President Obama discussed America’s faults Friday with young Asian leaders, saying the U.S. suffers from “pitfalls” such as income inequality, a political system controlled by the wealthy and political parties divided along racial lines.

Human-rights groups say Malaysia has a poor record on issues such as human trafficking and have accused the State Department of upgrading Malaysia’s status on human rights so the country could be included in Mr. Obama’s Trans-Pacific Partnership trade pact.

Human Rights Watch said the ruling party in Malaysia “has engaged in a strong crackdown on civil and political rights” since losing the popular vote in 2013, and that Prime Minister Najib Razak has strengthened a sedition law after promising to repeal it. The group also said opposition leader Anwar Ibrahim received a five-year prison sentence this year on “trumped-up sodomy charges,” and that Sharia (Islamic law) courts “have increasingly been used to prosecute alleged LGBT activity.”

After meeting with Mr. Razak on Friday, Mr. Obama said they discussed “the importance of civil society and issues not just in Malaysia, but in the region generally, and how we can promote those values that will encourage continued development and opportunity and prosperity.”

Mr. Razak said of Mr. Obama, “we take into account some of his views and concerns.”

“But Malaysia is committed to reforms, and we are committed to reassuring at the same time there’s peace and stability,” the prime minister said.

Speaking at a town-hall event in Kuala Lumpur, Malaysia, Mr. Obama said the biggest problem in the U.S. is the influence of the wealthy on the government.

“It is very important to avoid any political system where money overwhelms ideas,” said Mr. Obama, who raised a record $1.1 billion for his reelection campaign in 2012. “And the United States politics process has become so expensive and it lasts so long, and even though I was successful at it, we spend hundreds of millions of dollars in television advertising and in all the things that go into a U.S. presidential campaign.”

He added, “When politicians have to raise so much money all the time, then they start listening a little bit more to the people who have money, as opposed to ordinary people.”

In response to a question from the audience, Mr. Obama also said politics in the U.S. “increasingly is defined by personal attacks and saying very sensational things in the media.” He urged young Asian leaders to try “to debate people you disagree with, without saying that they’re a terrible person.”

The president himself is engaged in a nasty, long-distance debate with Republicans over his plan to accept Syrian refugees in the U.S. He accused GOP opponents this week of being “scared of widows and orphans.”

At the town-hall event, Mr. Obama also warned young Asians to guard against racial divisions in politics, saying in the U.S., “it’s still an issue that comes up.”

“I really hope that all of you are fighting against the kinds of attitudes where you organize political parties or you organize interest groups just around ethnic or racial or tribal lines,” Mr. Obama said. “Because when you start doing that, it’s very easy for people to start thinking that whoever is not part of my group is somehow less than me. And once that mindset comes in, that’s how violence happens. That’s how discrimination happens. And societies that are divided ethnically and racially are almost never successful over the long term.”

He said in the U.S., “we’ve struggled with this for over 200 years, but it’s still an issue that comes up.”

“And so I would guard against that here in your home countries,” the president added.

Mr. Obama said the U.S. “in many ways is better positioned than it has ever been for leadership in the 21st century,” with a strong economy, an improving college graduation rate and a thriving technology sector. But he said there are still some “anxieties” among Americans.

“Number one, in the United States, there is a growing inequality that I think is a real problem not just for the United States but around the world,” the president said. “And when people feel economic stress and inequality, then I think politics become harder because people are afraid for their futures and sometimes politics can become much more divided than it used to be.”

Mr. Obama didn’t mention billionaire GOP donors such as Charles and David Koch, but he said the wealthy in America are hurting the system.

“When there’s more inequality, the people who are powerful can influence the political system to further reinforce their privilege, and it makes it harder for ordinary people to feel that they have influence on the political process,” the president said. “And so people become cynical. Now, these are all problems that can be solved, and I’m confident we will eventually solve them. But right now, our political system does not work as well as it should.”

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