Take a look at this fascinating article, which claims that a small group of indie label types sat down over brews and created the "world music" label to better market eclectic records. (The link might be a bit slow to load, but it's worth it.)
They intended the phrase to encompass music that, from a retail standpoint, did not have an easy consumer category. If music had a pre-existing and workable consumer identification, it didn't need the world music label, they concluded. Was English trad "world music?" No need--it had the "folk music" box. Was reggae "world music?" No, it could stand alone, people knew what it was. "If you have a box already, it doesn't need to clutter up the world music box," said one participant.