It sounds like a pity thing. A participation trophy. Which is given in kindergarten to save the kids' feelings.
Maybe it's just where I'm from but if you say you can't win for losing, it means you've got bad luck even when everything should be going for you, so in experiencing that, you would think that you'd experience some fortune when times get down but nope... then it just gets worse.
It's a fairly common saying.
In this case, to say you CAN win for losing is a quirk. In some ways, I'm challenging the player to NOT pull too far ahead in terms of territory and population, or it will give your opponents all the more power and strength to research, which, as Joe points out, is probably most effective in a non-tech trading environment.
When players are experiencing some benefit from the effect of the option, it might be because they are cleverly using the option to not outgrow their competition but rather focus, instead, on making the fewer cities they have as powerful as they can in terms of yield output (not so much in terms of population perhaps, which plays into a high-education strategy).
There are even some realism based arguments that were posed a while back that support the effect being an explanation for some historical examples of small nations advancing faster than larger ones.
It's NOT intended to be a participation trophy for failing to compete, but it IS intended to help those that haven't competed as well to get a better chance to recover and grow to become a truly competitive player on the board. It REALLY helps those newborn barbarian civs to become valid participants in the game.