It's perfectly right. Part of what makes a weapon dangerous is its mass, another one in the way it's swung. A two-handed sword is either used as a thrusting weapon with little movement (typically your estock) and the make piercing attacks or with large sweeping movement using the inertia of the heavy blade at full advantage.
In the former case, a halfling could do as much damage as a human, providing he can lift the sword.
In the latter case, a halfling would be very less effective than a human because of his shorter arm and blade. He would also lack in 'bracing' and could end a swing spinning around.
I think we can say you can use 1-handed a weapon of your size and two-handed a weapon a size bigger than you, providing it's possible. Thus, a halfling (small size) could use a broadsword using two-hands but would still be doing medium attacks.
Maybe each weapon could be given a relative size. For example, a broadsword could be said +0, its size being the same as the race it is designed for and a 2-handed weapon could be a +1, making human broadswords medium weapons, human two-handed swords large weapons, halfling broadsword small weapons and halfling two-handed swords medium weapons.
I think that is realistic for slashing and crushing weapons
Thrusting weapons of any race could be of of the same size, I can't see any difference between being stabbed by a halfling spear or a gryx one.
Maybe missiles weapons could ignore this. As you pointed out, Razyr, a halfling may be nearly as strong as a human. So they should be able to have bows with similar tensions dealing similar damages.
All of this could also lead in having short races using spears and polearms rather than heavy weapons, compensing their lack of weight and strength by using weapons for which they are not important. The shortest races should never use crushing weapon as they put the more emphasis upon a weigthed end. Your average halfling or gnome fighter would then end to wear light armor, to keep the benefit of his high quickness, and wield bows and spears, as they are as dangerous in his hands as a spear and more easy to wield than a mace.
OTOH, I think heavy races (large) would be more attracted toward the heavier weapons, the elements above being reversed for them.
In complement of the size, maybe a minimum strength bonus could be required to lift some weapons. I remember someone has done a complete listing of RM weapons with stats including minimum required strength somewhere. I think it was in a Guildcompanion article. Almost anybody can effectively wield a spear in combat (if the size is right), whereas using a sword requires more strength and a mace even more so.
