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Editing in all movies, not just Pan's Labyrinthmakes a huge difference. For one thing, editing gives the movie a sense of motion. This is particularly important for Pan's Labyrinthbecause it interweaves the civil war in Spain and the make believe world of the protagonist. To switch back and forth requires good editing.
Second, since this movie is two stories in one, transitions are very important. You can lose an audience if the transitions are poorly done. Hence, the editing process if extremely important in this movie. Also when we consider that the two worlds in Pan's Labyrinthare so different, the editing process has some additional obstacles.
Finally, editing also selects the best takes. As you probably know, each movie has thousands of hours of footage and things are pared down to create a seamless story. This is not an easy process.
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