Since the chip is defined, shouldn't the compiler manage the memory automatically?<p>

It could try, but the programmer knows much, much more about how often a variable is accessed and what penalties (cycles and code size) he or she wants to incur when doing so.

Declaring a constant or variable in different memory areas (data, idata, xdata, pdata, code) can lead to very different execution times and code sizes.

You can influence the memory space the compiler uses as "default" (when none is explicitly given) by chosing a different memory model, but putting all variables into xdata by default will lead to large and slow programs.