Well, since AI constantly needed those extra army POPs, it was still reasonable for it.
Again, it's one of those "big picture" things - some AI actions might look stupid from certain angle... until we figure out that AI is making this decision using completly different premises then us as a base.
True, but do you want to have small AI countries fall over much more easily then very same countries controlled by human players though?
Difference in AI and human player effectiveness of using game mechanics is a fact and to be fair, I'm sort of proponent of usig cheats to balance it out. Not ham-fisted +20% for everything (which is good for extra difficulty of course), but minor touches here and there to make better impression that AI-controlled countries are capable of keeping up with humans. Of course if it can be achieved without a cheat its only better, but if AI scripts are unable to do that, minor cheat as a temporary solution is sufficient.