Informal Economy Undermines Disaster Readiness, Global Governance Study Finds

When earthquakes, storms, droughts, or floods strike, the damage is never purely physical. Natural hazards disrupt economic activity, impair the functioning of capital markets, damage infrastructure, and deepen social vulnerabilities. A new cross-national study argues that the size of a country’s informal economy—unregulated work, cash-based transactions, and unregistered businesses operating outside the reach of the state—plays a measurable role in amplifying the impact of natural hazard-related disasters, and that strong governance is the single most powerful lever a country has for building disaster readiness.

The research, published in the International Journal of Disaster Risk Science, analyzes annual data from 1993 to 2020 for 39 countries identified as having very high exposure to natural hazards in the World Risk Report 2024, meaning a World Risk Index value between 12.89 and 100. The sample spans an unusually wide range of contexts, from the Philippines, Indonesia, India, Colombia, and Mexico at the top of the risk ranking to the United States, Japan, Australia, Canada, and New Zealand. Somalia was excluded because no informality data were available, and several variables were missing for Libya. The author, Raluca Maran, applies partial least squares structural equation modeling (PLS-SEM), a statistical framework that estimates multiple cause-effect pathways simultaneously, capturing direct, indirect, and mediating effects within a single model—a capability that conventional regression or single-country case studies cannot offer.

PLS-SEM works with latent constructs, unobserved variables that are causally determined by multiple observable indicators. The study defines four such formative constructs: informality, governance readiness, economic readiness, and social readiness. Informality is measured through informal output, self-employment, and employment in agriculture, the latter serving as a proxy for informal employment because agriculture accounts for the largest share of informal work worldwide. Governance readiness combines political stability and the absence of violence or terrorism, regulatory quality, voice and accountability, and low levels of political corruption. Economic readiness reflects property rights enforcement alongside business, trade, investment, financial, and monetary freedom. Social readiness integrates mean years of schooling, income inequality, fixed broadband and telephone subscriptions, access to electricity, and patents per capita, capturing education, wealth distribution, and technological and infrastructural development. Disaster impact, the single-item dependent variable, is the number of people requiring immediate assistance per 100,000 population—including the injured, the homeless, and those needing financial assistance—an indicator drawn from the Sendai Framework for Disaster Risk Reduction 2015–2030.

The measurement model was validated with bootstrapping, a resampling procedure that repeatedly draws simulated samples from the original data with replacement to approximate the sampling distribution of estimates without imposing distributional assumptions. All informality indicators showed outer loadings of at least 0.5 at the p < 0.001 level. Some indicators with high variance inflation factors, such as several governance components, were dropped from the final specification, while two informality indicators with VIFs slightly above 5 were retained because formative models tolerate multicollinearity better and each contributed uniquely to the construct. Heterotrait-Monotrait ratios ranged from 0.556 to 0.902, below or marginally at the 0.90 threshold, indicating sufficient discriminant validity. Cronbach’s Alpha exceeded 0.7 and composite reliability RhoC fell between 0.7 and 0.95 for all constructs, confirming adequate reliability, and full collinearity tests found all VIFs below 5, ruling out common method bias.

The structural results are striking. Governance readiness exerts a large, positive effect on economic readiness (β = 0.672, f2 = 0.818) and on social readiness (β = 0.636, f2 = 0.680), and a medium, negative effect on informality (β = −0.454, f2 = 0.260). Informality, in turn, undermines governance readiness (β = −0.454) and economic readiness (β = −0.230), and directly amplifies disaster impact (β = 0.132, f2 = 0.090). Six of the study’s hypotheses were supported. The reciprocal relationship between governance and informality—a strong governance framework shrinks the informal sector, while a large informal sector erodes governance—suggests a self-reinforcing loop that can trap countries in institutional fragility, diminished fiscal capacity, and stunted economic growth.

Perhaps the most consequential finding is what did not appear in the results. No significant direct effects were observed from governance, economic, or social readiness on disaster impact. Adaptive capacity, the study concludes, operates primarily through indirect pathways. Mediation analysis reveals that informality fully mediates the link between governance readiness and disaster impact: the indirect effect is significant while the direct effect is not, indicating indirect-only mediation. In contrast, governance readiness plays a complementary mediating role in the relationship between informality and economic readiness, where both direct and indirect effects are significant and their product carries a positive sign. In practical terms, good governance does not shield a country from disaster damage on its own; it does so by formalizing the economy, strengthening markets, and building the social and infrastructural foundations of resilience.

The mechanism behind informality’s direct effect on disaster impact is well documented in the literature the study draws upon. Informal economic activities siphon off government revenues, undermine the equitable provision of public goods and services, and place compliant businesses at a competitive disadvantage. Informal workers often face precarious employment without social safety nets, deepening income insecurity and limiting human-capital accumulation. Reliance on unmonitored, cash-based transactions erodes the rule of law and fosters rent seeking, as regulators struggle to enforce standards and curb corruption. When a hazard strikes, these deficits translate into weaker institutional coordination, narrower fiscal capacity for relief, and populations who cannot be reached by formal protection systems—so more people end up injured, homeless, or in need of assistance.

The findings were stress-tested through two robustness exercises. First, the author re-estimated the model under alternative pathway specifications—for example, assuming that governance readiness no longer influences informality while informality can also affect social readiness. The path coefficients retained the same signs and statistical significance, with informality negatively associated with governance (β = −0.455), economic (β = −0.226), and social (β = −0.87) readiness, and positively linked to disaster impact (β = 0.16). Second, the analysis was repeated using a covariance-based SEM (CB-SEM) approach, which assumes multivariate normality and emphasizes overall model fit rather than maximizing explained variance. The CB-SEM results closely mirrored the baseline, showing informality decreasing governance (β = −0.554), economic (β = −0.547), and social readiness (β = −0.839), while increasing disaster impact (β = 0.262). The core conclusions held across both alternative estimation methods.

The study connects its results to the Sustainable Development Goals, particularly SDG 11 on Sustainable Cities and Communities and SDG 16 on Peace, Justice and Strong Institutions, which emphasize resilient infrastructure, strong institutions, and reduced informality. The policy implications differ across income groups. In low-income countries, where informality is widespread and fiscal space limited, strengthening administrative capacity—through simplified business registration requirements and improved tax collection—can reduce informality and enhance disaster readiness. Middle-income countries could benefit from labor market reforms, such as incentives for small enterprise formalization and stronger social protection. In high-income economies, where informality is sector-specific, reforms that bolster regulatory enforcement, transparency, and accountability could consolidate resilience. Across all income groups, a political environment characterized by low corruption is vital to ensure that formalization translates into broad social and economic gains.

The author is candid about the study’s limitations. Reliance on country-level yearly data masks subnational variations and is subject to measurement errors and inconsistencies across countries and over time. Operationalizing informality and the readiness constructs through composite indicators may oversimplify multidimensional concepts, and the long 1993–2020 timespan could obscure the influence of evolving policy frameworks and disaster risk profiles. The measurement of disaster impacts is restricted to the number of individuals affected, without incorporating the economic and financial consequences of such events, which remain largely unavailable for the 39 sample countries. Future research, the study suggests, could adopt higher-frequency or subnational data, expand the sample, and explore additional mediating or moderating variables such as climate change adaptation policies, technological innovation, or social capital. Even with these caveats, the message is clear: the fight against disaster vulnerability begins long before the hazard strikes, in the quiet institutional work of strengthening governance and pulling economies into the formal light.

Subject of Research: Structural equation modeling of informality, governance, and adaptive capacity to natural hazard-related disasters

Article Title: Informality, Adaptive Capacity, and Natural Hazard-Related Disasters: A Partial Least Squares Structural Equation Modeling Exploration of Governance for Disaster Readiness

Article References: Maran, R. (2026). Informality, Adaptive Capacity, and Natural Hazard-Related Disasters: A Partial Least Squares Structural Equation Modeling Exploration of Governance for Disaster Readiness. International Journal of Disaster Risk Science. https://doi.org/10.1007/s13753-026-00783-1

Image Credits: AI Generated

DOI: 10.1007/s13753-026-00783-1

Keywords: disaster risk reduction, informal economy, governance readiness, PLS-SEM, adaptive capacity, resilience, natural hazards, structural equation modeling, economic readiness, social readiness, Sendai Framework, World Risk Index