If the world and it's inhabitants don't work for me then I don't see how I can sell the world to others.
"I'm sorry, but I can't DM well if you take too many races," does not seem like a great selling point.
A Bugs Bunny toon may fit in your campaign world, it would not fit in mine unless it's a dream sequence.
The point is, ultimately, that the campaign world is not the meaningful unit of game to the players. The players are not sitting down saying, "Oh, great! Another chance to make the GM's world a reality!"
With restrictions on player choices, the GM is asking the players to take the burden of supporting the campaign world, rather than the campaign world supporting their play. In this, the players are
giving something to the GM. They ought to get something back. Basic fairness, there.
Note: this comes from the perspective that the GM is not ultimately "superior" to other players. "The GM does all the work, so the players should generally bow to the GM's desires," is an old, and I think largely outdated, model. If, in order to run a game, you need the players to give up a lot of stuff, that's not their fault, so they don't
owe you the solution.
As far as selling my world, not sure what to say. I've never had an issue attracting or retaining players.
So, your "What harm does it do?" comes from the position of a person who doesn't actually have any problems. Players, are not, in fact, taking a bunch of characters that don't work for you. I suspected as much - this is a hypothetical situation, for you.
The answers to the question you have asked clearly then
do not apply to you. What harm does it do? Well, in your case, nothing. Your status quo is fine for you. Go, have fun.
But realize then that your personal perspective does not apply to the answers, either. You don't really have much to say on why GMs might want to roll back on restrictions, or why it might be a positive for a GM to do so.