I don't understand what you mean by this statement.
If a human player plays on Chieftain difficulty, then he has a lot more happiness than normal. Luxuries generate 6 happiness instead of 5, you start with 12 happiness instead of 9, and cities only generate 1.2 + 0.6/pop unhappiness instead of the usual 2+1/pop.
What he's saying is that there's a bug where, for whatever reason, AIs will sometimes be stuck on Chieftain regardless of what setting YOU use (which is not how it's supposed to work). So while YOU are playing on Prince, King, et cetera, and seeing those penalties, the AI is only paying 60% of the normal unhappiness and gaining extra happiness.
So, you can basically remove Chieftain and set its values to those of Prince, like he suggested. Instead, I just set the default handicap to Prince, and that seemed to work. (I was trying to get the default at the Advanced Setup screen to be Prince, but that STILL doesn't work.) In my games the AI is definitely not having a huge happiness surplus, although my mod tends to reduce happiness in general.
AIs generally have a large happiness surplus, but it's not just because of the handicap. There are two other reasons for this:
1> The AI rarely expands as quickly as a human. Sure, you laugh at the AI for missing out on that great city location you just grabbed, but in the meantime he's got fewer drains on his happiness and so is entering Golden Ages more often. More GAs means a LOT more cash, and more production.
2> Resource trades. When an AI hooks up a second unit of a luxury, he looks around to see who he can trade it with. Since this is happening during the AI's turn, the first person that he'll check? Another AI, of course. So the AIs tend to have a LARGE number of luxury trades going back and forth. (You see the same thing with Research Agreements.)
The AI also isn't as picky about "even" trades, or insisting on resource-for-resource trades. So one AI might offer a resource for some gold, and then a few turns later get a similar offer in reverse. Since, as mentioned above, the AI is more likely to be in a Golden Age and so will have more money on hand, this is actually very common.
As for why the AI's little island cities grow so quickly? It's because
island cities grow quickly; once you get a Lighthouse, all water tiles generate 2 food; add in any fish and ally yourself with a Maritime, and you're set. You could do the same. Land tiles have all kinds of other bonuses, sure, but it's a bit harder to get them to that 2+ food self-sufficiency; your land cities will be working a lot of tiles that don't reach that threshold. (Plains with trading posts, hills with mines.) This slows down your growth tremendously, although you obviously get other benefits instead.
Thanks, but can't I just edit some particular XML file without going through the process of actually creating a mod?
No.
Well, you probably COULD, but it'd be a really bad idea. Editing the core game's XML files is just a really bad way to do things in general; your changes will get destroyed any time the game auto-patches, and your changes could easily conflict with a mod. And if you do it badly, then you could easily cause a game crash without having any way to easily fix it.