I don't recall that there are any special small sized armour pieces. For half-giants you have ogre and basilisk scale stuff, for medium sized races there is hard leather, but i haven't found any specific small stuff yet. But I do like the idea of adding race-clothes, like indeed elven leather, dwarven steel. And within every race, you have special suits for different ranks. It could definately give more personality to a char. Of course a gnome can wear dwarven stuff an vice versa, but unless that person has rp-motivations behind it, I think it would be less likely.
I was glad the white castle update was there, finally being able to wear some good stuff, lowering ghandi's ac to -4 (which i think it still should be better for paladins, but that's another discussion

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Scorpion mentions about searching through the lands and discovering new places. Despite the places I just can't reach due to aura problems, I think I've been to at least 95% of all known places, perhaps more. Don't know exactly how much is undiscovered, but I don't think that it would be a lot. Would be great if the DM would give a hint of amount of undiscovered places, motivating us to search further more.
For changing clothes, thieves and assassins can decrease their ac quite a bit with clothing. But wearing 'normal' clothes. Not sure about that. I agree that for RP-reasons it could add, but I think that seeing people change their clothes all the time in the Chapel or medic centre would drive me crazy. My screen would be filled with useless information. Between those lines something interesting might be.
Just my point of view