, such as treaties, war, and allowing new members into the confederacy, should be taken to a vote.
There's also the problem of dividing any territory that happens to get conquered by the federation. Since everyone contributes, everyone is going to want a piece of the pie, but (As far as I know) territories can only be controlled by a single lord. I suppose a new one could be raised to occupy it, but that still seems kind of wonky. The best way would be to share in the profits and expenditures, but that becomes more difficult when you get more than a few lords working together.
The only way I can think of to prevent that is to allow someone or a group of someones to request an offensive war, have it come to a vote, and allow those who requested the war to determine who receives territory. They can determine payments and such between themselves. Offensive wars shouldn't require
everyone's assistance, so if the attacking lords want more help they'd need to ask more counties to join in. If the war turns sour and requires action by the confederacy (Such as defending territories), everyone dog piles on the intruding forces, keeping the realm stable and defensible. The parties who initiated the war will be required to compensate anyone forced to participate.
It sounds like I might like this game, if just for the chance to attempt to make a system like that. If anyone happens to have a key floating around, I'm up for it.