Personally, I think the focus should be on "stage presence" as opposed to "cuteness." The singer is beautiful... but she also has a quieter, shyer, more thoughtful face, as opposed to the bright, outgoing, smiley face of the girl who was shown. It wasn't that the girl "wasn't cute enough" (IMO) it was that although her voice is beautiful, at 7 years old and with her personality and characteristics she couldn't portray the stage presence they were looking for. It is still an honor that her voice was used, and she was probably (just guessing here) relieved that she didn't have to go out there and face a billion people. I'm thinking of my own little girl at 5... even if she had the most amazing vocal talent in the world, she would not do well singing at an event like that. It takes a special kind of show-off to be able to perform like the "model" did. The only way she'd be able to participate would be in a situation like this one where she could sing in a studio.
They were putting on a show. I don't think this is such a scandal if it was handled in a positive way for the little girl. The international papers proclaiming her "not cute enough" is certainly not positive.