Thanks for all the responses. I think I understand the different arguments. I'd like us to find a reasonable interim solution, especially for small wikis like the Swahili Wikipedia, where the upload link is now hidden for new users, and visiting the upload page (if you do get a link from somewhere) results in an obscure error message.
How about this as an interim fix:
Instead of hiding the upload link and showing an obscure error message to new users, we show the link to all logged in users, and show a more informative message to non-autoconfirmed users, something like:
"Please visit the upload form on Wikimedia Commons [link to localized version] to upload files, then return here to insert them. Uploading to Wikimedia Commons makes the file available to all Wikimedia languages and projects. Files can be uploaded directly to {{SITENAME}} by more experienced users."
This could be an interim solution until we have nicer Commons integration. Thoughts?