When you manually add someone to your Canvas course, you can now change the role (and the associated privileges) without adding and removing the person from the course site.
To edit the enrollment type of a user in your course, navigate to the People area of the course. Select the gear in the row next to the person, then choose "Edit Role":
Note: You cannot edit existing users to have an observer role. Additionally, users with an existing observer role cannot be edited to have another role.