Refashioning his winning 2008 campaign mantra for 2017, Obama while addressing nearly 20,000 supporters in his hometown here asked them to hold fast to their optimism and to look within for leadership.
"I am asking you to believe not in my ability to bring about change, but in yours," 55-year-old Obama said.
"I am asking you to hold fast to that faith written into our founding documents: ... Yes, we can," he said in the address that lasted for 55 minutes.
He cautioned Americans about threats to democracy, saying "Democracy can buckle when we give in to fear. So just as we, as citizens, must remain vigilant against external aggression, we must guard against a weakening of the values that make us who we are."
The outgoing President lamented that despite his historic election as the nation's first black president in 2008, "race remains a potent and often divisive force in our society."
"After my election, there was talk of a post-racial America. Such a vision, however well-intended, was never realistic," he acknowledged.
Obama's presidency will come to an end on January 20 when Republican Trump would be sworn in as the 45th President of the US.
Without mentioning Trump, he used his speech to offer an implicit rebuttal to many of the contentious themes like temporary ban on Muslim immigration that characterised the 2016 presidential campaign.
Obama said he rejects discrimination against Muslim Americans, and drew cheers for saying they are "just as patriotic as we are".
"... I've worked to put the fight against terrorism on a firm legal footing. That's why we've ended torture, worked to close Gitmo, and reform our laws governing surveillance to protect privacy and civil liberties. That's why I reject discrimination against Muslim Americans," Obama said.
"All of us, regardless of party, should throw ourselves
into the task of rebuilding our democratic institutions. When voting rates are some of the lowest among advanced democracies, we should make it easier, not harder, to vote," he said as he completed terms at the White House.
"When trust in our institutions is low, we should reduce the corrosive influence of money in our politics, and insist on the principles of transparency and ethics in public service. When Congress is dysfunctional, we should draw our districts to encourage politicians to cater to common sense and not rigid extremes," he added.
He also warned economic divisions have intensified racial divisions, particularly at a time when the growth of the nation's Hispanic population continues.
To be serious about race, Obama said laws to fight discrimination in hiring, housing, education and criminal justice must be upheld - and "hearts must change."
"But we're not where we need to be. All of us have more work to do. After all, if every economic issue is framed as a struggle between a hardworking white middle class and undeserving minorities, then workers of all shades will be left fighting for scraps while the wealthy withdraw further into their private enclaves," Obama said.
The economy doesn't have to be a zero-sum game, he said, adding that last year, incomes rose for all races, all age groups, for men and for women.
For the fight against extremism and intolerance and sectarianism and chauvinism are of a piece with the fight against authoritarianism and nationalist aggression, he said adding if the "scope of freedom and respect for the rule of law shrinks around the world, the likelihood of war within and between nations increases, and our own freedoms will eventually be threatened".
"Rivals like Russia or China cannot match our influence around the world - unless we give up what we stand for, and turn ourselves into just another big country that bullies smaller neighbors," he stressed.
After successful eight years of his presidency, Obama said he is leave this stage even more optimistic about this country than he was when started.
"By almost every measure, America is a better, stronger place" than it was eight years ago when he took office, he told thousands of supporters.
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