This thread has a lot of well-argued replies from people with very different points of view, haha. I'll add my own 2 cents since I've always liked shorty races (even though I prefer gnomes over halflings, for their racials).
My opinion is that body model choices come down to romance and censorship, not realism, ease of modeling, one DnD edition over the other, etc. What we can probably push for are the poses and animations.
Hear me out: I played Beyond Divinity when the game came out. Your gender could be male, female or child. Hah, ofc I had to play as a kid! My kid was chained to the Black Knight and we were a mass-murdering duo. Woohoo! So you can be a mass-murdering kid and Larian's game doesn't get censored. (Beyond Divinity is old and it could be argued that things looked far less realistic though) You can be an assholish, thieving kid (like some of the grove Tieflings - looking at you, Mol!) and Larian's game doesn't get censored. BUT because BG3 has romance (even if you don't play it), TAV can't be a kid (which is a whole other topic!) and shortie races can't look even remotely like a kid. They will have deformed proportions to make them clearly distinct from human (or humanoid children). Just to avoid censorship. That's it. The Mysterious Guest tries to flirt with you, trails its finger seductively over your shoulder, and bends down to kiss you... I don't even want to imagine the outcry if TAV looked non-adult or some online groups could spin it that way.
The most we can probably get is animations that fit these models (gnomes move decently right now, even if their arms reach their knees instead of their thighs ), and stances & weapons without clipping. Over the past couple of patches, a lot of the worst, meme-worthy crap has been fixed but there's still stuff left to improve.
Elves have now gotten their own separate animations. If all races get their individual animations, customized for their specific body shapes, that would go a long way towards making shorty races look good imo. Often enough weird (inhuman) proportions can be de-emphasized by cool animations (I'm thinking of what WoW has done with their different races) and the end result feels nice to look at.