First off, the "compression code" is not that. Iwata's code was to improve performance, loading times specifically. Thanks to his code, the game can load battles and wild encounters just fast enough so that it doesnt feel like a slog every time. DYKG of all people mention this and even show a comparison of a prototype that lacks this code and a copy of the game that does include it, the difference is definitely there so thanks to Iwata's code, we got less tedium, not more space.

As >>58030325 mentions here, Kanto was already planned, just in a very miniture version initially, and remember, Gen 2 was vastly different during the Tajiri days so its anyone's guess how a mini Kanto would work.

Personally, i think that its both tech limitations and time that lead to these locations being cut and/or altered. Gen 2 was in development since 1997 if not sooner, the main concept got scrapped, developers came and went and technology was both limiting yet evolving at a rapid pace. My guess is that once they had shaped an actual product, they didnt want to take any risks prologing the development further or going wild with additions. There was clear intent to restore locations like for example the Safari Zone but eventually didnt for reasons only they're aware of and while it is sad to miss these locations in the originals, at least the rest of what we have is sufficent and entertaining enough which doesnt feel like they went crazy and cut major parts that downgrade the experience.