The problem with world-writeable directories is not so much that people can ADD anything to the directory, but that they can CHANGE anything in teh directory. A malicious user could easily access any of your scripts (since none of them are protected) and modify it in such a way that your entire site is deleted the next time it runs, or worse, do something that steadily detroys data without you knowing it.
Having a directory world-readable means that people can obtain directory listings to obtain data about directory structure (as stated above). A sophisticated user can use this data to crack your directory tree.
Having the directory being above htdocs actually poses a greater security risk. Once a user has accessed this directory (which can be done... chroots like Apache applies are NOT 100% secure), there is then nothing at all preventing the user from executing any type of malicious script on your entire system.
If the fact that you are allowing any user on the server to arbitrarily execute any code they want to isn't scary enough, I don't know what to tell you.