I was in a school pageant one year because I wanted to. The proceeds were for a good cause and it was honestly kind of fun to dress up pretty for a day and try on different outfits. I didn't win, but I had a lot of fun doing it. I think it was mainly because I didn't take it very seriously, and I got flowers from my parents anyway.
Most little girls like to play dress up, and I don't think it's wrong to allow them a little bit of fun if entering a pageant is what they want to do.
I think it's important to point out that shows like Toddlers and Tiaras show an extreme of child beauty pageants. They show all of the crazy ladies who want to live through their children and win; they often don't show the moms who are putting their children into pageants because it's what the children want to do.
There's also nothing wrong with celebrating femininity. I understand that there is more to life than outward beauty but there's nothing wrong with being pretty or liking pretty things. I love the Fancy Nancy children books because they highlight this fact. It's okay to be a girl and want to dress up, just like it's okay to be a girl and play sports.
In order for child beauty pageants to be fun and awarding in their own way, though, parents do need to properly explain to their children what it means to be in a competition and that losing doesn't mean that they aren't wonderful, special people. On the flip side, winning also doesn't mean that their outward appearance is all that matters.
As long as the motive to join pageants is child-driven, I really don't see the problem with them.