Small horses like the Falabella were originally bred as pets and curiosities. The small size of the Falabella is not because of environmental conditions, but selective breeding. Breeders would choose the smallest animals and breed them together. Even though a selection of naturally small ponies were chosen and bred- such as Shetlands, a small English Thoroughbred, and a Criollo- the inbreeding to take the Falabella down to its tiny size (like the miniature, the Falabella is measured in inches not in hands) has meant that it is likely to suffer from conformational defects such as: weak hocks, a heavy head, or crooked limbs, however the best examples are perfect miniature horses, with an intelligent head and a friendly nature. Falabellas are long-lived and often survive past 40 years. Due to its small size they are not suitable for riding except by the smallest child, but is quite strong for its size and has been driven in harness. Falabellas can be 30-33 inches tall, they can be all colors, and they are generally calm.
(Information from A Pocket Guide to Horses & Ponies)